Many businesses enter into Terms and Conditions every day without really understanding what they are agreeing to or how important they are.
In this article I look at what Terms and Conditions are and why they are important. I then set out some things to look out for when reading through a set of Terms and Conditions.
What are Terms and Conditions?
As individuals we see them every day as we click to accept Terms for using the latest IPhone or booking a holiday online.
They have a bad reputation and are known for being very long, detailed documents that are full of legal jargon and difficult to digest. When entering into agreements as a consumer there is legislation that can protect you to some extent from things that are hidden in the small print.
However businesses do not have the benefit of most of the consumer protection, so it is essential to understand what you are agreeing to when you sign a set of Terms.
Terms are a legal contract that sets out the basis on which you as a business are willing to enter into a business relationship. It is more usual for these to be drawn up by and therefore favour the supplier of most often larger organisations. When ordering goods or services, they will try to insist on their standard Terms of purchase being used.
Why are they important?
I believe that it is essential to prepare a well drafted set of standard Terms as it will help to protect your position when entering into business relationships which in turn will help to keep you CALM:
1) Checklist. Terms will help to focus your mind to the key parts of the agreement to make sure you have considered all of the important parts.
2) Avoid Expense. If you have a well-prepared set of standard Terms you can use those Terms in the majority of transactions instead of needing to agree bespoke Terms each time (or risk it not being clear what the contractual terms are at all).
3) Litigation Avoidance. It will help to avoid legal disputes and if a dispute is to arise it will help to settle that dispute with greater ease, as reference can be made to the Terms.
4) Meeting of Minds. It will help to manage expectations as they are a clear written record that sets out what is expected from each party entering into the agreement. As the obligations of each party have been clearly set out in the Terms it will minimise surprises. If a business uses its standard Terms with every purchaser it will help to provide a consistent service which will help to build and maintain a good business relationship.
Terms – what to watch out for
1) Definitions. It is vital to make sure you have read through the definitions part of the Terms carefully. Definitions appear at the start of the Terms and normally the word will begin with a capital letter followed by an explanation. This will become a defined term. The defined term will then appear throughout the Terms. Whenever the word appears with a capital letter at the start, it will take on the meaning set out in the defined terms.
The words that are usually defined are those that appear frequently throughout the Terms and those that are particularly important to the agreement.
It is essential to check that they are accurate as they may make the meaning of a word that is vitally important to the agreement different from the plain English meaning.
2) Obligations of the Supplier. This section sets out what is to be supplied by the supplier. Depending on the agreement it may set out the goods that are to be supplied or the services that are to be provided. It may provide for a mixture of both goods and services.
As a purchaser you should check that this section covers all that you are expecting to receive from the supplier.
As a supplier of services, check that the services to be supplied are specific and limited. Also make sure that you have not offered to provide too much.
3) Delivery. This will set out who is to make the delivery, when they are to make the delivery, where it is to be delivered and how it is to be delivered. Risk in goods (and so responsibility to insure) normally passes on delivery.
It is important to check that the address for delivery is clear and accurate so that delivery can take place effectively.
Check that sufficient detail has been provided about how you want delivery to take place, for example, if you are delivering goods it is important to consider the necessary packaging so that they are not damaged whilst they are being transported.
4) Payment. This section should set out the price of the goods or services that are to be provided, what the price includes, who is to make payment, who is to receive payment, when the obligation to pay arises and the consequences of late payment.
In case of goods or services to be delivered in instalments or over time, the dates or triggers for any payment of instalments should be set out here.
It is important to check what the price includes. If it relates to goods be careful to check whether it includes the cost of insurance and delivery of the goods.
Check the consequences of late payment. Most Terms will provide for interest on late payment, usually at a fixed rate above the base rate of a bank. Terms often provide for interest on late payment at a rate of 4% above the banks base rate. If you do not set out an interest rate in your Terms the Late Payment of Commercial Debts (Interest) Act 1998 provides for interest at a fixed rate which is never less than 8%.
5) Quality. There are a number of terms that are implied into every contract to say what quality the goods and or services should be.
With regard to goods it will be implied that the supplier has the right to sell the goods, that those goods are of a satisfactory quality and that they comply with their description/ specification (or with a sample if relevant). There may also be implied a term that they are fit for a specific purpose for which they are sold.
With regard to services there is an implied term that these will be delivered with reasonable care and skill.
The implied terms are supplemented by express terms that are set out in the contract.
There are different remedies available depending on whether a fundamental or a more minor term has been breached, the nature of the breach and what the Terms say about the consequences of that breach. Breach of terms which are fundamental to the contract by their nature or which the contract specifies as such (‘Conditions’) will allow the purchaser to terminate the agreement whilst some lesser breaches require particular remedies.
As a supplier you will want to try to limit or exclude your obligations as much as possible. The supplier can do this in the Exclusions and Limitations section of the Terms.
6) Exclusions and Limitations. This will look at the obligations of each party to the agreement and then try to either limit or exclude those obligations.
As the supplier check there is a cap on the monetary damages that can be claimed. Also check that you have excluded liability for indirect losses. Terms of purchase will not usually include such caps (as they are mainly for the benefit of the supplier).
In business to business contracts using standard Terms the Unfair Contract Terms Act 1977 (UCTA) will apply a reasonableness test to exclusions and limitations that are in the Terms. If they do not pass the reasonableness test they will be void.
Under UCTA a business to business contract cannot exclude or restrict liability for personal injury or death caused by its negligence.
In accordance with public policy a party cannot exclude liability for its own fraud or fraudulent misrepresentation.
An attempt to restrict or exclude liability for these things may cause that section of your Terms to be void, preventing you from relying on it. For clarity put a section in your Terms that states you are not trying to exclude or limit liability for any of these things, or for any other liabilities which cannot be lawfully excluded or limited.
7) Retention of Title. If you are selling goods, it is important to consider when ownership in the goods is to pass from the supplier of the goods to the purchaser who is paying for the goods.
It is important to understand that physical possession in the goods and legal ownership in the goods can pass from the supplier to the purchaser at different points.
As a supplier make sure that legal ownership in the goods only passes to the purchaser when the goods have been paid for. This means there is a possibility of retrieving those goods in the event of the purchaser going bust without paying you.
It is surprising how many businesses do not have a standard set of Terms. It is even more surprising how many businesses use a cobbled-together set of Terms from ones that they have found on the internet which are inappropriate, messy and not properly tailored to their requirements.
It is also common to find in practice that contracts are entered into by email correspondence or orally before any written Terms are referred to. Putting your Terms on the back of a delivery note or invoice is not sufficient. They need to be drawn to the attention of the other party before the contract is made in order to be properly incorporated. You should make sure you have (and use) an order form which clearly does this.
In cases where both supplier and purchaser have standard Terms (of supply/ purchase respectively) it is vital to make sure you win ‘the battle of the forms’ and get your own preferred Terms incorporated rather than those of the other party.
If you take anything away from this Beginner’s Guide on Terms and Conditions, the two most important things to remember are:
1) Prepare (or better, have your solicitors prepare) your own bespoke set of standard Terms and Conditions and make sure these form the basis of the contract so that your position is properly addressed and protected.
2) If someone else provides you with their own standard Terms and Conditions, make sure you read and understand them.
If you have any questions in relation to your Terms, please contact our Business Department on 0161 832 3304.