Terms and conditions are often overlooked or not drafted in detail when entering into a business agreement with potential customers. One would think that all entrepreneurs and business owners would always insist on signing proper agreements and read the ones that come across their desk. In most instances, this turns out not to be the case. Frank Knight, CEO of Debtsource – a specialist B2B credit management company – highlights six basics that business owners should consider when concluding B2B credit agreements with clients.
Of the thousands of credit agreements (credit application forms) that we audit for our customers every month, only about 40% require no changes, meaning that a staggering 60% of crucial credit agreements involving literally billions of rands in trade credit transactions have some contractual defect. These include not being signed by a director/member of the debtor, the clauses of the document not being legible, pages not all initialled at the bottom of each page, critical clauses being deleted, and the agreement being signed in the incorrect company name.
It turns out that many entrepreneurs are not really “details” people and prefer to “look at the bigger picture” rather than being concerned with details pertaining to terms and conditions. This of course can have catastrophic repercussions when deals go wrong, as courts are almost entirely interested in whether the terms were indeed crossed, before they become enforceable.
In South Africa every page of the agreement should be initialled. If the client has not initialled a particular page, there’s a good chance that the clauses on that page won’t be enforceable.
1. The terms and conditions that you print on your statement or the back of your invoice is useless. The person accepting delivery for your goods is not authorised to commit to your terms and conditions and their signing of the invoice to accept delivery of the goods should by no means be interpreted as you having enforceable terms. Similarly, terms and conditions which are housed on a website somewhere will not be enforceable if you try the “You agree to our terms hosted at www…” approach.
2. Only directors of companies, or those specifically authorised by the directors, are able to commit their company to your terms and conditions. It is pointless for anyone else to sign your agreements or credit application.
3. The purpose of an agreement is not to make it as short as possible. The purpose is to include all the required clauses that you may need when things go wrong. Some business owners feel guilty for asking their customers to sign a detailed document, meaning they edit out critical components to make the document look less onerous and offensive. At the other end of the spectrum, there is no need to ask your client to sign a document the size of a bible. For normal trade credit transactions, you shouldn’t need more than 25 clauses in your document (but bear in mind this is often industry dependent.)
4. You must retain a legible copy of the signed agreement, even if it’s not the original. Ideally these agreements need to be scanned and safely retained. Often ongoing clients will not be asked to sign a further agreement for years, meaning that you may have to rely on a document that was signed a long time ago when a dispute arises. Not finding the document, or not being able to clearly read the clauses of the document may cause further deepened disputes between two entities.
5. Business owners (or a responsible person) should look through every new agreement which their sales force sign before starting the trading relationship with their new client. The stereotype sales person is typically not “details oriented”, and if they have omitted key information or added wrong information trouble will ensue. Best to check the document upfront and resolve any issues before the trading relationship even commences.
Millions of rands get wasted in legal costs and protracted court battles owing to agreements not being diligently managed. Spending time and money upfront to ensure you have a great agreement and then applying diligence to the signed document is an investment you will never regret.