Seven Hidden Pitfalls of Payment Terms
One of the most important terms of your contract, payment provision often gets overlooked, as long as the amount looks right. In reality, you may be up for a rude awakening when your payment is withheld according to the terms of your contract. Here are the most common pitfalls to look for:
1. Timing Triggers
Be aware of the payment timing requirements in your contract regardless of whether you are billing for or paying for the work. Set a definite trigger for the 30 / 60 /90-day payment countdown. It could be an acceptance letter, demand for payment letter, or any other trigger parties can agree on. Beware of automatic triggers happening on a certain date or after a certain period following the demand payment letter. If you are the payor, make sure you have the right to affirmatively approve the payment to assure you have some leverage to negotiate the price down or withhold payments if the work quality is sub-par.
2. Disputed Payments
Make sure you have the right to withhold controversial payments. If there is a billing mistake, it is a lot easier to clear it up before the payment is made. Many contracts call for payment regardless of whether or not the payment amount is correct, promising to fix mistakes in the future. Do yourself a favor and make sure you only pay what's actually due.
3. Regulatory Requirements
Some industries regulate how the payments are made in a commercial transaction. For example, many states have prompt pay regulations to ensure timely payment from owners to contractors and contractors to subcontractors. Failure to adhere to the particular state’s "prompt pay" requirements that can make the paying party liable for interest on past due payments, as well as payment of the billing party’s attorneys’ fees and costs incurred in order to collect on the past due payment.
4. Payment conditions
Be mindful of “pay when paid” or “pay if paid” provisions in the contract. If your payment is tied to the other party's payments to the contractor and there is any delay in paying the contractor, you may experience delays irrespective of the timing requirements contained in your agreement.
5. Right to set-off
Some contracts will call for a right of set-off against the payment due to you. For example, if your customer is not fully satisfied with your work, or have to hire other contractors to finish it, that might trigger the right of set-off in your contract. I generally do not recommend agreeing to this term, because you are giving up your leverage to negotiate at a later date as to how to fix a particular issue.
Make sure to indicate what currency you are using in your contracts. If you do use anything other than the local currency, make sure you have a way to accept the payment without additional fees or set up clear conversion terms, because some foreign currencies may be somewhat volatile as to their value.
7. How Much?
Many contracts cannot have a set payment amount, which is not an issue pro se. However, make sure that your method of calculating payment due is clear and easy to follow. It's OK to include examples of how the payment is calculated.
If disputes regarding payment do arise, you should comply with your contract requirements as best you can. If your argument escalates to litigation, compliance with the contract payment terms will likely be given substantial consideration by whatever judge or arbitrator is hearing your case. If you have a substantively sound argument for disputing or demanding payment but fail to satisfy express payment terms under your contract, you may face an unfavorable outcome, so proceed diligently and carefully to avoid that result.
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