When reviewing payment clauses in contracts, most business leaders instinctively zero in on the amount and timing of payments. But these clauses are about so much more than just dollars and deadlines. A closer look at the fine print ¾the so-called 'boilerplate'—will reveal critical terms relating to invoicing, dispute procedures, late fees, and remedies, all of which can significantly impact your bottom line.
The key is knowing what to watch for and how your role—vendor or customer—shapes your position. In the below chart, we compare common boilerplate payment terms, and the positions often taken from both perspectives to help guide your review of payment clauses with an eye toward mitigating hidden risks.
Boilerplate Terms
| Payment Term | Vendor Position | Customer Position |
| Timing | Shorter payment windows (e.g., payments are due, Net 30). Starting the clock on the invoice date (whatever date is written on the invoice, typically, the date it is prepared and sent). | Longer payment windows (e.g., payments due, Net 60 or Net 45). Starting the clock on the data invoice is actually received, which offers protection from lost or delayed invoices. |
| Payment Schedule | Prefer prepayment of services (e.g., payments annually in advance). | Prefer to pay in arrears to protect leverage if and when an issue arises; otherwise, seek smaller, more frequent payments (e.g., monthly or quarterly). |
| Withholding or Setoff | Payment in full | Payment of the "undisputed" amounts, but able to set-off or withhold in good faith. |
| Disputes & Corrections | Require payment even if charges are disputed. Allow limited window for customer to dispute the invoiced amount or seek an invoice correction (e.g. 30 days from receipt of invoice). | Avoid limits on the right to dispute charges; or seek to extend the time period for raising them (e.g., 90-180 days). In lieu of a cutoff date for disputes, seek a shift in the burden of proof (e.g., after 90 days, the invoice is presumed correct absent clear and convincing evidence to the contrary). |
| Overages | Allowed to bill for overage charges. | Seek a deadline on vendor overage charges (to avoid
"surprise" invoices after your budgets have closed); or
tie the overage deadline to the invoice dispute deadline. |
| Late payment penalties | Meaningful late fees/interest rates on overdue balances (e.g., 1.5% per month or greatest amount allowed by law if less) in order to motivate on-time payments. Customer covers any costs of collection if necessary. | Avoid late fees if possible; otherwise, prefer penalties are
fair (e.g. try to lower the percentage rate) and that late fees
only apply to undisputed amounts. Prior written notice and an opportunity to cure vs. automatically imposed fees. |
| Other Remedies (Suspension) | The right to suspend services | Notice and opportunity to cure first; suspension only to the extent related to any remaining breach after cure period. |
| Expenses | Reimbursed upon submitting to customer. | Avoid hidden charges or broad reimbursement language (e.g. agree to reimburse only those expenses which are (i) reasonable and necessary, (ii) evidenced by receipts, (iii) pre-approved in writing by customer, (iv) passed through to customer at cost, without markup; (v) in accordance with agreed upon payment terms; and (vi) in compliance with customer's applicable travel and expense policies). |
| Invoicing Requirements (Format &
Details) |
Voiding paying incremental fees to use customer's preferred billing platform. | Mandatory inclusion of detailed information (e.g., purchase
order numbers, correct entity name and billing email address, in
the right format, etc.) Require vendor to submit invoices through its online billing platform (if one exists), at the vendor's expense. |
| Amount | No restrictions on price. | Any opportunity to limit price, including: volume discountstiered pricingcaps on variable fees that require customer's consent for fees above a certain amountfixed currency exchange rateswhen amounts due are tied to customer revenue, narrow the definition of revenues as much as possible. |
| Price increases | The right to revisit the pricing annually and/or at each renewal. | A cap on price increases (e.g., no more than the lesser of (i) 3% per year, or (ii) the increase in the CPI index) Require advanced written notice of any increase in the renewal price, as far in advance as possible (e.g., 60-90 days before any renewal decision deadline). |
| © Brian Heller, BHeller@OutsideGC.com & Stacey Heller SHeller@OutsideGC.com | ||
Bottom Line:
Payment clauses contain business-critical terms that directly impact your cash flow and risk exposure. Careful review and strategic negotiation can help to ensure that payment clauses align with your business goals. Whether you are the vendor or the customer, it is smart to clarify these issues before entering into a contract, especially when it is a new relationship. Understanding how these nuances will be handled can go a long way in avoiding potential disputes down the road.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
