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What should your terms of business agreement cover?

In short, your terms of business should cover the logistics, practicalities and legalities of your selling or providing goods or services to a customer, whether this is another business or a consumer.

Although unlikely to be the most exciting part of your business, having effective, well-drafted terms of business in place produced by a specialist commercial solicitor can save you a lot of time, money and sleepless nights in the future. They can also showcase your business’ professionalism and enhance its reputation. Here, we outline exactly what you should expect to see as part of your terms of business and why it’s so important to get it just right.

What is a terms of business agreement?

A terms of business agreement sets out the terms on which a business provides goods or services to a customer, whether this is an individual consumer who, for example, buys their Christmas presents from Amazon, or an accounting firm which enters into a contract with an office cleaning agency.

Terms of business are often standard terms used by a business for all of its contracts of a certain type. Take our example of a cleaning agency; its terms of business for cleaning offices are likely to be the same for all of its clients but it may also provide school cleaning services and could have different terms of business for its school customers. That said, individual, customised terms of business can also be entered into which cover, for example, a specific project or contract.

What’s the importance of terms of business?

Terms of business are important for several reasons:

  • Reduce dispute and litigation risk. Setting out clearly in writing your and your customer’s contractual obligations ensures that you are both fully aware of what you need to do to fulfil the contract and when. This can avoid disputes in the future. Having the terms in writing can be useful in the event that you need to provide proof at a later date of what was agreed.
  • Certainty. Having your terms of business written down creates certainty between the relevant parties. Negotiating a deal of any kind can result in the discussion and consideration of numerous options and alternatives, often over the telephone or in a meeting. This can result in disagreement or uncertainty as to what was finally agreed, especially if the issue doesn’t arise for some time. This can be resolved if the agreed term is expressly included in the terms of business. Similarly, having terms of business in writing can reduce the chances of terms being implied into the contract by the courts. Not only does this create uncertainty between the parties but the implied term may be disadvantageous to your position. For further information about implied terms, see Contracts: express and implied terms.
  • Liability limitation. Terms of business usually include some limits on the liability of the service provider or seller of goods, for example, if the service does not meet certain levels or the goods are defective. This can protect your business against claims being made against it.
  • Cost savings. Agreeing the terms of business at the outset of a new customer relationship can save money in the long-term. Issues are more likely to be discussed amicably and negotiated reasonably when the parties are keen to contract with each other. Resolving an issue at a later date when the parties’ relationship could, potentially, have soured will be far more difficult and costly.
  • Increased efficiencies. Although dependent on your business-and customer-type, putting in place standardised terms of business which apply to all, or a certain type of contract, can improve your workplace efficiency. Staff who deal with customers and the order process are less likely to make mistakes or get confused as to which terms apply and junior staff can be quickly trained if your terms of business apply across the board. 
  • Ensures the prevalence of your terms. By having your own terms of business prepared, you are less likely to be at the whim of your customers’ terms of business, which will probably not afford your business the protections it needs. It is important that both parties understand which terms of business prevail.
  • Professionalism. Having well-drafted, legally enforceable terms of business available can simply show customers that your business is a professional and reliable organisation. Most people would avoid or at least carefully rethink any arrangements with a business which appears makeshift and disorganised. Having formal documentation and paperwork in place can greatly enhance the reputation of your business.

What should be included as part of your terms of business agreement?

Terms of business should include the main terms and conditions pursuant to which your business will contract. Terms of business should be comprehensive and provide your business with the necessary protections but bear in mind that having aggressive or overly lengthy or complex terms may discourage customers from working with you.

When preparing your terms of business, you should also remember that less common or sector specific issues may be relevant. In addition, ensuring that your terms of business are legally enforceable may not always be straightforward. Taking legal advice can ensure that all these matters are covered and will help set your mind at rest.

So, which specific issues should be covered in your terms of business?

Description of the product/service to be providedAn adequate, clear description of the product or service to be provided and its quality.
This should match the product/service your business is providing under the contract and so it is imperative that it is correct.
DeliveryHow is the product/service to be delivered?
When is the product/service to be delivered? For example, will there be one delivery or instalments?
What happens in the event of late delivery? For example, can the customer cancel the order?
AcceptanceWhat constitutes acceptance of the goods/services?
How long do customers have to return the goods and in what circumstances can they do this?
Title and riskAt what point does ownership of the goods (and therefore risk) pass from your business to the customer?Who is responsible for any insurance?
PaymentHow much will you be paid?
When does the customer have to pay?
What happens if the customer fails to pay on time? For example, can you charge interest on the amount outstanding?
How does the customer pay?  

