Business Agreements with Third Parties

Supplier terms

The nature of the supplier agreement for your business is very much dependent on the nature of the goods or services supplied and the character of the typical customer.

Property in goods passes at the time as it is intended to pass, which is usually on delivery. Risk passes with the property. Those general rules can, however, be modified in the supplier’s terms.

Does the supplier require that the customer accept the risk of damage in transit or delay in delivery? Or is the risk wholly accepted by the supplier? If at the customers’ risk, is insurance to be offered?

Differing considerations also apply on the one hand to bulk goods than to, for example, white goods. The former might require only a general description, eg “20mm river gravel” as compared to the latter which will require numerous technical particulars.

Those characteristics have a significant bearing the supplier’s preference in respect of the many issues that need to be traversed in the supply agreement.

Is the supply to be by reference to a sample? What variations in colour, dimensions and quality etc are permissible?

Within what period must a customer notify defects in goods received? Is the customer entitled to re-sell goods and if so are any restrictions applicable?

Suppliers are entitled – within statutory parameters – to specify contractual limits to their liability for defects and consequential loss caused by goods or services supplied. How will this be accomplished? What improper use of the goods or services will void the supplier’s warranty?

What warnings and disclosure is required to prevent any misuse of liability falling back on the supplier?

If the supply is of a recurring nature, the circumstances in which either party may terminate the arrangement need to be specified. What period of notice will be required to allow termination of the arrangement where there is no breach by the other party?

Payment terms need to be specified. Will non-payment of invoices or insolvency of the customer entitle the Seller to terminate the supply without notice?

Copying or reverse-engineering so as to produce identical or similar goods or services should be prohibited. Suppliers of manufactured goods may also require a provision prohibiting the customer competing with the supplier by way of any subsequent manufacture or perhaps also, re-sale from a different supply source, of identical or similar goods.

If the customer entitled to re-sell the goods or to distribute them to other re-sellers, the supplier’s intellectual property needs to be protected by appropriate covenants and licencing.

What about security for payment? Indemnities? Retention of the title? Limitations of liability?

The above are just some of the many considerations that need to be carefully considered in drafting a comprehensive supply agreement for your business.

Security for payment

Security for payment can be achieved by one or more of the following means:-

• cash in advance;
• cash on delivery;
• bank guarantee;
• real estate security;
• retention of title until receipt of cash payment via Personal Property Security;
• security over other assets of the customer via Personal Property Security; and/or
• personal guarantee.

The nature of the goods or services and the industry into which their supply is made will influence the nature of the security which the supplier can demand. A recurring Personal Property Security over goods sold and the customer’s business assets is the very least level of security that supplier’s should require where cash, bank guarantee or real estate security is not provided.

Australian Consumer Law

Consumer or not a consumer?

The extent to which this all-pervasive law applies to supplier contracts depends firstly upon whether or not the goods or services are “acquired buy a consumer” which occurs if:

• their price is $40,000 or less; or
• they are of a kind ordinarily acquired for personal, domestic or household use or consumption.

The person supplied with goods or services is deemed to be a consumer unless the supplier proves otherwise.

If acquired by a “consumer”, suppliers need to have the following divisions of the ACL top of mind when their supply agreement is drafted:-

1. unfair terms in “standard form contracts”
2. statutory guarantees
3. misleading and deceptive conduct
4. unconscionable conduct
5. false and misleading representations

If the customer does not acquire the goods or services as a “consumer” as defined above, only 3, 4 and 5 apply unless the customer is a “small business”  in which case 1 “unfair terms” also applies. See below

Services can be “acquired” by a consumer without being paid for, eg car park facilities at a shopping centre are acquired from the centre while shopping at the businesses situated therein.

Unfair terms

• Extension to small businesses – If the number of your customer’s employees – including casuals engaged on a regular or systematic basis – is less than 20, it is considered a “small business”. The small business customer is therefore entitled to rely on the “unfair terms” protection if the upfront price does not exceed $300,000 or – if the contract is for a period longer than 12 months – the total price does not exceed $1 million.
• What is a “standard form contract”? A supply agreement is deemed to be in a “standard form” unless the supplier proves otherwise.
• What is an “Unfair Term”? There is no definitive list of what terms are considered unfair. Only a guide as to what might contract clauses might fall into that category.
• The ACL says a term is unfair if:
  • the term would cause a significant imbalance to the supplier’s and customer’s rights;
  • it is not reasonably necessary in order to protect the legitimate interests of the party; and
  • it would cause detriment to the other party if it were to be applied or relied on.

