Terms of Trade: The Contract Clause That Separates Businesses That Get Paid from Those That Don't

# Terms of Trade: The Contract Clause That Separates Businesses That Get Paid from Those That Don't

If your invoices don't sit on a solid legal foundation, you'll find out too late — usually when a customer goes insolvent and you're competing with every other creditor for scraps.

Terms of Trade is the legal document that sits behind every credit transaction. It's not sexy. Most businesses bury it in a clause at the bottom of their website or hand it over once during onboarding and never mention it again. But in a dispute or an insolvency, it's often the single most valuable piece of paper your business has.

What Terms of Trade Actually Are

Terms of Trade (also called Terms and Conditions or T&Cs) are the contract between you and your customer that govern the credit relationship. They spell out:

• Payment terms (Net 30, Net 60, etc.)
• Late payment interest and fees
• What happens if payment fails
• Your right to suspend services or goods
• Most importantly: whether you retain legal ownership of goods until payment clears

Why Retention of Title Matters

The critical clause in any Terms of Trade is **retention of title** (or security interest, depending on your jurisdiction).

Here's what it does: if you supply goods on credit and the customer doesn't pay, retention of title means you legally own those goods until payment is received. In an insolvency, that matters enormously. Unsecured creditors (those without retention of title) typically recover cents in the dollar, if anything. Secured creditors with retention of title get their goods back or move to the front of the queue.

**Without retention of title:** You're just another unsecured creditor hoping for recovery.

**With retention of title:** You have a legal claim to the goods, which is dramatically more valuable in a liquidation.

The Difference It Makes

Consider two scenarios:

**Scenario 1:** You supply $50,000 worth of goods to a customer on Net 30. No retention of title clause.

Three months later, the customer goes insolvent. Your $50,000 claim joins hundreds of others fighting over the assets. You might recover $5,000, if you're lucky.

**Scenario 2:** Same $50,000, but you have a properly drafted retention of title clause in your Terms of Trade.

The customer goes insolvent. You identify $40,000 worth of your goods still in their possession. You have a legal right to recover them. You either get the goods back or get priority treatment in the liquidation.

That's the difference between losing $45,000 and losing $10,000. At scale, across multiple customers, retention of title can be the difference between a manageable bad debt and a cash flow crisis.

Common Terms of Trade Issues

1. No Formal Terms of Trade at All

Surprisingly common. Many businesses operate on a handshake and then wonder why they have no recourse when a customer doesn't pay.

2. Terms of Trade That Are Too Generic

Downloaded from the internet or copied from another business, but not reviewed by a commercial solicitor or adjusted for your specific business model. Generic terms often miss critical industry-specific protections.

3. Retention of Title Clauses That Are Unenforceable

A retention of title clause only works if it's legally enforceable in your jurisdiction. In Australia, this means proper registration on the Personal Property Securities Register (PPSR). In the US, it depends on state UCC laws. Many businesses have retention of title clauses that look good but won't hold up in court.

4. Never Communicating Terms to Customers

The strongest Terms of Trade in the world only protects you if the customer actually agreed to them. If you never shared them, or buried them so deep a customer couldn't find them, they may not be binding.

5. Not Updating Them

Business practices change. Payment terms evolve. Late fee amounts shift. If your Terms of Trade haven't been reviewed in five years, they probably don't reflect your current business or current legal requirements.

What Your Terms of Trade Should Include

**Payment terms:** Specify Net 30, Net 60, or whatever your standard is. Be explicit.

**Retention of title clause:** In Australia, this needs to reference PPSR registration. In the US, it depends on state law — consult a commercial attorney.

**Late payment interest:** Specify the interest rate or reference it to a benchmark (e.g., RBA cash rate + 5%).

**Late fees:** Many jurisdictions allow a flat fee for late payment — often $50–$150 depending on invoice value.

**Right to suspend services/goods:** Explicitly state that you can suspend further supply if an account becomes overdue.

**Payment failure consequences:** What happens if a payment fails? Do you charge a fee? Do you automatically suspend credit?

**Dispute procedures:** How should customers raise a dispute, and what's your timeline for resolution?

**Governing law and jurisdiction:** Which state or country's laws apply, and where can disputes be litigated?

Getting Your Terms of Trade Right

If you supply goods or services on credit — and especially if you're in Australia or the US — get a commercial solicitor to review or draft your Terms of Trade. This is not a DIY exercise. The cost of a proper legal review ($2,000–$5,000 depending on complexity) is infinitely cheaper than the cost of losing a $50,000 customer to insolvency with no legal protection.

In Australia: Make sure your retention of title clause is PPSR-compliant. File the registration. This takes hours, not days, and the cost is minimal. But many businesses skip this step and then discover their clause is unenforceable.

In the US: Retention of title enforceability varies by state. Make sure your solicitor understands the specific state law where your customers are located.

For Both: Make sure your Terms of Trade are clearly communicated to customers at the point of sale, not buried months later. A customer who can credibly claim they never saw your terms will argue they didn't agree to them.

The Bigger Picture

Terms of Trade are one of the most underrated risk management tools in finance. They won't prevent bad debt — customers go insolvent for reasons beyond your control. But they absolutely can change your recovery rate from pennies in the dollar to something that actually protects your cash flow.

In the current insolvency environment, getting this right is not optional. Review your Terms of Trade. Get legal advice. Ensure your retention of title clauses are enforceable in your jurisdictions. Communicate them clearly to customers.

The businesses that weather the next few years of elevated insolvencies will be the ones that managed credit systematically and protected their legal position. A solid Terms of Trade is where that protection starts.