How to build payment clauses for services agreements

In this article, we have a look at some of the important aspects that must be kept in mind when drafting payment clauses for services agreements.

Most disputed terms WCC ranking: 

20

Most important terms WCC ranking: 

Not ranked

Most negotiated terms WCC ranking: 

30

What is the purpose of a payment clause?

Payment clauses provide clarity on how payments will work, when they become due and matters that relate to the commercial aspects under the Agreement.

Payment clauses are often the cause of disputes due to a lack of clarity and a failure to address all the important aspects that need to be address in the payment clause.

Building blocks of a dispute resolution clause

building blocks of a payment clause

Invoice requirements & Taxes

As the Customer, you want to ensure that the Provider invoices you correctly so that your financial department can process payment without further information that may be required.

As the Provider, clarity on the invoicing requirements helps ensure you receive timeous payments.

Certain Customers would also require a more detailed invoice separately stipulating:

  • the Services performed
  • the fees related to the Services performed
  • any reimbursable expenses
  • etc.

 

Different jurisdictions deal with taxes in different ways. For example, some jurisdictions will have GST applicable, and others may impose some form of VAT.

In general, and in most B2B contracts, the Agreement will provide that all amounts payable under the Agreement are exclusive of any form of sales tax.

Another important aspect often missed is the process related to any Taxes that a Customer needs to withhold or deduct from the amount payable. Be clear on when these Taxes can be withheld and what happens when the Provider can produce documentation that substantiates an exemption from such Taxes.

Payment terms & method of payment

How long after an invoice is rendered will the Customer have to make payment?

When using a Master Agreement and statements of work, the payment terms can also be diverted to the statements of work. If this is the case, make sure to also include fallback payment terms in your Master Agreement. 

Also, what is the payment method that needs to be used? These days, electronic funds transfer is the obvious method, but businesses still use other methods.

As the Provider, you also want to ensure that payment needs to be made without deducting any bank charges. In other words, the amount that ends up in your account needs to be the amount per the invoice.

Set-off rights

As the Customer, if the Provider does owes you an amount under the Agreement, having a set-off right may assist from a cashflow perspective.

As Provider, a set-off right can hold several risk. You do not want a Customer exercising a set-off right in respect of an amount that may still be disputed.

Refunds and disputes

As a Provider, a refund may be a last resort, and you typically want to avoid provisions that provide refunds will be provided to the Customer. On the other hand, the Customer may push for refunds in certain circumstances as this may provide the Customer with a good amount of leverage during disputes.

If the Customer believes that the Services were not rendered in accordance with the Agreement, then the Customer can always institute a claim.

To try and meet each other halfway, the Parties may agree to a dispute resolution mechanism that will apply if there are any disputes that relate to payments under the Agreement. See the below example clauses for an example of such a dispute resolution clause.

Overdue amounts & collection costs

As a Provider, you want to make sure that you reserve the right to charge interest on overdue amounts. The interest rate that will apply may vary, with certain Providers reserving a right to claim the maximum interest allowed by law. This rate will mostly be dependent on industry practices and the negotiating power of the respective Parties.

In addition to the interest that may be charged on overdue amounts, as a Provider, you also want to reserve a right to recover reasonable collection costs from the Customer. Without reserving such rights, you may only be in the position to recover collection costs once a judgment is obtained (which can take some time).

Additional assurances & suspension of services

As a Provider, you may not always know what is going on underneath the surface with the Customer’s financial position.

Reserving the right to call for additional assurances may be a powerful tool to ensure that you do not take on disproportionate risk when waiting to be paid by the Customer.

Also, as a Provider, you want to expressly reserve the right to suspend the provision of Services if the Customer is not abiding by the Payment terms.

Most favoured pricing

Where the Customer has a particularly strong negotiation position, the Customer may ask for a “most favoured pricing” clause.

As Provider, you want to keep these clauses written in general terms.

These clauses should be more than a mechanism to get you to the table to start negotiating a price change.

Example clauses

Customer friendly

1.           PAYMENT

1.1        Invoices:  All invoices must have a reasonably detailed description of:

(a)          the Services performed

(b)          the fees related to the Services performed

(c)          any reimbursable expenses

1.2        Payment terms:  The Customer must pay the invoices of the Developer within 60 days after receipt by the Customer.

1.3        Method of payment:  All amounts due under this Agreement must be paid by electronic bank transfer.

1.4        Proration:  Except as may be otherwise provided in this Agreement, all periodic charges must be computed on a calendar month basis and prorated for any partial month.

1.5        Set-off:  The Customer may set off, as a credit against any monthly charges payable to the Developer under this Agreement, any amounts owed to the Customer under this Agreement.

1.6        Most favoured pricing: 

(a)          At all times during the Term, the Fees and other charges hereunder must be the lowest fees and rates contemporaneously charged by the Developer to any of its customers for similar volumes of goods and services of the same or comparable type and scope.

(b)          If at any time the Developer charges any comparable customer a lower fee, rate, or price for similar volumes of such comparable goods or services than the corresponding Fees charged hereunder, in that case, the Developer must immediately apply such lower rate or amount, as applicable, for all comparable products and services provided to the Customer.

(c)          Such lower rates or amounts, as applicable, must apply retroactively to the date on which the Developer began charging them to such comparable customer.

