Most businesses understand that having a set of terms and conditions to underpin their operations is a valuable way to go.
Unfortunately, far fewer businesses understand how to avoid the traps which might result in those fancy terms and conditions being largely useless.
For this article, we’ll set out the three core things that businesses need to understand once they have their terms and conditions drafted:
- The fundamentals of contracts;
- The importance of legal entities;
- The counter-offer problem.
This article is more geared towards businesses that deal with other businesses. If you’re running a B2C brick and mortar shop, or you sell widgets online using a point of sale system, then you hopefully have most of these elements covered as part of your normal systems.
A contract, then, has a few major elements:
- Acceptance; and
The offer is the proposal that sets out the terms on which someone is prepared to do business. So, for example, I send you an email saying, “I’ll buy your donkey for $100” – that is an offer.
Acceptance is when someone agrees to the terms of an offer. You reply to my email saying, “yep sure”.
Consideration is the value going from each party to the other – I get a donkey, you get $100.
So the question for your business is this: at which point are your terms and conditions being applied?
Because in truth, the only time you can validly apply your terms and conditions is during the offer phase of the negotiations. Someone needs to make an offer embracing the idea that your terms and conditions will apply. If some different offer is accepted, you might be having some issues later.
For many businesses, this means providing your terms and conditions up front and early. They need to be understood and agreed to be part of the deal that you are doing. For some, this is quite straightforward, but for others with extensive negotiations that take place it can get more complicated as items are varied, discussed or changed over time.
Some common mistakes to avoid here:
- You can’t retrospectively apply terms and conditions after a contract is formed, so including your terms and conditions on an invoice you issue after the fact will achieve very little;
- Make sure there is a clear, concluded understanding of the terms. Often during long negotiations with meetings, emails, text messages and zoom calls along the way, the actual terms of the deal can become quite blurry. Someone just eventually starts work or provides some goods, thinking the deal is X when the other party thinks the deal is Y. Thankfully this is pretty easily avoided – be clear on the terms before signing on the dotted line (or commencing work, or delivering goods, or shaking hands*).
- Watch out for your terms being accidentally replaced by the other party’s terms along the way (see our third heading below for more on this).
*Naturally we recommend a nice, clear, signed contract for business dealings. But we also live in the real world and understand this doesn’t always happen.
You Can Only Contract with a “Person”
We’ve described in more detail in our previous article some fundamentals about entities and how they impact your business.
For here, though, the vital thing to understand is that your terms and conditions are only useful if you can enforce them.
And you can only enforce a contract against an identifiable legal entity.
So if you do a deal with “Dave’s Delicious Drop” to deliver 1 tonne of grapes each month, do you actually know who you’ve contracted with?
- A company owned by Dave?
- A company of which Dave is the director, but not the owner?
- A company owned by someone else?
- A partnership between Dave and his long-time friend Stewart?
- A trustee of a trust?
If you have to sue for 12 tonnes of unpaid grapes, the last thing you need is to find out that you can’t figure out who Dave’s Delicious Drop actually is. While your lawyers can generally figure this out eventually, it’s just cost and time that nobody really needs to spend.
Again – this is easily avoidable. Familiarise yourself with what is and is not a legal entity (see our article here) and make sure you’ve got one as the identified party to your contract.
The Counteroffer Problem
In some industries a common problem arises. Normally this happens when the purchasing process involves a quote followed by a purchase order.
The problem is this:
- You issue a quote which says “our terms and conditions will apply”; then
- They issue you a purchase order which accepts the price of your quote, but says “our terms and conditions will apply”;
- You do the work.
So whose terms and conditions will apply?
Usually – not yours.
The problem is that your offer (quote) has been rejected. It has been replaced by their offer, which is on their terms. If you go ahead and do the work, you’re accepting their offer and also their terms along with it.
The practical question is, what should you do here? Realistically you want the business, so your options are:
- Read their terms and figure out whether you really care (are there any material differences between yours and theirs which actually disadvantage you?). If there are no real problems with their terms, then maybe you can just proceed;
- If (1) reveals some deal breakers, push back on those specific items;
- Try to negotiate so that your terms apply.
Of course all of these steps do slow things down, and potentially annoy the other party. So you need to balance the risk and reward, but if you want your terms and conditions to apply then you’ll need to do something.
Clarity is Key
Our key takeaway here is to aim for clarity:
- Clarity of what the terms are;
- Clarity of who you’re dealing with.
More often than not, disputes about contracts involve a degree of uncertainty – everyone just proceeded without really thinking about these things until later.
A few minutes at the start on these core elements can save a lot of problems down the track.
Need your processes reviewed, new terms and conditions or have a potential dispute looming? Reach out and we’d be happy to help.