Payment Terms Clause

What It Does

For in-house counsel, payment terms need to work for the people issuing, approving, and disputing invoices. A practical test: give finance an invoice with one disputed charge and ask when the remaining balance is due, what notice the dispute requires, and when interest or suspension can begin.

• Sets the payment period and the event that starts it, including the required contents of a complete invoice.

• Specifies late-payment consequences, including any interest rate, applicable legal cap, collection costs, notice, and suspension rights.

• Structures milestone, progress, and retainage payments, with stated conditions and deadlines for releasing withheld amounts.

• Allocates payment currency, exchange-rate exposure, and responsibility for specified taxes and withholding.

• Defines the process for disputing charges, any right to withhold disputed amounts, and the obligation to pay the undisputed balance.

The Aldeyra and bluebird agreements below illustrate different drafting choices: one specifies interest and suspension rights, while the other expressly addresses payment of the undisputed portion.

Examples

Block, Inc. (Square) / ON Semiconductor

ASIC Development and Supply AgreementNet-30, invoice-date triggerOne-Sided2024

"Invoicing of the NRE shall take place in accordance with the payment schedule as detailed in the applicable SOW. All invoices are payable within thirty (30) days of the date of invoice."

Source

Aldeyra Therapeutics, Inc. / Danforth Global, Inc.

Master Services AgreementLate-payment interest at 1.5% per monthOne-Sided2024

"Any portion of the Consulting Fee or any other fee or amount payable hereunder that is not paid when due will accrue interest at the rate of one-and one-half percent (1.5%) per month or the maximum rate permitted by applicable law, whichever is less, from the due date until paid."

Source

bluebird bio, Inc. / Lonza

Second Amendment to the Master Manufacturing Services AgreementRight to withhold disputed amounts, pay the undisputed portionOne-Sided2023

"CLIENT shall otherwise pay the undisputed portion of such invoice in accordance with the timeframes above. The parties shall endeavor to resolve such dispute as quickly as possible, and upon resolution thereof CLIENT shall promptly pay the amount agreed."

Source

Acutus Medical, Inc. / Regents of the University of Minnesota

Exclusive Patent License AgreementMilestone payments tied to regulatory and commercial eventsOne-Sided2020

Financial Milestones payable upon achievement of the following milestones Milestone | Payment Approval received from U.S. regulatory agency | Thirty five thousand dollars ($35,000) First Commercial Sale outside the U.S. | One hundred thousand dollars ($100,000) due within 12 months from milestone First Commercial Sale in the U.S. | One hundred thousand dollars ($100,000) due within 6 months from milestone

Source

Mednax Services, Inc. / R1 RCM Inc.

Services AgreementPrice exclusive of taxes, buyer bears sales, use, and VATOne-Sided2021

"All service charges, fees, expenses, and other amounts due under this Services Agreement are exclusive of all taxes. Other than net income taxes imposed on R1, Client shall be responsible for all sales, use, withholding, and value added taxes incurred or assessed in connection with the Services, and R1 shall invoice Client for those taxes for all taxing jurisdictions where R1 is permitted or required by law to collect such taxes."

Source

Negotiate

Payor Positions:

You want time to verify the work and resolve billing errors while keeping undisputed payments on schedule.

• Negotiate the payment period and tie its start to a complete, correct invoice and any agreed acceptance requirement.
• Cap late-payment interest and specify a notice and cure period before interest or suspension begins.
• Reserve an express right to withhold charges disputed in good faith while paying the undisputed balance.
• Limit suspension rights to overdue, undisputed amounts after the agreed notice and cure process.
• Fix the payment currency and allocate exchange-rate exposure, taxes, and any withholding gross-up before signing.

Payee Positions:

You want a definite payment deadline and a workable response to overdue amounts.

• Seek a shorter payment period with a clear invoice trigger and a deadline for written dispute notices.
• Specify the interest rate, capped at the maximum permitted by applicable law, and negotiate recovery of collection costs.
• Reserve suspension rights for overdue, undisputed amounts after a defined notice and cure period.
• Use milestone or progress payments for long engagements, with objective deadlines for releasing retainage.
• Identify which taxes the price excludes and define any gross-up, including its exceptions and documentation requirements.

Red Flags

• Interest on late payments with no cap and no cure period, which lets a small billing dispute compound into a large liability.

• Interest that compounds monthly instead of accruing simple interest, which turns a modest stated rate into a far larger effective cost the longer an invoice sits unpaid.

• A payment clock tied to “receipt of invoice” with no requirement that the invoice be complete or correct, giving the payee control over when the deadline starts.

• No express process for withholding charges disputed in good faith, leaving the payor to assess its rights under the agreement and applicable law.

• A right to suspend performance or charge interest on the entire invoice, not the undisputed portion, over a single contested line item.

• Retainage or holdback with vague or open-ended release conditions, letting the payor sit on withheld cash indefinitely.

• Silence on currency and taxes, which leaves exchange-rate risk and sales, use, or withholding tax liability to be fought over after the deal closes.