Most businesses start with handshake arrangements and an invoice. That works while everyone is reasonable, volumes are low and counterparties are small. It stops working at scale, and the transition usually happens after the first significant dispute.
Get your terms incorporated properly
Terms only apply if they were incorporated before or at the time of contracting. Terms printed on an invoice issued after the work was agreed are generally too late.
What works:
- Reference the terms clearly on quotes and order acknowledgements, and provide them.
- Online, require an affirmative acknowledgement before purchase rather than a footer link.
- For ongoing relationships, put a signed trading terms agreement in place once rather than relying on each transaction.
- Keep evidence of what was sent and when.
The battle of the forms
At scale you will increasingly contract with businesses that have their own terms. Where a purchase order with the buyer’s terms meets an acknowledgement with the seller’s, which prevails turns on the sequence of offer and acceptance — generally the last set sent before performance begins.
Businesses that always respond with their own terms are in a better position than those that file the customer’s terms unread. And larger counterparties will simply require their terms, which makes reading them essential rather than optional.
What to check in a larger customer’s terms
- Indemnities. Broad indemnities can exceed your insurance cover. Signing an indemnity your insurer will not back is a serious exposure.
- Liability caps — whether yours is capped at all, and whether consequential loss is excluded.
- Payment terms and whether set-off is permitted.
- Termination rights, and whether they are symmetrical.
- Unilateral variation clauses.
- Intellectual property, particularly who owns work product.
- Audit and compliance obligations, which large customers increasingly impose.
The clauses that protect you
Retention of title. Ownership stays with you until payment. To be effective against a liquidator or competing secured creditor it generally needs registration on the Personal Property Securities Register. A clause without registration is much weaker than suppliers assume.
Interest and recovery costs on overdue accounts. Without a contractual right, recovering collection costs is difficult.
Personal guarantees from directors of small company customers. Normal commercial practice, and the difference between a total loss and a recoverable one.
Limitation of liability, subject to the statutory limits on contracting out.
Force majeure, drafted to cover the events that would actually affect you rather than a generic list.
Statutory limits on what you can exclude
The Consumer Guarantees Act cannot be contracted out of in consumer transactions. In business-to-business dealings, contracting out requires both parties in trade, in writing, and it must be fair and reasonable — a genuine test rather than a formality.
The Fair Trading Act allows unfair terms in standard form consumer and small trade contracts to be declared unfair. Terms causing significant imbalance, not reasonably necessary to protect a legitimate interest, and causing detriment are vulnerable. Unilateral variation clauses, automatic rollovers with onerous exit terms and broad liability exclusions are common candidates.
The Construction Contracts Act payment regime overrides contrary contractual arrangements in construction contracts.
Credit management at scale
Informal credit decisions do not scale. What is needed:
- A credit application form capturing the correct legal entity, directors and trade references.
- Credit checks on new accounts above a threshold.
- Credit limits, reviewed rather than set once.
- A systematic collections process at defined intervals.
- PPSR registration where you supply on credit.
Review periodically
Terms drafted at start-up frequently do not reflect what the business now does. Review them every few years and after any significant change in what you sell, who you sell to, or how.
business.govt.nz publishes contract and terms guidance, the Commerce Commission publishes unfair contract terms material, and the PPSR is at ppsr.companiesoffice.govt.nz.
General information only, not legal advice.
