Can a Contract Ensure Payment?

As a supplier, making sure you are paid is business critical. For businesses of all sizes, timely payment is crucial and the primary reason for trading. Revenue generation is vital for business, and contracts can be pivotal in helping your business secure timely payments. Contracts can help you in various ways, e.g., formalising your commercial agreement’s payment terms, setting clear terms to avoid mismatched expectations, and clarifying the consequences of late or non-payment. By clearly setting out the obligations around payment, a well-drafted contract can help your business reduce the risk of payment disputes and give you strong legal protection. Unfortunately, contracts alone will not be able to guarantee pay, but they will provide you with a significant chance to make the payment with greater ease. This article explores how your business contracts can help your business get paid. 

How Can a Contract Help Your Business Receive Payments?

Your contracts can provide valuable protection to ensure your customers pay your business, and trading without a contract will expose your business to significant risk issues. 

Using clear and specific payment terms is critical to ensuring pay. Ambiguous or vague terms can lead to delays, disputes, or non-payment, which can be extremely stressful and time-consuming for your business. 

To avoid the risk of non-payment, you should ensure that your contract covers various key and clearly drafted clauses, including the following:

Invoicing Dates – Have You Set Them Out?

Your contract should clearly set out when your business will send invoices and how services will be charged — for instance, whether you charge a fixed fee or on a time-spent basis. This way, the customer will know what to expect, and there will be less of a scope for problem issues to arise. 

Payment Triggers – Are They Clear Enough?

Your contract should set out the events or milestones that will trigger the payment, such as the delivery of goods, the completion of a project phase, or specific pay dates. Your payment terms should be bespoke and tailored to your business practices and the way you charge. You will need to make sure the terms your contract includes accurately reflects how your business charges commercially. 

Additional Expenses – Have You Covered Them?

Your contract should clearly specify any extra costs or expenses so the client knows exactly what to expect and does not receive a ‘shock invoice’ they can dispute. If your clients were to receive a bill with additional expenses, they did not approve of, this could be a pain point for them, which can lead to problem issues, e.g. complaints and payments being withheld. 

By setting out these terms in writing, both parties will be able to have an understanding of the obligations from the outset, which can help prevent confusion or disagreements later on. 

If your customers do not comply with the payment terms, you will then be in a position to go ahead and enforce your rights, e.g. take legal action against them to obtain the payments which they owe your business. Having payment terms in writing can help your business enforce its rights. 

How Can You Address Late Payments?

Even with a well-structured contract in place, which your customer has agreed to, late payments can occur unfortunately. Your contract should, therefore, include provisions to deal with any overdue payments effectively and include clear steps and rights to resolve this problem with your customers.

One way to handle this is by charging interest on overdue payments. This makes late payments more expensive for the client and encourages them to pay on time, to avoid interest charges.

You can use other powerful contractual clauses to help protect your business from the risk of non-payment scenarios. For example, a ‘time is of the essence’ clause in relation to payment is a valuable addition to your contract. This clause highlights the importance of strict pay deadlines and gives you the right to terminate the agreement and potentially claim damages if the client does not pay you on time. 

Can Suspension Clauses Help You Achieve Payment?

A suspension clause is a powerful tool that you may wish to consider including to help prompt payments. If your business provides vital or exclusive services, the ability to suspend those services in the event of late payment can give you increased leverage. Clients are less likely to delay payments when they know they could lose access to a critical service or product if they fail to pay you on time. 

Including a suspension clause in your contract will let you halt your services when the client fails to meet pay obligations. This can help provide you with a practical and swift solution to resolve the problem, as suspension clauses are particularly effective, helping to ensure clients prioritise your payments to avoid interruptions in service.

What is the Best Way to Ensure You Can Obtain Payment Under a Contract?

The most effective way to secure payment overall is simply to request it upfront. When a client pays before receiving services or goods, it removes the risk of non-payment. However, this may not always be practical in specific scenarios e.g. in business-to-business transactions where clients push for more flexible payment terms.

If a full upfront payment is not feasible, consider requesting a deposit to cover part of the payment. For longer or larger contracts, you can request interval payments to allow you to receive partial payments for work completed so far. If a client defaults later, you will at least have received some payment for the services or goods already delivered.

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Can Due Diligence Help Prevent Late Payments?

While robust contract terms provide a legal framework to secure payments, they cannot guarantee that the business will make payment. A contract will grant you legal recourse, such as the ability to sue for breach of contract or pursue debt recovery through legal proceedings. However, obtaining actual payment depends on successful enforcement and may be affected by the client’s financial position. If the client is insolvent or lacks sufficient assets to pay your bills, even a court judgement may not result in full payment. Therefore, while a contract strengthens your legal position, it does not totally eliminate the risk of non-payment, and careful due diligence on a client’s financial stability is crucial.

Before entering into a contract, due diligence can help your business reduce the likelihood of payment issues. As a practical step, assessing a client’s creditworthiness and financial stability might give you some insight into whether they may struggle to meet their payment obligations.

Overall, contracts are key tools which can help protect your business and encourage prompt payment from your customers. Further, contracts will afford you various legal remedies should your customers not pay. However, you will need to make sure that you also take practical steps to protect your business – such as carrying out due diligence checks or seeking advance payment where necessary. If you need help preparing a contract that can help your business get paid on time, you can seek support from a commercial contracts lawyer.

Key Takeaways

Contracts are crucial tools to protect your business from risk as a trader. These vital legal documents can help prompt timely payments from your customer base and protect your business from risk. By setting clear payment terms, specifying invoicing dates and pay triggers, and setting consequences for non-payment, you are far more likely to obtain payments on time and avoid payment-related issues and disputes. 

If your business needs help drafting clear payment terms in your contracts, our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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