Despite a post-quake construction boom in Christchurch, an unprecedented number of building firms are going bust. Reports surfaced earlier this year of almost 100 rebuild-related companies having been placed into liquidation since the February 2011 earthquake, owing tens of millions of dollars. Some relatively high profile companies have fallen victim in recent times, emphasising that even large, well-established businesses are not immune to poor management and the vagaries of the rebuild market.
When a company is placed into liquidation, there’s often little, or no chance, of anything being recovered. However, there are steps that you and your business can take, starting with having robust Terms of Trade in place, that will help prevent a sad ending for your business.
The purpose of Terms of Trade is to set out the essential terms and conditions on which parties will do business. Terms of Trade are primarily designed to protect the rights of the business selling goods or providing services, however, there are other advantages. Of particular relevance to the Christchurch situation is that Terms of Trade can be used to limit potential liabilities of the business and provide a degree of security for the recovery of debt following the supply of goods or services.
The first aspect to be aware of when adopting Terms of Trade, is that many of the ‘one size fits all approach’ templates available online are unlikely to give you the protection you and your business need. The more the Terms of Trade are tailored to your business, the more effective and useful they will be.
There are, however, certain essential matters that should be addressed in any Terms of Trade irrespective of the size of your business, and the nature of the goods and/or services being provided. These include:
- Definitions: All key terms should be defined, including the parties to the terms of trade.
- Quotes, Orders and Acceptance: Clauses dealing with how orders are placed, how quotes are dealt with and confirming that placement of an order constitutes a binding contract and acceptance of the Terms of Trade.
- Price and Payment: Clear, unambiguous statements about when and how payment is to be made and any arrangements regarding prompt payment discounts and the charging of interest on late payments. The latter is particularly useful and acts as another incentive for clients to pay you on time. The Terms should also reserve the right to recover debt collection costs from your customers.
- Ownership: The point at which ownership passes to the customer. It is in your interest to ensure that ownership in the goods is retained until such time as payment in full is made for the goods, particularly where the cost of the goods is significant. You could go a step further and take a registered charge over the goods until payment is made. Specific legislation applies to the creation of these charges and the Terms will need to be drafted with legislative requirements in mind.
- Guarantees: If your customer is a company, you should consider obtaining guarantees from the directors and/or shareholders. Small, recently formed companies are unlikely to hold significant assets and the risks of non-payment are increased. Under the guarantee, the directors will be personally liable for the debts incurred by the company. This would allow you to pursue the directors for payment as it would be more difficult for them to hide behind their company.
These are just some of the key features to effective Terms of Trade. This is, however, only the first phase in managing risks in doing business with an individual or business of whom you may have no real or prior knowledge. Once you have established effective Terms, you should ensure they are incorporated into all of your business transactions. Conversely, you also need to consider any Terms of Trade that you are offered and be sure that they don’t have the propensity to compromise your position in the future nor limit the action that you are able to take.
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