While there are a number of important aspects to any customer agreement, at its core, the agreement seeks to do two ‘simple in theory’ things:
- To regulate the extent of the liability of the company.
- To get customers to pay.
The precise formats of the agreements regulating these things are varied, and all seek to achieve the same result, but, depending on the type of business, may do so through a terms of service on a website, a service level agreement or any other formal written agreement.
There are several standard provisions (look to the Electronic Communications Act of 2005 for guidance) that ought to be included in any customer agreement, but, specific advice should be sought in relation to the commercial impact of legislation such as the Consumer Protection Act, the National Credit Act and the Protection of Personal Information Act (covered, to some degree, here).
Specifically, however, you should seek to incorporate the following key provisions:
- Limitation of liability
- Dispute resolution.
Limitation of liability
It is almost impossible to exclude all forms of liability, regardless of the nature of the business, so these risks need to be managed in the form of appropriate insurance when a contractual exclusion is not possible.
When things do go wrong, you need to have a well-constructed provision that seeks to limit the extent to which your company is liable. For example, if you are a software business, you could face liability in a situation where your software malfunctions or does not perform as expected.
If you are an advisory company, even a relatively minor mistake in your advice could have vast implications, equating to large sums of money.
The key here is to manage this risk, rather than to seek to exclude all liability whatsoever, which would probably not hold up in court anyway.
Inserting a confidentiality provision into your agreement is one of the mechanisms that will assist in protecting all of the trade secrets and business processes that make up your secret ‘sauce’ and governs the extent to which third parties are able to access and use that information.
This is one of those areas where a carefully-crafted confidentiality clause can be of immeasurable value to your business. And beware: A ‘copy and paste’ precedent can be disastrous.
It is particularly important that the definition of what constitutes ‘confidential information’ is wide enough to encompass all aspects relevant to your business, but relevant and reasonable in its application to withstand judicial scrutiny, if it comes down to it.
The fundamental purpose of starting a business is to make money. This is made difficult, though, when you don’t have an effective way of enforcing payment from customers.
Failing to regulate the expectations of all parties through a well-constructed payment provision in your customer agreement means that your clients may not know (or may argue about when) payment is due. You also need to make it clear to whom payment is due and what late payment charges may be applicable.
It is also plausible that a poorly-drafted clause may create vague responsibilities that, in turn, create loopholes and make judicial enforcement more difficult. It really is in everyone’s interest to have clear expectations of when and how payment should be effected.
Termination and dispute resolution
Regulating the termination of your business relationship can be very similar to divorce, so it’s best to carefully navigate these waters at the beginning of your relationship. The same applies to situations where a dispute may arise between parties to a contract.
Termination usually applies with some form of notice period, if the contract is a fixed-term contract, but, things to consider are:
- Whether the Consumer Protection Act applies to the termination (and what a reasonable cancellation figure would be)
- What length of notice period is reasonable
- Whether there is an expectation of renewal from any of the parties
Where there is a dispute between parties, careful consideration needs to be given to how you intend to resolve these disputes, and what happens if you are unable to do so.
In most cases, a formal dispute will be raised through a notice, which is served on the breaching party, and will set out the grounds for the alleged breach and provide a specified period of time to rectify the breach.
Where the breach is not rectified, you need to consider what the next step is. For example, a dispute may be referred to arbitration or formal mediation, where a mediator or arbitrator is appointed to resolve the dispute in a manner that is more time- and cost-effective than referring the matter to court.
Recent decisions in our courts have shown a strong preference toward exhausting all available methods of formal and informal dispute resolution, such as mediation and/or arbitration, prior to approaching the court for assistance, and have even gone as far as to order costs against parties who have not meaningfully participated in the dispute resolution.
A careful blend of the commercial considerations and legal risks and obligations are the recipe to a solid customer contract, and one that should undoubtedly be expertly tailored to your business’ specific needs.