Legal Risk and your Terms of Business

Our last two newsletters looked at the legal issues you should be aware of as a Director when your company is in financial difficulty.

Two of the main ways to avoid financial difficulties are ensuring prompt payment by your customers and avoiding contract disputes. In this month’s newsletter we give some practical tips on managing the legal risks of your terms of business. Failure to identify these legal risks properly could leave your company exposed to something much worse than a bad debt.

James Hunt
and the team at Everyman Advisory

Legal Issues: The Basics

As a supplier, you must make sure that your terms of business are brought to the attention of the customer early on and are agreed, preferably in writing.  Terms of business on the back of an invoice will be ineffective.

With a well-organised and well-advised customer, there may be what is often called “the battle of the forms”.  The customer will issue an order with its terms of purchase.  The supplier then acknowledges the order with its terms of sale.

If you are a supplier, the best solution is to require customers to sign up to your terms of supply when they become a customer.  You can do that by incorporating this step as the first in your credit control procedure.

Assessing your key risk areas

When preparing your standard terms of sale, you need to have identified the key risk areas for your particular business.  Consider the following:

When supplying high value capital goods, you will almost certainly want a “retention of title” clause which means that the customer will not become owner until he has paid for the goods.  Repossessing goods can, in some instances, be the only (but highly effective) practical remedy for non payment;

For extended project work you will almost certainly want stage payments to protect you against the risk of non-or late payment;

Where the customer appears to be a poor credit risk and the contract value is high, you may want to insist on a bank performance bond or cash escrow;

For perishable goods, you should stipulate that the customer must reject the goods within a very short timescale if he is not happy with them;

Where there are multiple potential customers (e.g. in a group of companies), you need to be clear that you have identified the correct customer and that someone with the relevant authority (e.g. a director) has signed the contract;

Where your own, as well as third party goods, are supplied by you (with perhaps little or no margin on the third party goods), you need to ensure that your contractual liability is limited to the contractual rights you enjoy.  For example, you should stipulate that you hold any product warranties or guarantees for your customer’s benefit but otherwise are not liable for defective goods;

Where the failure of your goods or services could cause significant loss to the customer, you should ensure that your liability is capped; and

Where your product or service is complex, it is a good idea to insist that the customer buys on the basis of his own investigation of the performance against his requirements.

Failure to identify these legal risks properly could leave your company exposed to something much worse than a bad debt.

Insuring the Risks

In some industries, it is common for suppliers to take out insurance against non-payment by customers.  Product liability, public liability and professional indemnity insurances can all be relevant, depending on the nature of your business.  These insurance policies need to be checked for specific policy wording and exclusions.  Your solicitor and/or specialist insurance broker will be able to help you.

Hints and Tips

Make sure your customer agrees your terms of business early on, preferably in writing;

Identify your key risks when preparing your terms of sale;

Ensure you have a “retention of title” clause if you are supplying high value goods;

Insist on stage payments for long projects;

If you supply perishable goods stipulate a short timescale for complaints;

If you supply to a group of companies make sure the correct customer signs the contract;

When supplying goods from a third party ensure that your liability is limited to the warranties and product guarantees you have received;

Take advice from an expert about insurance or selling book debts (factoring).