Almost every industrial service contractor has had the experience of trying to collect from a difficult customer on an invoice. Sometimes these issues can be predicted before the project, but often they cannot. Once the dispute arises, it’s too late to add helpful terms to the deal, so the time for a contractor to protect itself is on the front end. The following three clauses can significantly strengthen a subcontractor’s bargaining position in these situations.
Interest Clause: Texas law allows a contractor to charge up to 18% simple annual interest on late payments if there is a written contract that provides for the rate. If there is no written contract, the default rate is 6% simple annual interest. On a $100,000 invoice where payment is one year late, inclusion of the 18% interest clause can mean the difference between a $106,000 claim and an $118,000 claim. Although payment disputes are often settled for less than the full amount of the justified claim, a contractor should always try to maximize its justified claim to allow a higher negotiated settlement. One way to do this is by including an interest rate between 6% and 18% in the contract.
Anti “Pay-When-Paid” Clause: In many payment disputes, the non-paying customer’s story is that it has not been paid for its own work, either by the property owner, the general contractor, or another subcontractor, as the case may be. To counteract this problem, a contractor should secure its customers’ agreement that the contractor’s invoices are due and owing at a specified time after the invoice date, regardless of whether the customers are paid.
“Complete Agreement” Clause: When payment disputes escalate, a customer may attempt to rely on oral or written communications outside the contract to contradict the contract terms. This tactic can complicate an otherwise straightforward contract dispute, necessitating more lawyer time and client money to reach resolution. A subcontractor can avoid such confusion with a clause stating that the written contract contains the parties’ complete agreement, and that the contract cannot be amended except in a writing signed by both parties.
For more information on this topic, please email Clint Twaddell or call him at (512) 735-7800.