Owner Managed Business update - September 2019
Welcome to our September edition of Owner Managed Business update.
Standard terms and conditions: why it's important to get it right
Standard terms and conditions (T&Cs) are an important means for a business to protect itself. Where the parties do not have the time or resources to negotiate (bespoke) contract terms, T&Cs set out the parties' rights, obligations, roles and responsibilities. Looked at another way, T&Cs are a tool to allocate and mitigate business risks and avoid uncertainty and misunderstanding.
What should T&Cs cover?
This will depend on the individual business but well-drafted T&Cs should set out the standard "rules" of doing business and the "consequences" of what happens when things go wrong or one party wants to end the arrangement. Whilst the exact scope/nature of the T&Cs will vary from business to business and vary depending on whether they are for purchasing or sales, generally speaking, we would expect any T&Cs to include the following:
- Payment terms – consider when and by what means payment for goods and/or services needs to be made.
- Term and Termination – it should be clear from the start when a binding contract is formed (e.g. by the customer issuing a purchase order, or the supplier issuing an order acknowledgment). Likewise, the duration of the contract should be specified along with each party's termination rights (e.g. either party can terminate in the event of: (i) a material breach, (ii) an insolvency event and/or (iii) without cause at any time on [x] days' notice).
- Warranties – both in respect to any goods and/or services that are provided (e.g. that the goods are fit for purpose and the services shall be supplied in accordance with any agreed specification).
- Remedies – what happens if either party is in breach of the T&Cs (e.g. doesn't deliver or pay or wants to end the arrangement early (without cause))? Should the innocent party have a right to terminate and claim damages?
- Limitation of Liability – inserting a cap on liability can be a useful way to limit financial risk as a number of factors will need to be considered (e.g. whether you are a customer or supplier, the overall value of arrangement, and whether the T&Cs are B2C or B2B).
- Applicable law – T&Cs should always specify the applicable law and jurisdiction that will apply to a deal.
Formation of a binding contract and incorporation of the T&Cs
Where each party has their own terms it is not always clear as to whose are incorporated into any given contract. The key issue is to identify when a binding contact is formed. There has been plenty of case law in this area, but in practice it is generally accepted that the last set of terms despatched before acceptance or performance (without objection being taken to them) will prevail. This last set of terms is sometimes referred to under English law as the "last shot" in the battle of the forms.
In addition to "when" terms are brought to a party's attention (e.g. on acceptance, before delivery etc.), a party who wants to trade on its own standard terms will need to consider "how" its terms are brought to the other party's attention (e.g. published on its website, on the reverse of its invoice etc.).
There are no hard and fast rules that a business can follow to ensure that its standard terms and conditions apply to each and every arrangement that it enters into. However, it is good practice to attach them (or, if extensive, provide a summary with information on where to access the full version) in as many documents (e.g. quotation, order confirmation etc.) as possible. However, a party would have greater certainty if it restructured its contracting process to ensure that each party signed up to a formal contract (i.e. both signatures on the same document) which attaches the applicable standard terms and conditions.
What are the risks of failing to incorporate T&Cs?
Beyond the obvious fact that a business without T&Cs may be considered to be less professional to prospective clients, from a legal perspective, the risk of failing to provide and/or incorporate T&Cs could be the difference between success and failure of a contract.
T&Cs will provide the basis for any contract for goods and/or services. As such, its incorporation will have a direct impact on the general performance of the company whether, for example, through prescribing the use of particular (and potentially more economical) dispute resolution procedures and/or setting out the payment terms directly affecting the cash flow of the business. Failure to incorporate T&Cs risks the following:
- Unfavourable terms – the other party to the contract may have provided terms which may inadvertently have been accepted through failure to provide any alternative terms which may consequently be unfavourable;
- Payment terms – if there is no record informing either party of when payment is due, this creates uncertainty in the agreed payment mechanisms and subsequently may impact on the cash flow of the business;
- Intellectual property – any intellectual property created during the provision of the goods and/services may be passed on and/or disputed by the other party;
- Limitation of liability – if no restriction is given to the period and/or limits of any liability, this could potentially expose the business (and its directors) to a myriad of consequences including loss of profit, or opportunity; and
- GDPR – if no T&Cs are apparent, companies may not be sufficiently compliant with the General Data Protection Regulation 2018 (GDPR) if they are dealing with personal data as a result of their goods and/or services.
Should T&Cs not be incorporated, the ultimate and most extreme consequence could be the economic unviability of the company in question but at best, this could create an unnecessary amount of uncertainty.
We see a large quantity of disputes which fundamentally hinge on the adequacy and incorporation of the T&Cs. This applies to all business in all sectors. T&Cs can often be a pivotal factor when a dispute arises.
Common contentious situations that we come across in relation to T&Cs are:
- Oral contracts – a contract was formed orally or an amendment to a written contract was made over the phone but without record. When a dispute arises, this causes an "it's my word against yours" situation and whether you are adamant that an agreement was made or not, the lack of evidence may make a formal resolution difficult or at best risky. Many clients lose out financially even when it appears they are in the right.
- Unincorporated T&Cs – the company itself has a set of terms and conditions but in the process of negotiation, the T&Cs were never sent or brought to the attention of the other party. Therefore either no T&Cs have been incorporated into the contract or the other side has provided their T&Cs which would then become binding. Any incorporated terms may be unfavourable to the client or if no terms are apparent, this can lead to a drawn out and costly dispute.
- Bespoke T&Cs – most companies are good at providing their own T&Cs but until they are disputed, it is not always clear how robust and enforceable these actually are from a legal perspective. Often, where such T&Cs are 'standard form' they do not provide the level of protection and clarity required and can often by unfit for purpose.
T&Cs are without doubt a key and fundamental cornerstone to any successful business - providing protection and certainty in equal measure. If your company already has T&Cs, it is important to review these on a regular basis and ensure that these have, at least once, been reviewed professionally. If your company does not currently have T&Cs, it is a must that these are considered immediately and all current contracts reviewed to ascertain any exposure to risk. A simple but necessary step could end up saving your business considerable time and money in the long term.