“Begin with the end in mind” (Stephen R Covey – Habit #2)
Tired of setting personal goals that you have forgotten by the time Australia Day rolls around? Us too. We love New Year as a time to review, revitalise, and set new personal goals but in 2020, at the start of a new decade, we want to shift the focus to your business goals.
We’ll admit it – we are very concerned about the economic outlook for Australia and globally at the beginning of this decade. Usually we are optimistic and tend to downplay the doomsayers but now it’s different and markedly so. Bushfires, climate change, trade tensions, declining economic activity, low wages growth, the government and the media cannot keep covering over the cracks, we fear the economic dam walls are increasingly unstable.
But this isn’t just another 2020 blah blah blah article. We actually want to help our clients with some practical steps to ensure they don’t suffer during a downturn? Let’s start by ensuring your business risks are identified and then minimised. “How?” we hear you ask – read on for more.
We have been asked many times about how a set of Terms can be improved. Businesses tend to not regularly review their commercial documentation until it is too late, and the damage has been done. They often do not appreciate how getting it right at the beginning of the Customer relationship can avoid the pain of breakup later. We have identified 5 main areas of risk that we repeatedly see in contract review – these are the 5 areas of your Terms and Conditions that you need to freshen up this year.
How do your Terms and Conditions stack up?
1. PPSA Protection
Just because your Terms mention the Personal Property Securities Act 2009 does not mean you are secured. We have found that one of the biggest problems in supply Terms is no PPSA protection at all or deficient protection.
The main risks we have uncovered are:
- No PPSA provisions at all
- No proper creation of a security interest
- Failure to include proceeds of sale of goods in the security interest
- Failure to constitute a security agreement for the purpose of the Act
- Each order constituting a separate supply and security interest, rather than one continuous supply and security; and
- No obligation for Customers to prevent higher ranking security interest in the goods supplied.
Without this protection, you could faces issues when trying to prove a security interest, or you might not be able to register your financing statement on the PPSR, or you might be limited in the amount you can recover under any security. Worse still – you could completely lose title to goods sold because you haven’t created a valid security interest or made a proper PPS registration at all.
Key message: To protect, you must prepare. To secure, you must safeguard. To register, you must review.
You can also see the CreditorWatch PPSA eBook for more detail https://online.creditorwatch.com.au/eBook_PPSRAComprehensiveGuide.html (yes, we declare an interest, we are featured in it!)
2. Proper limitation of liability
A big area of risk we have identified is liability of Suppliers. We are surprised by the number of businesses whose Terms have no cap on their liability for breach of contract, the most frequent situation being no limitation of liability clause at all.
If a supplier has no limitation of liability and breaches any of its obligations under the contract, then it could be responsible for the loss caused by the breach to an unlimited extent (far exceeding what was paid under the Terms.
The other common situation is exclusion for consequential losses, such as lost profits. We often see Terms that have no exclusion for consequential losses, which could leave Suppliers exposed to liability for an unlimited amount of damages – even those which you might think aren’t directly related.
Key takeaway: Use the New Year to know exactly how (and to what extent) your Terms limit your liability.
3. Missing clauses
Another major risk identified is missing clauses. We have done some stats and, on average, we can expect to find 18 clauses that are missing from a standard set of Terms. That stat alone is pretty scary for us – we are in the risk identification and minimising business and want the best protection for our Clients.
You might be surprised to know how many major contract areas are forgotten – a requirement for the Customer to inspect goods on delivery, the Supplier’s ability to change prices, the Supplier’s ability to update the Terms, termination rights, and how disputes are resolved.
Legal gaps in your Terms are the same as a missed doctor’s appointment – miss it and you will be told “if only I’d seen you 6 months ago” ….
Key takeaway: Take the opportunity to find and fill any “gaps” in your Terms.
So many Terms that hit our desk are a shemozzle – there’s just no other word for it.
Heavy legal jargon, misplaced marketing material, boilerplate clauses that aren’t necessary, capability statements, credit applications mistaken for legal terms and conditions, and thrown in somewhere are a mish-mash of the rules to govern the parties’ business relationship. There’s no structure, no thought put into the layout, the font is so small you need a magnifying glass to read it, and there is no plain English.
Why do contracts have to be this way? And why does all this matter?
Because contracts should be easy to read and understand for everyone involved. It makes for less internal management time, utilises technology where possible, potentially less disputes and better customer relationships. Who wouldn’t want that?
Key takeaway: Don’t just review the legality of your Terms, make sure they are user-friendly too.
5. Unfair terms
Why does it matter if your Terms are unfair to your customer? It’s your contract and your risk to take on, right?
Sort of. If the Australian Consumer Law (the “ACL”) considers one of your supply terms to be unfair, then the effect could be severe The unfair clause could be void and removed from the entire Terms (along with the rights and obligations that the clause provides). If that is something like limitation of liability, then you could find yourself in a situation of unlimited liability.
Key takeaway: If your Terms are one-sided, you could be at risk.
So, if you’ve identified some of the same areas of risks in your Terms and Conditions, do something now to protect your business in 2020 and beyond. If you would like us to give your Terms and Conditions a LEDcheck Contract Health Check with detailed feedback about where you could improve, please just let us know by sending them to firstname.lastname@example.org
Key takeaway: Make 2020 count, make your end goal to get your risks identified and minimised for the economic times ahead.
For more information, contact Ledlin Lawyers