Payment terms may seem relatively straight-forward but can lead to potential issues if not dealt with up front in a contract.
Fees and Payment Terms
Rarely do parties disagree whether a contract should include the amount of fees a customer would pay a provider to perform services or deliver products. But, the specifics in regard to the number of installments, approval of expenses, obligation to pay taxes, and currency are all subject to negotiation.
The payment schedule is also important. A customer may want to pay after all services have been performed (or products delivered) whereas a provider may prefer to have their money before beginning work. The parties may negotiate a variety of payment terms including payment up front, net 30, net 45, net 60 or even upon full performance.
A common provision in a master services agreement may allow for flexibility. For example:
Payment Terms. Customer shall pay Provider all fees and expenses, in the amounts and upon the terms stated in a Statement of Work.
Or the parties may agree on certain payment terms in a master services agreement. For example:
Payment Terms. All invoices shall be paid by Customer to Provider within 30 days after the date of receipt of an invoice. All payments shall be made by wire transfer to a bank account designated from time to time by Provider by written notice to Customer. All invoices shall be issued, and payments made, in U.S. dollars.
Missed or Late Payments
What happens when a customer does not make a payment to a provider when due? Customers may want to ensure that the deliverables are acceptable. Alternatively, providers may desire to include a contractual remedy such as interest payments on non-payments or the ability to withhold services or deliverables until payment is made. For example:
Late Payments. Any amounts not paid by Customer when due will bear late charges at the rate of 10% per annum or the maximum rate permitted under applicable law, whichever is less, commencing 30 days after the date of the invoice. Additionally, Provider will have the right to withhold shipments if payments are more than 60 days past due.
Customers may try to negotiate late payment penalties to only apply to “undisputed” invoices. This can lead to collection problems for the Provider if the contract does not clearly define what an “undisputed” invoice is. This is why providers generally prefer to include language that states the obligations of the parties in the event of a dispute. For example:
Invoice Disputes. If Customer wishes to dispute an invoice charge, Customer must (a) pay any undisputed portion by the payment due date; and (b) no later than the payment due date, provide Provider with a written explanation of the dispute, together with appropriate supporting documentation. The parties shall then work together promptly and in good faith to resolve the dispute. To the extent a dispute is mutually resolved, Customer shall pay the agreed amount (if any) within 10 days after receipt of a reissued invoice. If Customer complies with this Section, late fees will not be charged on the disputed amounts.
Payment terms seem relatively simple, but depending on the length of the term and amount of the contract, could have material consequences for a party.
The items discussed above are only a small portion of items that may be negotiated in a contract. Each party will want to weigh the potential risks of unperformed obligations against the benefits of the contract to determine what terms are acceptable in a final contract.
Shawn Peddycord is a business attorney specializing in acquisitions and contracts in North County San Diego. He represents small businesses in a variety of asset and equity purchase and sale transactions, and has extensive experience drafting and negotiating commercial contracts. This blog is for informational purposes only, is based on California law, and is not intended as legal advice or as a substitute for legal counsel.