7 Things you need in your Standard Terms of Trade

Terms of Trade are important for businesses because they record the terms on which you provide goods or services to your customers. It constitutes a contract between you and your customer. Without Terms of Trade in place, you can be left with limited legal recourse against your debtors. Good Terms or Trade improve your chances of recovering bad debts.

The 7 key points to include in your Terms of Trade are:

1. Clearly identified parties, in particular your customer;
2. Guarantee for payment to you by a director or other individual if your customer is a company or trust;
3. Claim for interest for overdue invoices;
4. Retention of title terms;
5. Terms that allow you to stop work or withhold supply if invoices becomes overdue;
6. Provision to recover your full legal costs if you have to take the matter further; and
7. Jurisdiction (ie. Which court is to deal with disputes).

1. Clearly identified parties

This may seem simplistic, but it is amazing how often alleged incorrect identification of the customer causes problems and delays with debt recovery, particularly where the customer uses a trading name. When it comes to collecting a debt, you need to be sure that you are commencing action against the right person or entity.

For businesses, that starts with the Terms of Trade and Credit Application. When you are giving credit to a new customer, you should ask the following questions:

• Who is really the customer? Is it a person, partnership, registered business name, company, trust, etc?
• If the customer is a business or a company, have I done a free search on the Australian Securities Investments Commission website (www.asic.gov.au) or the Australian Business Register (www.abr.business.gov.au) to make sure that it exists and that I know what its ACN or ABN is?
• If it is a trust establish, who is the trustee?
• If it is a person or a partnership, do I know its/their full name(s)?
• If it is a business name, do I know the identity of the registered proprietor?

Clearly identifying the parties from the outset will ensure that your invoices are addressed to the right person or people and will make debt collection much more straightforward.

Debtors often say they are the wrong defendant. Some experienced debtors deliberately fudge their trading identity. Flush these people out early and avoid giving credit to them.

2. Guarantee if customer is a company

If the customer is a company, you need to be wary of its solvency situation. It is quite easy for a company to cease trading and leave you with bad debt.

You should ask directors of a company to provide a guarantee. It is usual for directors of companies to give these types of guarantees. If the company cannot pay (or no longer exists) then the person who has given the guarantee is personally responsible for paying you.

You should also find out whether the proposed guarantor owns real estate by doing a search of the Lands Titles Office records.

Be careful with sole director companies, where the sole director does not appear to own land but his partner or wife does.

Guarantees of this sort do not have to be lengthy or complicated and can be incorporated into your Terms of Trade or put in a separate document if you prefer to keep it as a separate agreement. But the directors of the company must sign the guarantee for it to be binding.

3. Claim for interest

It is only fair that you should be able to earn interest on money that is owed to you – after all, if that cash was in your bank account, it would be doing just that (or reducing your interest bill). Instead, your customer is using your money interest free.

There is a fine line between “penalty” interest and reasonable interest in Terms of Trade, and very high interest rates that are clearly designed to penalise a non-paying customer may be overturned by a court if challenged.

We generally suggest that a reasonable interest rate on overdue invoices can be charged in your Terms of Trade. Certainly, depending on the value of your invoices, interest can become significant and worthwhile collecting. It compensates you for the loss of use of the money that should have been paid on time.

4. Retention of title

If you are in the business of supplying goods (like plant and equipment) to customers, then the retention of title terms is desirable for your Terms of Trade. Retention of title terms mean that you can make sure that goods that you are supplying do not legally become your customer’s property until they have paid you in full for those goods.

Since the Personal Properties Securities Act 2009 (Cth) came into force on 30 January 2012, suppliers are required to register their retention of title arrangement on the Personal Property Securities Register (PPSR) to properly effect a retention of title arrangement for the sale of goods.

For arrangements made on or after 30 January 2012, ideally, registration on PPSR should be completed prior to delivery of the goods to the customer.

The PPSR will be online, and you will be able to register your securities online. However, if your securities are incorrectly registered, the registration will be void. It is important that when registering on PPSR, you accurately describe the parties, the collateral and the type of security interest.

It is worthwhile for big supply arrangements to be registered on the Personal Properties Securities Register, as the cost of registering the retention of title agreement will be justifiable “insurance” in the event that your customer becomes bankrupt or goes into administration or receivership.

In the absence of an express term allowing you to stop supply or services, clearcut at law, it is not you can

5. Stopping work/withholding supply

It may seem obvious not to keep doing business with a non-paying customer, but some Terms of Trade (particularly in ongoing service arrangements) do not easily allow this. In these situations it can be risky for the business to withdraw its services because of the losses that would be caused to the customer.

To avoid any doubt, your Terms of Trade should explicitly state that you will stop supplying or working for the customer until such time as your overdue accounts are paid up.

6. Recovery of legal costs

If you have to take your customer to court to recover your money, you want to make sure that your customer is footing the bill in full. To do so, your Terms of Trade should contain a term that allows you to recover your full legal costs from the customer. This is particularly helpful if the customer disputes the debt, but later is found liable.

Your Terms of Trade should specify that you can recover your costs on a “solicitor and own client basis”, which means what you actually pay to your lawyers, not what the court usually orders.

7. Jurisdiction

This is particularly important for internet businesses or businesses that have customers scattered all over Australia (or the world). Your Terms of Trade should specify that in the event of court action, the jurisdiction will be South Australian courts exclusively. Commencing court action in South Australia gives you a big strategic advantage.