A term is presumed “not to be reasonably necessary to protect the interests of the party advantaged by it” unless that party proves to the contrary.

In practice, a contractual provision will be interpreted as “unfair” if it is “so weighted in favour of the supplier as to tilt the party’s rights and obligations so significantly that it grants to the supplier a beneficial option, discretion or power; or imposes a disadvantageous burden, risk or duty”. If a term is “transparent”, ie expressed in reasonably plain language; legible; presented clearly; and readily available to the consumer (eg bright colours and larger type), it is less likely to be considered unfair.

A term which denies customers interest on delayed refunds has been held to be unfair. Charging a 15% administration fee to process refunds has been held to have gone beyond what was reasonable to protect the supplies interests and was therefore unfair. Terms that require cancellation of a recurring service by phone to a call centre when notification by email or web service could have achieved the same result, are likely unfair.

Terms that impose exit obstacles in respect of the supply of recurring services or the recurring delivery of goods are likely unfair. A term that requires a customer to bring proceedings against a supplier in a foreign jurisdiction – notwithstanding the supplier also carries on business in Australia – is likely unfair.

A term that limits the period in which customers may bring claims in respect of defects is likely unfair.

• Consequences of an unfair term in a standard form contract – If found to be unfair, the term is struck out but the remainder of the contract remains valid. Draftsmen should, therefore, consider the inclusion of “cascading” or alternate terms that will apply in the event that a particular term is struck out as unfair.

Statutory guarantees in supply contracts for goods and services

As noted above, these guarantees apply only if the item is “acquired by a consumer”. The guarantees are enforceable as if they were included in the contract. In respect of goods, the guarantees are that the goods sold or hired:-

• will be of an acceptable quality (having regard to the nature of the goods, their price and any disclosures made by the supplier) in appearance and finish, free from defects, safe and durable – s54 – “Quality guarantee”
• will be fit for the purpose for which goods of that kind are commonly supplied and for the purpose which the customer expressly or by implication makes known to the supplier- s55 – “Purpose guarantee”
• will correspond with the description provided by the supplier e.g. online or by way of sample or demonstration model – s56, 57 – “Compliance with description guarantee”
• will have from the manufacturing facilities for repair of the goods and available spare parts “for a reasonable period” after the date of supply of the goods – s58 -“Availability of repairs and spare parts guarantee”
• can have any express warranties made by the manufacturer or supplier honoured by them – s59 – “Express warranty guarantee”

For services, the guarantees require the services acquired (except if the services relate to insurance or “transport and storage” in the course of a business trade or profession):-

• to be provided with due care and skill – s 60 – “Due care and skill guarantee”
• will be reasonably fit for the purpose for which services of that kind are commonly supplied and for the purpose which the customer expressly or by implication makes known to the supplier- s61 (1) – “Purpose guarantee”
• will be of such a natural quality and condition that they might reasonably be expected to achieve the results that the consumer as expressly or by implication informed the supplier that it wishes to achieve – s61 (2) – “Results guarantee”
• will be supplied within a reasonable time – s62 – “Supply period guarantee”

Other ACL issues

Customers can also seek redress for:-

1. misleading and deceptive conduct
2. unconscionable conduct
3. false and misleading representations

In relation to consumer and non-consumer transactions. See Misleading & Deceptive Conduct Liability includes that relating to an injury. Additional provisions regarding liability for defective goods apply to manufacturers and importers.

The top 10 must-dos before entering into a franchise agreement

1. investigate all commercial claims and disclosures in the franchisor disclosure statement.
2. spend time with at least three other franchisees to discuss their experience and profitability in detail.
3. conduct a detailed analysis of the benefits and detriments of the proposed franchise location.
4. get professional financial advice to test financial and other projections from the franchisor.
5. assess the uniqueness of the franchisor business model.
6. understand the commerciality of the franchisee business share ie territory, franchise fee etc.
7. investigate the financial soundness of the franchisor.
8. assess the capacity to grow volume in the franchise.
9. ensure sufficient working capital.
10. assess the likelihood of non-franchisee competitor threats.

And of course get sound and competent legal advice as to the franchisor disclosure statement, the franchise agreement and all other ancillary documentation.