Today we offer thoughts (and alternatives, from the vendor point of view) about certain customer-favorable terms you may see in technology contracts: disputed payment clauses.
What’s a “Disputed Payment” Clause?
A disputed payment clause may say something like, the customer doesn’t have to pay fees “subject to a bona fide dispute.” Or, “if Customer disputes an invoice in good faith, it may withhold the amount in dispute….”
Or maybe the main payment clause simply says, “Customer shall pay all undisputed fees on or before ___.”
Sounds fair?
Vendors, Why Include One In Your Contract?
Disputed payment clauses create at least two problems, from the vendor’s point of view:
- Takes the pressure off the customer
- Lost money
Vendors don’t want customers to dispute a payment, and the customer may be wrong – so why make a dispute risk-free?
If a contracting party doesn’t perform its obligation (like the customer’s obligation to pay) because it thinks the other party’s done something wrong, it takes a risk – of breaching the contract.
Vendors are better off if the customer has to worry that the vendor will terminate or take some other unpleasant action. After all, the vendor will be worried about not getting paid. Why should the vendor worry alone? And the dispute will get resolved faster if both parties feel the pressure.
And if a vendor lets the customer delay payment until the end of the dispute, without paying interest, the vendor loses the time value of the money.
If Unavoidable, Negotiate Guardrails
Maybe a vendor will have to give disputed payment terms to some customers who (a) think of it and (b) demand it. But vendors, do you really want them in your standard terms?
When a disputed payment clause is unavoidable in a particular deal, a vendor could still negotiate some restrictions – like a deadline, requiring the customer to explain the dispute in writing, interest if the fees end up having been legitimate, etc.
Here’s an example of a clause with some guardrails, from The Tech Contracts Handbook (3rd ed.) (Part I(G)(4)):
During the first __ days after a payment is due (the “Dispute Period”), Customer will not be considered in breach of this Agreement if it withholds the portion of such payment that is subject to a bona fide dispute; provided Customer: (a) gives Provider written notice setting forth in detail the reason for the dispute, on or before the payment due date; (b) meets and confers in good faith with Provider to resolve the dispute, starting promptly after such notice; (c) pays the undisputed portion of the payment on or before its due date; and (d) pays the disputed fees, if legitimate, promptly after resolution of the dispute. No dispute will alter Provider’s rights to interest payments pursuant to Section __ (Fees) regarding payments actually due.
And here’s language addressing interest in the disputed payment situation (which assumes the rate etc. is stated elsewhere):
Interest on late payment will accrue from the original due-date, regardless of the dispute, and will be due at the time of payment….
(Reminders: For the reasons described above, we don’t see disputed payment clauses to be a vendor’s first choice (even as improved above, from the vendor’s perspective). And, of course you’ll always need to carefully consider the specifics of your deal, and adjust accordingly.)
To Learn More:
- We talk more about payment terms in The Tech Contracts Handbook (3rd ed.) (Part I(G)).
- You can find sample clauses from The Handbook (free) at our website: https://www.techcontracts.com/clauses-overview/.
- For a deeper dive into information technology contracts, consider joining our courses, available on-demand – including The Tech Contracts Master Class™. More information and enrollment for the Master Class series is available here: https://courses.techcontracts.com/p/the-tech-contracts-master-class-4-course-series-2.
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THIS ARTICLE IS NOT LEGAL ADVICE. IT IS GENERAL IN NATURE AND MAY NOT BE SUFFICIENT FOR A SPECIFIC CONTRACTUAL, TECHNOLOGICAL, OR LEGAL PROBLEM OR DISPUTE, AND IT IS NOT PROVIDED WITH ANY GUARANTEE, WARRANTY, OR REPRESENTATION. LEGAL SITUATIONS VARY, SO BEFORE ACTING ON ANY SUGGESTION IN THIS ARTICLE, YOU SHOULD CONSULT A QUALIFIED ATTORNEY REGARDING YOUR SPECIFIC MATTER OR NEED.