Table of Contents
Payment, term and termination clauses are some of the key commercial and legal aspects of supplier contracts. This article discusses the significance of these clauses in contracts where you are the recipient of goods or services. We will explore the positions you should be looking for and how to avoid common issues and mistakes.
Payments
Payment clauses are often the most important commercial aspects of a contract. In reality, many disputes arise over transactional elements, which include payments. Accordingly, when you are reviewing contracts, take note of the following considerations relating to payment.
Timing for Payments
You should consider the timing for payments under the contract. A simple services contract may involve a monthly payment for services rendered during the preceding month. However, a milestones-based payment schedule may be more appropriate for complex transactions involving a deliverable.
Conditions Triggering Payment
Keep an eye out for clauses that state that payment is due “once the supplier considers the services or deliverables complete.” As the recipient of goods and services, you should have the right to ensure that payment is only due once the services have been performed to your satisfaction or the goods have been supplied in accordance with the contract.
An acceptance-testing provision for any deliverables is a useful mechanism to allow your business to re-submit any defective deliverables so that they can be re-supplied, and any applicable specifications before the associated fees are payable.
Ability to Withhold Payment
Similarly, you might want to consider the ability to withhold payment if the other party does not provide agreed goods to an acceptable standard or satisfactorily perform the service. For example, this clause might dictate your ability to withhold payment until the other party remedies or resupplies the good or service. You might also draft a set-off clause in your contract, allowing your business to deduct fees from invoices due to the supplier.
Notably, the wording of this clause is essential. Otherwise, your business’ decision to withhold payment might breach the contract if you do not clearly draft this clause.
Additionally, your contract should include a mechanism to dispute payments for non-compliant goods and services. Further, it should clearly state that while a dispute is ongoing, your business’ non-payment for the non-compliant goods or services will not place you in breach.
Calculating Fees
Look out for fees that can:
- change at the supplier’s discretion;
- vary with Consumer Price Index or interest rate changes; or
- increase annually.
You should also understand who is responsible for paying goods and services tax (GST).
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
Term
Clarity around term clauses is vital to ensure that an engagement progresses smoothly. Term clauses are key to understanding when contractual obligations commence and how long they will endure. This can be significant to appropriately time and plan for different service providers. Likewise, your business can avoid an overlap in fees or potential conflicts between suppliers (in the case of exclusive arrangements).
When reviewing term clauses, be aware of contracts with no end date and those that automatically renew. Automatically renewing contracts are especially common in contracts with software and SaaS providers.
Suppose your business engages a supplier to provide software that may be sub-licensed to customers. In that case, an automatic renewal clause in a supplier contract may leave you contractually obligated to purchase, for example, 300 software licenses for a certain year. This may be problematic if only 150 customers have renewed their contracts and need the software products, leaving your client with 160 unused licenses they are obliged to pay.
Continue reading this article below the formTermination
In an ideal world, your business would enter into meaningful contracts with suppliers without issues. Unfortunately, however, there are instances where you might need to terminate your commercial agreement. Therefore, ensuring you have the right to terminate is essential.
As the recipient of goods and services, look for the following elements in your termination clause.
Termination Rights That Suit Your Needs
You should assess which parties have the right to terminate the contract for convenience. You may want to consider whether mutual termination rights for convenience are acceptable, noting that your business may be more disadvantaged if the supplier terminates. This is because your business will likely have obligations to customers, meaning that you are at a major disadvantage if your supplier decides to walk away.
It may be preferable that neither party can terminate for convenience. Alternatively, if you have the bargaining power, you might negotiate that only your business has the right to terminate for convenience. Likewise, the supplier may only terminate the contract for breach.
Time Frames Involved in Termination
If you agree that the supplier can terminate for convenience, ensure the termination notice period is sufficient to enable your business to source a suitable replacement. This time frame may vary significantly depending on the nature of goods or services supplied.
Additionally, a commercially sound provision would specify that if a party is seeking to terminate due to a breach of contract by the other party, the party alleging the breach must:
- notify the breaching party; and
- give the breaching party a time frame to remedy the breach (if possible) before terminating the contract.
Consequences of Termination
You should consider what rights and obligations (if any) continue after termination. Common rights that ensure past termination include:
- confidentiality obligations;
- limitations of liability clauses; and
- intellectual property clauses.
Suppose there is some work in progress or a service order outstanding at the time of termination. In that case, you may consider specifying that the supplier must complete the outstanding work on the same contract terms, even if the contract is terminated.
Triggers for Termination for Breach
Finally, consider the critical aspects of your business’ relationship with the supplier, and specify that a failure to meet those critical aspects will result in termination. Common termination triggers may include:
- repeated failures to meet service levels;
- consistent problems with deliverables (including if they do not meet any specifications or requirements); and
- significant delay.
Notably, your business is unique, meaning your contract should reflect its individual needs. The termination triggers that are relevant to your business will vary depending on the commercial arrangement.
Key Takeaways
If you are a recipient of goods and services, term, termination and payment clauses are essential provisions to negotiate and review in your commercial agreements. Understanding how these terms operate is key to drafting suitable terms that protect your business should the arrangement turn sour. In particular, you want an express term that clearly specifies the timing for payment and your business’ ability to withhold payments. Likewise, term and termination clauses ensure continuity of service by the supplier, and are mechanisms for your business to end the relationship if certain conditions are not met.
For more information or assistance drafting your commercial contracts, our experienced contract lawyers can assist 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 1300 544 755 or visit our membership page.
Frequently Asked Questions
Understanding how long the commercial agreement will last is essential. This can be significant to appropriately time and plan for different service providers. When reviewing term clauses, be aware of contracts with no end date and those that automatically renew.
If your business receives goods or services from another business, you should assess which parties have the right to terminate the contract for convenience. Also, review any timeframes involved in termination and whether there are consequences.
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