Understanding Basic Contracts: The Payment Provision

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I know, it seems like a simple contractual provision. It can be, but a lack of detail in the payment section of a contract can be disastrous.

Take the following provision for example:

Payment: “Contractor shall be paid $40,000 for the deliverables set forth on Exhibit A.”

When is the payment to be made? Up front? At the end? Is it paid all at once? Where is it paid? And how? Wire? Check? What happens if it’s not paid on time? The language above could be interpreted to mean that the payment should be made up front (which is not ideal for the client; it’s better to make progress payments). In short, there’s not enough detail.

Make sure that your payment provision answers all of the following questions:

  • How much?
  • How?
  • When?
  • What happens if it’s not paid on time? (this may be addressed in the termination section as well)
  • Does either party have audit rights (like in a commission or revenue share situation)?

Here’s the new and improved version of the language above:

Payment: Client shall pay Contractor $40,000 in accordance with the payment schedule set forth on Exhibit A. Payments shall be made via check, wire, or ACH to the address provided by Contractor on the signature page. Any payment not received on or before the required payment date shall incur a late fee of $250 and any payment not received within 5 days after the payment date shall accrue interest at 10% per year. Further, in the event that a payment date is missed, Contractor shall have the right to pause work until such payment and any applicable late fees and interest are paid.

No one ever says, “I wish you had been less specific in the contract.” The more detail, the better. Please be careful with the payment provision; better yet, hire a good attorney to draft it for you.

Posted in: General Business
About the Author
Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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