Trading terms (series)

We’ve recently published a series of short articles about trading terms via LinkedIn, to help get business owners on the right track – to explore what trading terms are for, how to make them work, what to include, and what to leave out. To see the original articles on LinkedIn, follow these links – or read below, for the whole series:

Article #1: https://sjrcl.au/what do trading terms do anyway

Article #2: https://sjrcl.au/trading terms – must haves

Article #3: https://sjrcl.au/trading terms – nice to have

Article #4: https://sjrcl.au/trading terms – left out

Article #5: https://sjrcl.au/trading terms – what else

What do trading terms do, anyway?

Clients often have a sense (or have been told) that they ‘need’ terms and conditions for their business (and they do). But how do you know what you need, or what to include? Can’t you just copy a set from the internet and adapt them? [See my tips on that common approach, below].

In this article series, I’m writing all about trading terms, to help get business owners on the right track – to explore what trading terms are for, how to make them work, what to include, and what to leave out. To begin: How do you actually get trading terms to work?

You need a good process to get your trading terms to work effectively. Here is my take on how to get them to sing:

• They must match how your business actually operates, in a practical sense. Generic terms which don’t match your actual operations are… ‘sub-optimal’. Often, generic terms say something completely irrelevant or unhelpful. Try to avoid this.

• You need a proper, worthwhile process to get clients to accept your trading terms. This is 100% necessary for many technical legal reasons. Don’t just publish the terms on your website – you need to build them into your customer engagement process. You will need some form of signup – you could do that on paper (I guess, but it is 2023…), by communicating them with your quotes, or through a range of great digital solutions.I prefer that clients don’t rely on a single sign-up alone – I prefer to have layers of communication for clients’ trading terms. Build a reference into invoices and into your periodic credit reviews – that’s an important safety net.
• You need to integrate your trading terms (and the actions flowing from them) into your business systems. Can you set up your ordering system, so that the first supply can’t be made until someone has confirmed trading terms are in place? Consider going another step (if supplying on credit) and ensuring that the first supply can’t be made until your PPS registration is in place.

• Your terms should include a process for updating your terms. Make it easier on yourself next time!

• Use complementary documents (credit application etc.) to make terms work better.

And listen… if you absolutely must copy a set of trading terms from the internet then here are some frank tips for that:

• copy from a source in your own country – where the same law applies – and choose a reputable source, in a similar industry, who has spent actual money on their terms;

• change enough that your breach of copyright will not be blindingly obvious;

• don’t accidentally copy their ‘website terms of use’ accidentally – you want their trading terms (yes, I have seen this done several times…)

• seriously, just don’t do this – you’re just buying future problems… ask for some professional help instead.

What should you include in your trading terms?

So, what are the key things to include in your trading terms? Here is my list of ‘must haves’:

• Scope – it is essential to set the scope for what you’re doing (and not doing). It’s crucial to set clear boundaries for what work you’re doing, what goods you’re supplying, and where your responsibility starts (and ends). This is the area most often missed, in generic trading terms.

• Enabling PPS words – if you will ever supply goods on credit, then you need appropriate wording to give you access to a PPS registration (Purchase Money Security Interest type). This is historically called ‘retention of title’ wording, though that phrase is a bit misleading under the PPS regime. [Note: this could go in the Credit Application which we will discuss in a later article in the series – but I prefer it in the main trading terms, to deal with ‘accidental credit’ situations].

• Limitation of liability – this must be in your trading terms. Remember that some (if not all) of your supplies will probably be Australian Consumer Law supplies, so you will need to comply with ACL requirements for those supplies at least. Consider the ACL consumer guarantees also – you may be required to include specific wording here.

• Payment terms – these might (probably will) be on your quote / invoice or Credit Application, but I’m a fan of putting them in the main terms as a fallback (to help deal with process failures). I prefer the main trading terms to require the shortest payment period which is standard for the business, and for the credit application to be used to extend that (if credit is approved, and if credit is within the limit).

• Interest and Costs – if you plan to recover them, then they need to be included. Also: send interest invoices if you expect to get interest paid.

• Governing law – sometimes this can be inferred from the facts, but if you have multiple offices / shipping points and national customers – then this is essential.

• Termination rights – I prefer a short term termination right which either party can use – this can de-escalate disputes and remove uncommercial incentives. This needs to be carefully assessed to your actual business circumstances – it’s not suitable for some types of products – but can be very helpful. It amazes me how often the only termination clauses are based on default – that’s usually a sub-optimal approach for you as the supplier.

What are the ‘nice to have’ elements?

There are lots of other useful things to consider for your trading terms:

• Product-specific terms. Some of your products / services may not follow the ‘standard’ rules. For example – you may supply most products on an order-by-order basis, but require a minimum volume (or term commitment) for certain products. You could have a whole set of new terms for those specific products, if that suits your business process – but it might be more efficient to enable specific Product Terms from within your main terms, then supply a ‘here’s what’s different for this product’ booklet.

• PPS all assets. As well as the PMSI (see ‘must haves’, earlier), consider including a right to register an all assets PPS interest – if you want that right, then establish it in the trading terms (or credit application). Should you seek this and should you actually register it? This will depend on your customer profiles, your level of exposure to customers, the level of alternate security you have obtained etc..

