How many times have you heard the old saying, “Better to be safe than sorry”? What about “Prepare for the worst and hope for the best”? These sayings have become so ubiquitous because they’re great advice, especially when it comes to protecting your commercial interests.
So, how exactly can you “prepare for the worst and hope for the best”? One way is by making sure you’ve got a strong set of terms and conditions in your contracts of trade.
In an ideal world, our clients would be paid on time and in full without any fuss. However, as many of our clients have found out the hard way, this just isn’t always the case. Too often do we have a client who finds themselves in a precarious situation because they didn’t have a set of terms and conditions in their contracts that protected them in the event of default.
Any contract you use should have some core terms and conditions that, if drafted properly, serve to protect your business should the worst eventuate.
Here's our pick of 5 core T’s & C’s every contract should have
1. Director’s personal guarantee
A director’s personal guarantee means that the director(s) agrees to be personally liable for any amounts the company owes you. Should the company default on payment, action can be brought against both the company and the director. This not only opens up another potential pool of assets from which you can make a recovery, but also gives you the option to pursue the director personally if the company goes into liquidation.
2. Debt collection and legal costs
A clause requiring payment of any collection or legal costs arising out of the recovery of outstanding amounts is a staple of any good contract. It provides a contractual and legally enforceable basis for requiring a debtor to pay not only the principle debt, but also the costs of having to collect that debt.
3. Late fees and interest on outstanding amounts
There are legitimate reasons for charging administrative fees and interest, such as to compensate for the hours spent chasing overdue accounts or to cover the interest payable on a supplier’s own overdraft.
However, a court will not enforce an administrate fee or interest clause if they consider it to be a “penalty clause”. A penalty clause is one which requires payment for default that is excessive to any loss that the supplier may have suffered as a result of that default.
To avoid being deemed penalty clauses, the clause must result in a payment which is a “genuine pre-estimate of loss”. Determining what this is exactly will require careful consideration as it depends on the particular supplier’s circumstances.
A charging clause in a contract will help mitigate the risk of an unsecured creditor. This clause secures any outstanding amounts owed to you through charge over any real or personal property that the customer or the guarantor, if there is one, owns. This gives you an interest over that property for satisfaction of the debt.
5. Jurisdiction and Governing Law
If you trade interstate and need to commence legal proceedings to recover a debt, you may find yourself needing to file court claims in the various State and Territorial courts all over the country.
To avoid such a costly and time-consuming situation, it is best to include a “governing law” and “jurisdiction” clause in your contract. This type of clause stipulates that the parties agree that the correct law for interpreting the contract and the courts in which any dispute is to be resolved is to be the State or Territory where the supplier is located.
If you need help with drafting new terms and conditions for your business or with updating the current ones you have, don’t hesitate to contact us. Our team here at Paladin Legal will be glad to assist you.
Call us today on 1300 363 752 or send us an email at firstname.lastname@example.org.