Prepare to Win: Contract Clauses That Prevent Non-Payment

“By failing to prepare, you are preparing to fail.” 
― Benjamin Franklin

Anyone who offers a product or a service without being paid the full amount upfront is providing credit.  Managed properly, credit is a good thing.  But it also has a well-known downside: non-payment.  The techniques used to deal with non-payment are generally known as “credit management.”  

Strong credit management starts with having favorable contract terms.  When non-payment happens (and it happens to the best of us) the contract terms below will help get you paid.  Consistency is key: no matter how much you want to think your clients are a going to pay you need to consistently apply the techniques below to prevent non-payment. 

  • First things first: ALWAYS HAVE A CONTRACT.  You can find many samples and templates on line. Use them.  Most have the basics to have an enforceable contract, such as when the contract begins, what the contract is for (also known as “scope”), and how much you’re supposed to be paid for your work.  But there are a few clauses which you should also include to help make sure you’re paid and you can win in Court, if it comes to that: 
  • Always make sure that payment terms are specific.  The best thing to do, of course, is to get paid as much as possible before you even start the project.  Negotiate for that.  But most clients won’t agree to that.  Rather, they will say they will pay 20% of the fee on signing (or within 10 days but, in any event, before you do anything) and the rest within a certain amount of time of each deliverable, say 10 days or 30 days (“net 30”). If it’s an ongoing engagement, you may need to continue to work during the period your waiting for payment.  Your contract should say something like “Client agrees that Provider may terminate the contract with no further liability to Provider in the event the Customer breaches the payment terms set forth herein.”
  • Always have a late payment penalty clause.  A typical provision reads “Unless otherwise specified in writing, invoices not paid within X days of the invoice date will accrue interest at 1.5% per month.”
  • Always have a clause specifying that if the account is placed in collection the Client has to pay the lawyer or collection fees.  A typical provision reads “Client agrees to pay all reasonable attorney’s fees and or other fees or costs if the account is placed with an attorney for collection.”
  • Always have a choice-of-law, forum selection and jurisdictional waiver clauses.  Those clauses allow you to sue for your fees in a court convenient to you, and not where the client may be located.  It also means that the law that will apply is the one you want.  A typical choice-of-law clause reads: “This Contract and any claim or action related thereto will be governed by and construed in accordance with the laws of the State of ____, without regard to its conflict of law provisions.”  A forum selection clause and jurisdictional waiver clause typically read: “Any party commencing against the other party any legal proceeding (including any tort claim) arising out of this agreement must bring that proceeding in the State or Federal courts in or nearest the county of ____ in the State of ____.  Each party hereby consents to the exclusive personal jurisdiction and venue of the State or Federal courts in or nearest the county of ____ in the State of ____. Each party hereby waives any claim that any a legal proceeding brought in accordance with this paragraph has been brought in an inconvenient forum or that the venue of that proceeding is improper.” The law on this is tricky, but most of the time the forum selection, choice of law and jurisdictional waiver will prevail against any claim that the Court lacks jurisdiction.
  • ·Sometimes when you threaten sue to collect your fee you’re going to be threatened with a lawsuit back.  You can preemptively strike and disarm the deadbeat by inserting into the contract a “waiver of counter-claims” clause.  A typical waiver of counter-claims clause reads “Client waives any and all of its rights to interpose any claims, deductions, setoffs or counterclaims of any nature in any dispute with respect to the Agreement.  Any claims, deductions, setoffs or counterclaims must be brought as a separate action subject to the choice of law, forum selection and jurisdictional waiver provisions of this agreement.”  That won’t stop then from suing you, but it will increase the costs on them if they chose to do that because they won’t be able to piggyback on your claims against them.
  • When you think there’s a non-payment risk either because the client is newish, seems shady, or you know they’ve failed to pay a freelancer in the past, demand a personal guaranty from the owner.  That way, if the company fails you can always go after the owner for your fee.  There is no hard and fast rule for when you need to ask for the guaranty, but as a general rule when you think there is a non-payment risk, there probably is.  If you ask for the personal guaranty and they won’t give it to you, RUN.  Language of a personal guaranty of payment typically reads “[owner] hereby personally guaranties the payment of all obligations of [Company Name] hereby agrees to bind itself to pay on demand any sum which may become due under this agreement whenever [company name] shall fail to pay the same according to the payment terms set forth above. This guaranty shall be a continuing and irrevocable guaranty and action may be taken against [owner] for any non-payment without notice thereof.”

Of course, none of this is legal advice.  We just want to make sure that if you need to register a debt with Indepayment, you’re in the best possession possible to collect.