Start-up Series: Do I Need Terms of Business and What Clauses Should I Look Out For?

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Tegen Quinn, Senior Associate at Darwin Gray outlines why businesses should set out terms of business to avoid risking costly mistakes down the line.

What are they:

These are the terms on which your business trades with its customers and suppliers.

Whether you create your own standard terms of business to send out to your customers and suppliers or you are agreeing to operate subject to someone else’s standard terms, what is important is that you have a clear set of terms in place to set out the parameters of the business relationship.

Why do I need them?

They are particularly useful in protecting your position if things go wrong and you end up in a dispute with a customer or supplier – for example, by limiting the scope of your obligations and your liability.

If you sell to individuals you will also need to ensure that their additional statutory rights are clearly set out in your terms.

Do I need a bespoke set of terms?

Where you are able to operate subject to your own terms of business then it is advised to have them professionally drafted.

A modest investment up front to prepare your own standard terms can save you substantial sums of money later down the line.

Businesses which have written their own terms rarely include appropriate protections for their business. Many download a template from the internet, or copy terms from a competitor. However, terms written in this way are unlikely to cover all facets of your business, and it is often the case that businesses get their fingers burned when something goes wrong – which can be a costly mistake.

Similarly, if you are being asked to trade subject to someone else’s terms, depending on the value of the contract to your business, you should consider seeking legal advice on those terms to check that you do not inadvertently agree to something that could cause you trouble commercially and legally down the line.

What terms should I look out for?

Aside from the commercial fundamentals such as price and delivery times, there are a number of key areas you should be sure to check:

  1. “Time of the essence” – a time of the essence clause could mean that even a small delay in delivery could entitle you or your customer to terminate the contract and sue for damages.
  2. Warranties – these “warranties” (promises) can be given in relation to all manner of things, including performance. If breached, these warranties could entitle the party relying on them to sue for damages and/or terminate the contract.
  3. Assignment of intellectual property rights – check which party will have the intellectual property rights in the goods or services that you are providing or ordering.  Depending on the nature of the agreement, you may want to ensure that you have the benefit of these rights so you can exploit them commercially elsewhere.
  4. Indemnities – this allows the party with the benefit of an “indemnity” to short cut legal proceedings, effectively handing out a “blank cheque”.
  5. Limitation of liability – you will no doubt wish to limit your liability to the other party, particularly in relation to “consequential losses” e.g. loss of profits, as well as in relation to the overall amount for which you could be sued.
  6. Rights of termination – check if you want the right to terminate the agreement early or consider the consequences should the other party have this right.
  7. Import/export requirements – the contract may contain specific import and export requirements, which must be properly considered. This is particularly important if you are dealing with a foreign counterpart.
  8. Right to sub-contract – you or the other party may intend to sub-contract some or all of your obligations under the contract. Do the terms require the consent of the other contracting party so that some degree of control is retained over who is carrying out the work?
  9. Governing law and jurisdiction – if you are dealing with a foreign company, their terms may seek to incorporate a foreign law jurisdiction clause, meaning that any dispute will have to be dealt with in a foreign court, subject to local laws. This could put you at a distinct disadvantage should a dispute arise.

For more details on the above or a related topic, contact Tegen Quinn [email protected] or find out more on the Darwin Gray website: www.darwingray.com/corporate-commercial.