Lawyer Ron Qin explains what terms of trade are, and why you should have them
For this article, we will be going back to basics a little bit and covering ‘terms of trade’ and how to best use them. Just a word of caution – if you already have a specific building contract (preferably prepared with the help of a solicitor), then please stick to that, as you do not want any clashes. This article is more for the ‘general’ tradies, who have a higher frequency of comparatively smaller jobs and don’t tend to use formal building contracts.
Picture this: your client has asked you to build a themed backyard, with a water fountain. The client is new; however, the project is reasonably sized and the new client sounded okay over the phone. You proceed on a rough quote with some basic planning, and commence the job. You proceed to order what you need for the project, including a very costly fountain piece. There’s a delay to the start due to another job, the client gets upset, some heated exchanges take place, and the client cancels the job.
So what about the materials and planning you have already sunk into the project? You would think the client should pay, because costs were incurred specifically for this job. However, the client thinks that because you never started the job, nothing needs to be paid. You could hire a lawyer and engage in a costly exercise in dissecting facts down to minute details, relying on what is an arguable case at best. Or you could have robust terms of trade to minimise the chance of this unsavoury scenario taking place in the first place.
What are ‘terms of trade’?
Terms of trade is a legally binding contract between you (or your business entity) and the client. This is so even if no negotiation takes place or even if the client does not bother to read the document before signing it or indicating his or her acceptance of it. The concept is no different from the fine print on the back of the form you sign when you hire equipment.
The terms of trade will dictate on what terms you will provide your service and/or products. It is vital (as with all written contracts) to be clear and unambiguous, so both parties know where they stand in the arrangement.
What should be included?
Firstly, terms of trade must be tailored to your business. We do not encourage a copy and paste, even from similar businesses. Your terms of trade must fit your business.
Each business is unique and, when you realise that what you
are trying to achieve is not reflected in the general terms of trade obtained from another source, the consequences may be serious.
Here are some things for you to consider, which will shape your terms of trade:
Do you supply goods-only, labour-only, or both?
Do you offer design as part of your service? Or just build?
How will payment be made, and how often?
Who pays for the materials up front?
What kind of price system do you use (quote, shopping list style schedule, or cost-plus, etc)?
Do you offer credit to existing customers, and, if so, how much?
What kind of warranty and/or guarantee do you provide (labour-only, or including products)?
Any disclaimers (such as limitations of liability, tag-outs, etc)?
Notwithstanding the above, there are some key provisions that we recommend incorporating in any terms of trade:
At what point your client becomes bound by the terms.
At what point in time does the customer assume the risk of loss or damage to goods.
Consumer Guarantees Act disclaimer to non-consumer clients.
Title to, and ownership of, products not yet paid for.
Ownership of intellectual property such as copyright in designs.
Force majeure (especially important given the constant threat of Covid).
Enforcement of the terms of trade and associated costs.
Protection for you when your client uses your products incorrectly and/or against instructions, leading to damage.
It is extremely important to remember that your terms of trade should evolve with your business. This means when your business alters, or there are law changes affecting your business, your terms of trade will need to be updated. Unfortunately, we come across outdated terms of trade that sometimes include unenforceable provisions.
How to set up your business procedures
Terms of trade by themselves are not the silver bullet – your business processes and systems should be calibrated, so you get the maximum benefit out of them. Building on what we have discussed so far, we recommend the following business processes as a minimum:
Implement a client on-boarding process, which includes a sign-up form (to be attached to the quote and the terms of trade). Make sure the client accepts the terms and returns a signed copy. As part of this form:
- Clearly identify the client – is it a company, individual, or something else?
- If the client is not an individual, consider getting a personal guarantee from a ‘natural person’ (an actual person, rather than a company) to cover the client’s liability.
Obtain a copy of your client’s ID where possible.
If the client does not return the form (which is not ideal), at least obtain written confirmation the terms are received.
If a steady supply of materials is provided to a long-term client, consider registration of a security interest on the personal property securities register.
Discourage trading until the client on-boarding process is complete.
Take action sooner rather than later when the client defaults on payment.
Good record keeping. When there is a dispute, invariably the written proof will be given much more weight than the recollection of verbal agreements.
If people don’t pay you
Unfortunately, sometimes clients don’t pay your bills. This could be due to various reasons, but with good terms of trade in place, recovery will be that much easier.
Before going down the enforcement route, we recommend talking to the debtor and, if possible, negotiating a payment arrangement both parties are happy with. We still urge you to seek legal advice before any negotiation, as you may unknowingly agree to something which would preclude you from taking enforcement action in the future.
If negotiation fails, then we urge you to seek legal advice and choose the appropriate debt recovery method. For example, if the debt is undisputed, it may be more cost-effective to engage a debt collection agency that would charge on a commission basis. For disputed r larger debts, we again recommend seeking legal advice, so a debt recovery strategy can be formulated.
That may may involve a quick-fire process such as a statutory demand or summary judgement proceedings, or resolution of any dispute through the Disputes Tribunals, adjudication under the Construction Contracts Act, or the Courts. Please do bear in mind the cost of recovery will increase if the debt is challenged.
Lastly, whatever debt recovery option you choose, you should be alert to the cost/benefit trade-off. The saying ‘don’t waste good money to recover bad money’ rings true. It makes little commercial sense to sink significant costs into recovering a debt, which in reality has little to no chance of being paid.
Good terms of trade will form the foundation of your business. They may be time-consuming to craft, but it is a small price to pay to avoid countless headaches and arguments, which not only lead to production loss, but add unnecessary stress. The resources dedicated to producing the terms of trade are insignificant when spread out over hundreds (if not thousands) of clients, but the reward will remain constant.
Do not hesitate to give us a call to discuss creating terms of trade for your business, or a review of your existing terms of trade.
Ron Qin is a solicitor and construction law specialist in the Auckland firm Martelli McKegg. He guarantees personal attention to new clients at competitive rates.
His phone number is (09) 950 9034, and e-mail email@example.com. This article is not intended to be relied upon as legal advice.