1.7        Taxes:  The following shall apply to any payment:

(a)          All amounts payable under this Agreement are gross amounts but exclusive of any value added tax (VAT), sales tax, income tax, consumption tax or any other similar tax, duty, fee, levy or other governmental charge, customs duties and other levies (“Taxes”), except as specified otherwise.

(b)          If any payment is subject to any Taxes, the Developer may charge such Taxes to the Customer.

(c)          If the Customer is required by law to make any deduction or withholding of taxes from any payment due to the Developer, then the Customer must:

(i)           prepare and submit any necessary filings and remit such taxes to the appropriate taxing authority; and

(ii)          provide the Developer with evidence of withholding and payment to the appropriate taxing authorities.

Despite the above, no such deduction or withholding shall apply if the Developer provides the Customer timely, appropriate and duly executed documentation that substantiates an exemption from such taxes.

1.8        Good faith disputes:  If the Customer, in good faith, disputes any invoice, in whole or in part:

(a)          The Customer must notify the Developer of the dispute at least 10 days before the invoice due date.

(b)          The Parties must use reasonable efforts to resolving the dispute promptly.

(c)          The Customer must provide sufficient detail of the nature of the claim, the amount, the relevant invoices, and information allowing the Developer to identify the affected Services within the time required for payment of the relevant invoice.

(d)          Payment of the disputed amount may be withheld until settlement of the dispute, but payment of the undisputed portion must be made per the payment terms.

(e)          Upon resolving the dispute, the Customer must promptly pay the Developer such amounts as due and payable.

Proivder friendly

1.           PAYMENT

1.1        Invoices:  All invoices must have a reasonably detailed description of:

(a)          the Services performed

(b)          the fees related to the Services performed

(c)          any reimbursable expenses

1.2        Payment terms:  The Customer must pay the invoices of the Developer within 7 days after receipt by the Customer.

1.3        Additional assurances:  If, in the opinion of the Developer, the financial position of the Customer at any time does not justify delivery on the agreed payment terms, the Developer may:

(a)          demand full or partial payment in advance or such security or payment conditions as the Developer may consider adequate to ensure due and timely payment by the Customer; and

(b)          suspend, postpone or cancel the Services until the Customer’s financial position is corrected in a manner acceptable to the Developer.

1.4        Overdue amounts:  The Developer may charge interest on the outstanding balance due under the Agreement as follow:

(a)          The interest will be charged at a rate of 12%% per annum.

(b)          The interest will accumulate from when payment becomes due until the payment is received.

(c)          The interest will be calculated daily and capitalised monthly.

1.5        Method of payment:  All amounts due under this Agreement must be paid by electronic bank transfer.

1.6        Refunds:  The Customer will not receive any refund on any amount paid under this Agreement.

1.7        Collection costs:  The Customer must pay the reasonable costs arising out of the collection efforts of the Developer to recover overdue amounts.

1.8        Suspension of Services:  If the Customer’s undisputed payment is overdue by 7 days or more, the Developer may suspend the Services on written notice.

1.9        Proration:  Except as may be otherwise provided in this Agreement, all periodic charges must be computed on a calendar month basis and prorated for any partial month.

1.10     Set-off:  The Customer may not set off as a credit against any monthly charges payable to the Developer under this Agreement any amounts owed to the Customer under this Agreement.

1.11     Taxes:  The following shall apply to any payment:

(a)          All amounts payable under this Agreement are gross amounts but exclusive of any value added tax (VAT), sales tax, income tax, consumption tax or any other similar tax, duty, fee, levy or other governmental charge, customs duties and other levies (“Taxes”), except as specified otherwise.

(b)          If any payment is subject to any Taxes, the Developer may charge such Taxes to the Customer.

(c)          If the Customer is required by law to make any deduction or withholding of taxes from any payment due to the Developer, then the Customer must:

(i)           prepare and submit any necessary filings and remit such taxes to the appropriate taxing authority; and

(ii)          provide the Developer with evidence of withholding and payment to the appropriate taxing authorities.

Despite the above, no such deduction or withholding shall apply if the Developer provides the Customer timely, appropriate and duly executed documentation that substantiates an exemption from such taxes.

1.12     Good faith disputes:  If the Customer, in good faith, disputes any invoice, in whole or in part:

(a)          The Customer must notify the Developer of the dispute at least 10 days before the invoice due date.

(b)          The Parties must use reasonable efforts to resolving the dispute promptly.

(c)          The Customer must provide sufficient detail of the nature of the claim, the amount, the relevant invoices, and information allowing the Developer to identify the affected Services within the time required for payment of the relevant invoice.

(d)          Payment of the disputed amount may be withheld until settlement of the dispute, but payment of the undisputed portion must be made per the payment terms.

(e)          Upon resolving the dispute, the Customer must promptly pay the Developer such amounts as due and payable.

(f)           If a dispute is resolved against the Customer, the Developer may request the Customer to pay interest on the disputed amount in accordance with Section 1.4.

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The Author

Martin Kotze is a commercial lawyer with over 10 years of experience. He specialises in transactional work within the Tech, Financial Services and Property industries. 

He is also one of the co-founders at DocNinja and regularly advises listed companies to small and medium enterprises on how to contract better with their customers. 

Martin Kotze

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