Commercial Contract Price and Payment Terms

If you are supplying goods and/ or services it is very important to ensure that you include watertight price and payment terms in your commercial contract.  This should reduce the risk of misinterpretation, and therefore a challenge of those terms by the customer.

Commercial Contracts and Price

The following points provide guidance on drafting points that you should consider when drafting pricing terms in a commercial contract:

1. The price should be clearly defined and where appropriate you could cross reference to a pricing schedule. This might not be possible where you supply services on a time and materials basis. In that case you should clearly state the hourly rate and how the time incurred and materials supplied are approved and also verified.

1. You should ensure that you can vary the price over the term of the commercial contract. Standard provisions include the right to increase the price in line with inflation or the retail price index. You should also reserve the right to vary the price in circumstances where either the price of your raw materials changes or any other external factor causes you to increase your price.

1. The price should also clearly state whether it is inclusive of VAT, and if not you should reserve the right to charge VAT.

Commercial Contracts and Payment Terms

The following are terms that you might consider including in commercial contacts relating to payment terms:

1. In relation to payment terms, the best strategy is to demand payment upfront, this significantly reduces the risk of non-payment. However if this is not possible then you need to clearly define the payment terms. Payment terms are generally cross referenced to either the date of the invoice, or the date of issue of the invoice, or when the goods and services are being provided. The exact nature of the payment terms should be determined by assessing which payment mechanism reduces the risk of non-payment.

1. Where possible you should include a late payment interest clause. This means that in circumstances where payment is delayed beyond the due date then you can charge late payment interest. In general late payment interest is up to 8% above your bank’s base rate. It is also possible to qualify this by stating that the interest will be charged both before and after judgment, in the event that you have to pursue the outstanding amounts through the courts.

1. You should also consider including a provision that states that either time for payment shall be of the essence or alternatively that late payment will be deemed a material breach of the commercial contract, thereby enabling you to terminate the contract.

1. It is also standard practice to include a clause that prevents set-off and deductions by the customer, against the price. This prevents the customer from setting off any amount you owe him against the amount due from the customer.

1. You should also include a consequences of termination provision that clearly specifies that any outstanding amounts are still payable despite termination of the commercial contract. You might also consider including a term that upon termination all amounts outstanding are immediately payable.