• Update process – it can be painful and time-consuming to update your trading terms with all of your customers, and that can deter businesses from doing it – even when they really need to. You can make the update process easier, by adding a more sensible and flexible process in your trading terms.

• Retention of intellectual property rights – where this is appropriate, because you need to re-use the work you’ve done. You do need to watch how you handle this issue, because you can easily end up with an unfair contract term here (see ‘what should be left out’, later).

• Timeframes for delivery (and guidelines about when they will change, or not apply). Great for managing expectations.

• Rates for ad hoc (casual) supply. How do you get paid for extra work, which you didn’t quote for? A bit of careful design in your trading terms can cover this issue neatly.

• Packaging (especially container / pallet) cost-recovery mechanisms.

• ‘Hands off’ provisions for your staff. You will naturally put your staff in positions where they will form strong relationships with customers – consider protecting your investment in your staff, when that is appropriate for your industry and culture.

• an ability to respond to increased credit risk (this may go into the credit application instead) — possibly including extra powers.

• details of voluntary warranties (these are often published separately, but you need to at least consider how well they integrate and where there are inconsistencies).

What should be left out?

Honestly, you see a lot of rubbish in trading terms. I’m never sure if some terms are there because of sheer inertia (they looked wise in 1998 and haven’t been reviewed since), or due to sloppy design – but what you leave out is also important.

Here are some things which should definitely be left out:

• Crippling Intellectual Property restrictions. I mentioned this IP topic earlier in the ‘nice to have’ list – but you do need to be very careful how far you go. It’s appropriate to retain IP in some things (perhaps to license them to the customer for their own agreed purposes and use) – but the customer may expect (and need) absolute ownership of some of the work product. If you go too far here, then you risk failing to deliver what the customer bargained for – that could be very unfair.

• Unfair contract terms. I wrote a whole LinkedIn series about unfair contract terms in late 2022 – it can be found here: https://sjrcl.au/UCT series. The consequences of UCTs have become much worse for suppliers recently (with the ACCC looking to chase fines for use of UCTs) , so these really need to be avoided. Nearly every set of client trading terms I review contains at least a few UCTs, and for some of them – it’s nearly every clause.

• General disclaimers of liability (or indemnities against liability, or both).They’re not COMPLETELY useless but they are pretty dangerous for so many reasons, including because they:
  – encourage sloppy thinking about scope;
  – are often inconsistent with your Australian Consumer Law (‘ACL’) or other mandatory duties;
  – can give a false sense of security;
  – may be unfair contract terms;
  – can, at times, interfere with your insurance coverage in unexpected ways.
  This is not to say that you should not limit liability in your trading terms – you definitely need to do that (see ‘must haves’, above) – but it needs to be done skilfully, in an appropriate and layered way.

• Ancient terms about bailment, holding proceeds of sale on trust, owning admixed goods and similar ‘dinosaurs’. Please don’t take this comment as dismissive – these points should be considered, but we need to recognise that legislation has changed some of these concepts, since some of those ancient terms were first written (in a previous century). Current terms need to match the reality of your actual business practices.

• Extremely short inspection timeframes or time limits for defects (see above comments about unfair contract terms and ACL issues).

What else do you need?

To make trading terms actually work for your business – what else do you need?

In previous articles in the series, I talked about the “why” and “how” of trading terms, about what to include, and also about what to leave out. In this final article of the series, I’m focusing on what else you need to make trading terms work for your business:

Complementary documents – I touched on this in previous articles. Effective trading terms operate best as part of a holistic package which matches your actual business process. That package often looks something like this:

• core trading terms which apply to all typical customers and products. They need to be adequately accepted through a sensible signup process (see article #1 for more details).

• quote and invoice forms which link back to the core terms. This ensures the core terms actually get communicated, and that the customer is always able to find them – an important step to reduce disputes.

• where you’re offering voluntary warranties – clear terms for those.

• product terms for specific products which fall outside your business norms. If possible, consider building these product terms as variations to the core trading terms. This is not a hard and fast rule – it’s a design choice which I like to assess each time, and discuss with clients. The advantages of this core terms + products terms approach are improved consistency, and easier maintenance of terms over time; the disadvantage is a slightly higher risk of process breakdown.

• a credit application form. Every customer who gets credit from you (above a fairly low threshold – perhaps $5,000?) should complete a credit application. At a minimum , this will collect the info you need to make a credit decision, and record longer payment terms and a credit limit (or method for setting one). It may also give your business extra rights to manage that credit, and to extra security).

• extra security documents (which may be personal guarantees, general or specific security agts, or real estate mortgages depending on the level of credit provided).

A ‘deployment champion’ within your business – trading terms documents are useless if not used as intended. Someone needs to implement them in your business, then check periodically for consistency and process errors.

If that deployment can be integrated with your operational software, this consistently leads to better coverage, more reliable outcomes and reduced cost over time. Please seriously consider this.

Review – if done well, the terms should last for years. But… 3 or 4 years, not 12. Major changes in law, business practice or economic circumstances should make you re-assess them.

The aim of this 5-part series on trading terms has been to help business owners get on track when considering trading terms – I hope you’ve enjoyed it, and found it useful.