• Boon Gan

How your contract can ensure payment

Updated: Mar 24, 2021

Cashflow is the lifeblood of business. There is only so much borrowing that small and medium businesses can rely on before the lending dries up, or the liabilities threaten to exceed their assets. Therefore it is important that your customers pay you, so that you can pay your suppliers and employees to keep the business going.

Here are some typical reasons why businesses don't get paid even after they deliver an invoice:

  1. The customer disputes the quality of goods or services delivered, and therefore refuses to pay.

  2. The customer claims that the shortfall in goods or services delivered have caused loss to them, and therefore refuses to pay because the loss and damage is equal to or exceeds the amount that is still owing to the business.

  3. The customer knows that the business owners do not want to spend time and money on court proceedings, and stonewalls any demand for payment as long as they can.

Of course, these difficulties can be overcome. The bigger question is, at what cost and to what effect? Letters of demand have limited effect, and court proceedings cost time and money, as well as add to mental pressure for people who don't take well to uncertainty.

But what if you could prevent, or at least reduce the risk of, such issues from arising?

There are many ways that a contract can pre-empt such problems. The following list is by no means exhaustive!

When the customer disputes quality

This is especially difficult when the dispute arises after the goods or services were delivered and an invoice is presented for payment. Even if you could argue that such a dispute was an afterthought because the issues were not raised at the same time as the delivery of goods and services, such an argument would only be entertained at trial. That means having to wait at least 18 months before you can shut down these sort of arguments and obtain judgment against the customer.

Therefore it is important to close off, at an early stage, such disputes over quality:

  • Expressly state that all disputes must be raised and resolved in writing within a certain time, or else it will be waived by the customer. Think of it as a shortened limitation period.

  • Have a clause which makes invoices final and conclusive within a certain period of time if not disputed, which will then make the customer take your invoices seriously. But of course, you have to be prepared for the customer to closely scrutinise every invoice you deliver before paying up.

Such clauses will prevent defences of defects or subpar quality if you ever have to obtain payment through court proceedings, and shorten the entire process.

When the customer claims loss and damage

This is a widespread situation in certain industries such as construction, where the contract is only a small cog in a bigger machine and the customer claims that delay or shortfall created a domino effect of further monetary losses. The dispute becomes expensive because by launching a counterclaim in response to your claim, you now effectively have to fight two lawsuits at the same time. This also creates a disincentive to sue because the counterclaim is quickly threatened at the first sign of any demand for payment, so for smaller businesses it is an insidious tactic.

Similarly, a few clauses can close the gate to such belated counterclaims.

  • Limit the time period in which parties have to make claims. However this may not be useful in situations where the customer claims that the loss and damage occurred much later.

  • Expressly state that any claim by the customer must be made separately without deducting payment from the business. This prevents a stalemate by threat of counterclaim, and also increases the speed at which the business can obtain judgment for payment.

Reducing the cost of dispute resolution

Although the clauses mentioned above will reduce the scope of potential disputes, the contract still must be enforced so that you can rely on the coercive power of the state to obtain payment. The threat of having to pay legal costs may incentivise the customer to pay up before legal proceedings begin, but there are other things to consider, such as preserving the business relationship. So depending on the business's desired outcome, the contract may either provide for the court to have exclusive jurisdiction to railroad the dispute towards judgment, or provide for less adversarial methods such as mediation.

Experiencing difficulty collecting payments on your invoices? Ask us about a contractual framework to make collections and enforcement easier via email ( or LinkedIn (Boon Gan Ng).

3 views0 comments