The ‘How To’ Guide on Payment Terms

Payment terms are important for every Australian business. Payment terms are a frequent source of controversy when negotiating a contract because they can affect the cash flow of both the payer and the payee. However, even if you’ve achieved favourable payment terms in your contract, the reality of getting paid fully and on time can sometimes be very different.

This article looks at the tips and traps of payment terms and provides readers with some easy, actionable tips.

Author: Farrah Motley is an experienced business lawyer with a wealth of business and legal experience..

What are payment terms?

The term “payment terms” refers to the method and timing of payment. For example, payment terms may specify that payment is to be paid by cheque, electronic funds transfer (EFT) or credit card. Generally, the method of payment is not controversial, but the timing of payment can cause issues.

This Australian government has also published this useful information on payment terms.

What are considered “good” payment terms?

What can be considered “good” payment terms really depends on the position of the business or person who will receive the funds. For example, there is a big difference between a multi-million dollar company with plenty of cash reserves to manage overheads while waiting for funds to come in, and a small business or sole trader. Moreover, if a business is reliant on a small pool of customers for cash flow, payment terms will become an increasingly important part of their business.

Many customers take payment terms for granted and in Australia (like many other countries) it is considered a standard part of business-to-business (or B-2-B) transactions. However, it’s important to remember that payment terms are the same concept as offering credit. The vendor or business providing the goods or services is fronting the payment, because the good(s) or service(s) are being provided before payment, and is then reimbursed by the client.

Offering payment terms at all to a customer is, on the part of the customer, a privilege. What it means is that the vendor considers the customer to be financially viable and trusts the customer to pay for the good(s) and service(s) when the relevant payment term expires and payment falls due.

Depending on your industry, and if you are not a small business or sole trader, 30 days from the date (or receipt of) the invoice, with an invoice to be submitted monthly for good(s) or service(s) provided during the previous month, is fairly standard. Even better, however, is payment upfront for a portion of the fees (like a deposit), which can help ease the burden of cash flow on small businesses.

For small businesses or sole traders, 7 or 14 days from the date of the invoice, with an invoice to be submitted at regular (perhaps weekly) intervals, may be considered reasonable.

In these circumstances, not only is the pay-when-paid payment term invalid and unenforceable, but the client entity may also be engaging in misleading and deceptive conduct under the Competition and Consumer Act 2010 (Cth).

In Queensland for example, s 16 of the Building and Construction Industry Payments Act 2004 (Qld) provided that:

a pay when paid provision of a construction contract has no effect in relation to any payment for construction work carried out or undertaken to be carried out, or related goods and services supplied or undertaken to be supplied, under the construction contract

In Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5, the High Court of Australia took a broad view of the pay-when-paid prohibition in equivalent South Australian legislation and held that provisions which make the release of retention under a subcontract contingent on an event under a head contract, are void and therefore unenforceable. The High Court reasoned that the due dates for payment of the retention sum were dependent on events that were unrelated to the subcontractor’s performance. Because payment of the retention sum was dependent on the completion of the head contract (which had nothing to do with the subcontractor’s performance), the head contractor had no right to deduct the retention sum from the subcontractor’s claimed amount.

The Australian Building and Construction Commission has also published this helpful information regarding security of payment and pay-when-paid clauses in Australian contracts relating to the construction industry.

There are other countries which also do accept the validity of pay-when-paid clauses, such as Singapore (in the context of the building and construction industry).

What is “supply chain finance”?

The process involves:

1. Buyer issues an order to the supplier;
2. Supplier fulfils the order and sends an invoice to the buyer;
3. The buyer approves the supplier’s invoices and confirms that when the invoice falls due, it will pay the financial institution (which acts as the payment intermediary);
4. The supplier applies a discount to the invoice and ‘sells’ the discounted invoice to the financial institution;
5. The supplier receives the funds from the financial institution;
6. The buyer pays the financial institution when the invoice falls due.

This infographic also explains the process:

If your agreement doesn’t give your business the right to stop supply or performance, and you refuse to do what you’re contractually bound to do, you may be considered to have repudiated your agreement. Repudiation occurs when a party demonstrates, by words or conduct, that they do not intend to be bound by their agreement. There are significant consequences for repudiation and it’s therefore important to consult with a lawyer before your business takes any significant steps due to non-payment of invoices.

Payment terms based on time

Most payment terms are based on time. For example, a seller will be able to invoice and receive money within a defined period of time (for instance, invoicing on the last business day of the month and receiving funds within a further 30 days from receipt of the invoice).

But, a payment term in a contract that looks like it is only based on time, may also be based on other events happening. A common example of a payment term that is based on time and events may include providing a “Valid Tax Invoice” on the last business day of the month and receiving funds within a further 30 days from receipt of a “Valid Tax Invoice”.

That begs the question – what is a “Valid Tax Invoice”. If the definition of a Valid Tax Invoice means that the invoice must include things like:

1. a separate amount for GST;
2. a date;
3. any requirements set out in tax laws,

those are fine. They are things that are within your control and are standard requirements for an invoice.

However, if the definition of a Valid Tax Invoice means that the document must include “any information the client requires”, that is outside of your control. If the client makes unreasonable demands regarding your business’ invoice, and you miss the cut-off of the last business day of the month, your payment terms are tied to more than just time. Your right to payment isn’t triggered until you’ve provided a “Valid Tax Invoice”, which you can’t do if your client isn’t satisfied with the information it contains.

Milestone payment terms can, however, be problematic in other settings. For instance, the achievement of a milestone may be dependent on your client doing (or not doing) something, on third parties or on the industry, economic or other environmental factors which are outside the control of your business

Further, milestone payments can be problematic for cash flow. If your business isn’t paid for the goods and/or services provided until it has achieved a certain milestone (generally after the relevant goods and/or services have been provided), your business has to fund the progress up to the point it receives payment.

If you are going to use milestone payments to structure your payment terms, it’s important that you ensure that the milestone events are things that are entirely within the control of your business, and not subject to third-party approvals or events which are outside your control.

Examples of milestone payment terms which may put your business at risk of not receiving payment in full or at all are:

1. the seller may submit an invoice for payment once the deliverable has been approved by the head client (what if the client never approves the deliverable; and
2. the seller may submit an invoice for payment upon the achievement of 50% of the services (and both the seller and the client dispute whether 50% of the services have been completed).

Another problem which is often seen (and evident in the above two examples), is poorly defined milestones. If the milestone is not sufficiently defined, disputes can arise between the parties about whether that milestone has been reached.

How can Prosper Law help?

Prosper Law is managed by Farrah, an expert business lawyer based in Brisbane. Farrah helps businesses with commercial and legal issues, right across Australia. Farrah is a top lawyer with experience dealing with payment terms in contracts.

Contact Farrah using the details below and arrange a free consultation with a business lawyer to discuss your legal matter today.

Want to read more? Check out this article which talks about how much a lawyer costs.

Author: Farrah Motley | Director

PROSPER LAW – Australia’s Online Law Firm

M: 1300 003 077

E: enquiry@prosperlaw.com.au

W: http://www.prosperlaw.com.au

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