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Updating terms and conditions - a trap

When you take on new business customers you no doubt ask them to sign a document confirming that they agree to your terms and conditions, including any credit limit on the account. Your terms may include clauses, or be accompanied by separate document, making the directors of the customer’s company personally liable in the event that it can’t pay your bill. That’s a sensible precaution, but if it’s not worded properly it may become ineffective.

Trap. If you modify your terms and conditions you will, of course, have to notify your customers. What you may not realise is that in doing so there’s a chance that any personal guarantees you obtained will lapse.

Amended terms

Generally, the law leans in your favour where a customer has accepted your terms and conditions, and it would be difficult for a director etc. to wriggle out of a personal guarantee. However where, as is usually the case, your terms and conditions include a credit limit, varying it might cause the personal guarantee to come to an end. At the very least it may make it difficult for you to enforce. This means you could rack up legal costs in the process and make enforcement financially inviable.

Trap. If a customer can show that there’s been a material change to the terms and conditions of business from their perspective, a court can rule that the original agreement has ended and so any guarantee associated with it unenforceable. In legal terminology it will be “discharged”.

Tip. To ensure that a personal guarantee isn’t unintentionally discharged as a result of updating your revised terms and conditions, ask the customer to consent to the changes in writing, with signatures from each guarantor.

Pre-emptive changes

To avoid having to obtain a new agreement each time you make a change to the terms and conditions, consider amending the wording of the personal guarantee. It should not be limited to a specific amount (credit limit) and, importantly, should operate indefinitely or at least until the customer’s account is closed with nothing owing. A commercial lawyer is likely to have a standard document that can be adapted for your business at relatively little cost.

Spread the risk

While a single director can bind their company to an arrangement, personal guarantees don’t work that way. If only one director signs the terms and conditions of business which incorporates the guarantee, then it only applies to them.

Tip. Either ask that the terms or conditions are signed by more than one director or send a separate guarantee document to be signed by, say, at least two directors (assuming the company has more than one).

You can easily check how many directors a company has through an online search at Companies House (CH) (see The next step ).

For a link to the CH search site, visit http://tipsandadvice-business.co.uk/download (CD 19.01.02).