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Terms of trade 101 - how to avoid getting burned

If you’re in business, big or small, you’ll be entering into contracts with customers, suppliers and others on a day-to-day basis.

How familiar are you with the ins and outs of your company's terms of trade? Brush up on the basics with lawyer Gerard Praat.

gerard praat lawyerAssuming liability for negligence

If you’re in business, big or small, you’ll be entering into contracts with customers, suppliers and others on a day-to-day basis – and they don’t have to be in writing for them to be binding on you.

In most cases (hopefully) all will go smoothly. Inevitably, however, there will be some cases where things don’t go according to plan, and the parties will need to concentrate their minds on the terms of the arrangement. At that point, it’s generally too late to change them if you find out you don’t like them.
 
What does all this mean to me?

If you want to dodge those contractual bullets we regard as avoidable, you need to do two things.

First, you need to establish your own terms of trade and make sure they are incorporated into your business transactions.

Secondly, you need to consider carefully any terms of trade which you are offered by any third parties and be sure that they don’t present you with a bombshell.
 
What kind of ‘nasty surprises’?

A good example of this is where you’re offered a standard form contract which requires you to assume liability, not only for your own negligence, but also for the negligence of the other party to the contract, and to arrange liability insurance to cover any damages or loss arising from that negligence. If you’re reading this and the warning light is yet to assume a reddish glow, then you need to read on.

Your liability insurance (assuming you have this) will almost certainly not cover you for liability that you assume for someone else’s negligence under a contract such as this. In most cases, you would need to obtain a special extension to your policy from your insurer to cover this event. That assumes your insurer would agree to cover it and you can afford the extra premium. The most likely outcome is that you (or your insurer) would decide it was too hard to get cover for this risk.

If you did not pick up on this issue and you signed the agreement in haste then you would be in a very poor position. You would be liable for any loss or damage to others arising from the other party’s negligence and you would have no claim against that other party and most likely no claim on your liability insurance.
 
What if I am ‘already there’?

If you already have agreements with customers and suppliers in which you agree to waive rights of recovery against them or to hold them harmless from anything they do or supply in terms of their agreement with you, then you need to tell your insurers.

Your insurer relies on its rights of recovery from others if it settles your insurance claim for loss or damages caused by someone else. That’s the right of ‘subrogation’. You have a duty to preserve this right which will generally be a condition of your policy of insurance. If you agree to waive those rights of recovery for any third party and you don’t tell your insurer, it may decline your claim for cover because you have – without its knowledge – prevented them from making a recovery from careless customers or suppliers.
 
What have we learned?

*       If you’re in business, be sure to have your own terms of trade and make sure they apply to all relevant transactions.
*       If you are offered terms which require you to either insure against or waive any claim for someone else’s negligence, don’t sign up; get advice.
*       If you are already in a contract which has these terms included, tell your insurance company fast.

We can help you with the first two points. When it comes to the last point, you’re in the hands of fate and your insurance company for the time being.

Gerard Praat is a partner at Knapps Lawyers, Richmond, Nelson. Knapps Lawyers is a member of NZ LAW. This article first appeared in the NZ LAW Limited’s  member firm e-newsletter, Commercial eSpeaking, Spring 2012.