This provision can help with your cashflow as you can stipulate how often and how much you get paid, so avoiding the situation where you have to make a large outlay before receiving payment from the customer. This is of particular importance to small businesses and start-ups.
Security for paymentWhere payment is to be made in the future, do you require some security in respect of the amount owed, such as a third-party guarantee?
Term and noticeWhat is the length of the contract?
Can a party give notice to end the contract? If so, what are the terms of notice?
Termination eventsWill any specific events automatically terminate the contract or at least, give one party the option to terminate? For example, insolvency of a party or material breach.
Warranties and indemnitiesIs either party required to give any assurances in relation to the contract?
Are any payments required so that one party isn’t out-of-pocket in a certain situation?
Exclusion / limit liabilityIn what situations will you not be liable for failure to perform under the contract?  

Some exclusion and limitation of liability clauses are unenforceable or must comply with “fairness” or “reasonableness” tests and so it is important that you take legal advice in respect of this.
Intellectual property (IP) protectionsDoes the contract involve the use or licensing of any of your intellectual property? If so, what protections do you require?
Confidentiality and restrictive covenantsIs the contract itself or certain parts of it confidential or have you given the other party access to any confidential information, such as manufacturing processes or other trade secrets?
Is there a concern that the other party may try to compete with your business or poach or solicit your customers or employees? If so, certain restrictive covenants can be included to reduce this risk.  

Bear in mind that restrictive covenants have to be carefully drafted so as not to be deemed a restraint of trade. If they are drafted too widely, they will not be enforceable and so will, essentially, be worthless.
AssignmentCan your or your customer’s rights under the contract be assigned to a third party?If so, does the assigning party require the consent of the other party?
BoilerplateMany clauses in your terms of business may be standard across all commercial contracts but they are still important from both a practical and legal perspective and should be thought about carefully.

Battle of the forms

Confusion may arise where both parties want their own terms of business to prevail and this situation begs the question, which terms of business apply? Known as the “battle of the forms”, there are no strict rules as to how to ensure that your terms of business have been incorporated into the contract but there are various steps that you can take to make it more likely.

  • Ensure that you expressly and clearly reject the other party’s terms of business in favour of your own.
  • Be consistent in referring to the application of your terms of business on paperwork and documentation and provide copies of your terms of business to the other party as soon as possible in the negotiations and during the order and delivery process. For example, include them with order acknowledgments, delivery slips, invoices and so on.
  • If any of your terms of business are unusual for your business sector or are particularly onerous, flag these up specifically to the other party.

Standardised terms of business or bespoke?

Whether you decide to put in place standardised or bespoke terms of business will depend on your business, your customers and the type of contracts and projects you enter into.

As mentioned above, standardised terms of business can create efficiencies within your workplace and is a cheaper option as once you have prepared your terms of business, they can remain in place until any changes are required by law or as a result of a change to your business processes.

Standardised terms of business can also be amended as required for individual customers or projects by putting in place an overriding agreement, such that your terms of business apply subject to any changes set out in the other agreement. For example, say that you have agreed with a particular customer that they can have 28 days to settle any invoice whereas your terms of business stipulate 21 days, a separate agreement can be entered into with that customer stating that notwithstanding the provisions of the terms of business, they must pay within 28 days.

Bespoke terms of business may be useful if you have a particularly important or large client with significant bargaining power which refuses to accept your standardised terms or if you habitually provide different services or goods on various terms to your customers. In this situation, having standardised terms of business may just not be practical.

A key point to remember is that your terms of business have to work for your business, both practically and legally; if they do not, you need to have a rethink, possibly with the benefit of legal advice from an expert commercial contract solicitor.

Practical steps: your terms of business

  1. Don’t leave your terms of business at the bottom of your to-do list. Having written terms of business creates certainty, reduces the risk of dispute and litigation, and shows your professionalism and commercial approach.
  2. Take legal advice in respect of your terms of business to ensure that they are legally enforceable, business and sector specific, consistent and cover all key aspects.
  3. Regularly review your terms of business and update them as required. This may be because your legal obligations or your business processes have changed.
  4. Train staff who deal with orders, payments, and customers on your terms of business. Ensure that they understand the terms and can explain them clearly and keep their training up to date if you amend your terms of business.
  5. Ensure that your terms of business prevail over your customers’ terms of business and send them regularly and consistently to each customer.
  6. If you have a supply of goods/services agreement which is separate to your terms of business, ensure that the two documents are consistent and that it is clear to both you and your customers which document prevails.
  7. Ensure that your terms of business are practical and “work” for your business. If they don’t, change them.

Our commercial law team is available to assist you with any queries that you may have in relation to terms of business and with expertise across a wide range of sectors and industries can advise you on both the legal and commercial aspects of your terms of business at every stage of your business’ lifecycle.

What next?

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