What lawyers don’t tell you about terms of business

Terms of Business
Starting a Business in Australia

Why your terms of business may not be effective – legally

Often terms of business are not legally binding.

For example, they’re often printed on the back of a quotation or order form. Unless they are brought to the attention of the customer, and you can prove it, they are not regarded as being part of the legal agreement. This means the terms are useless and you cannot rely on them when a problem occurs.

Another reason why your terms of business may not be effective is that some lawyers think it is clever to draft terms and conditions in a way which favours their client over the client’s customer. This can result in terms being unfair to the customer. When this happens those terms will be unenforceable because of legislation such as the Australian Consumer Law (ACL). The chance of this happening is even greater if your terms and conditions are on a website.

That’s the legal downside. The practical downside is that such terms can have a negative effect on your reputation and result in losing sales/customers.

Although the ACL covers sales of goods or services to consumers, as from November 2016 unfair terms in agreements with other businesses will also be unenforceable.

Why your terms of business may not be effective – practically

Practical solutions are overlooked in many terms of business. What makes the situation worse is that overlooking practicalities means the ‘legal’ protection is often illusory – it does not work in practice.

For example, it is impractical to have a legal clause such as “Ownership of the goods does not pass until paid for” (a typical clause which is designed to enable you to get your goods back after delivery if you are not paid) if your terms of business don’t give you the right to access the customer’s premises to recover the goods, which is often missing! Even if you do have this right, it’s no help if the buyer has financial difficulties and the goods are not registered by you (see more about this at the end of this article).

The practical answer?

Don’t rely on legal protection in this type of situation! Just make sure that your insurance covers you even after the goods have been delivered. And make sure that it covers the cost of any damage to goods after delivery as well.

If you provide services to consumers or to other businesses, terms relating to payment are usually designed to protect you if you need to go to court to recover money which is owing. In view of the cost of doing this, it is often impractical. Therefore, don’t rely on the legal protection e.g. make sure that you are paid in instalments along the way so, if you are not paid one instalment, you don’t lose much. But you need to make sure you have the legal right to stop supplying the services if this happens, which may require a clause to be added to your terms of business.


What practical protection will work for you?

There are different ways of providing practical protection which differ from business to business. This means the lawyer who drafts your terms needs to have a good understanding of how your business works.

But they often don’t take the time.

What is regularly ignored by lawyers, despite the fact that it is the most important form of practical protection which applies to all businesses, is the need to avoid misunderstandings with customers.

Misunderstandings often lead to disagreements and are the main cause of business problems/disputes (assuming your goods or services are of reasonable quality).

Consequences of misunderstandings

You don’t have to end up in a legal dispute  for the consequences of a misunderstanding to cause significant problems e.g. the loss of a sale; the loss of a customer; damage to your reputation from negative comments on a ratings website or social media.

In a world where a disgruntled customer can pay people overseas as little as $5 a pop for writing whatever damaging comments they want about your business and posting them online, the effects of a disagreement stemming from a misunderstanding can have a seriously detrimental effect on your business.

Avoiding misunderstandings

It is much more likely for a misunderstanding to arise out of a spoken conversation than the written word, which is one of the main reasons why most agreements need to be in writing, and they need to be clearly expressed which is helped by plain English drafting.

But many terms of business are expressed in such long winded, legalistic language that customers are put off reading them. This is exacerbated by using small print. Also, people these days are used to ignoring terms of business because they invariably tick a box on the internet without even bothering to look at the terms and conditions.

You may say “So what? It doesn’t matter whether they read them or not because, if they accept the quotation, they are bound by them”. But, this is not always true. Even if the terms are legally binding, if the customer does not read them there is a much greater chance of a misunderstanding occurring. Therefore, your terms of business should not only focus on areas where there is the potential for a misunderstanding but they need to be presented in a way to ensure that the important terms are actually read.

Registration: will it increase your protection?

Terms which give you the legal right to access premises to recover your goods if you are not paid are of little protection if the reason you have not been paid is that the buyer has financial difficulties. This is because, unless you have registered your interest in the goods on the Personal Property Securities Register (PPSR) a bank or liquidator can sell your goods and keep the proceeds without paying you.

So, should your terms of business include a clause giving you the right to register your interest in the goods on the PPSR?

This may be overkill. For example, depending upon the type of business, the profile of your customers and the value of the goods you sell, going to the trouble of registering your interest on the PPSR each time you hand over goods before receiving payment may be totally impractical. It may not be worth the effort.

Free evaluation

Send your terms of business to Terms of business evaluation and we will give you a free assessment of their effectiveness. More information about terms of business contracts in general can be found here.

Copyright 2016

Russell Wheeler

Business Lawyer