Payment terms and late-fee clauses
Net 30, late interest, set-off, disputed invoices, and suspension rights — how payment clauses work and which details decide whether you get paid on time.
The short answer
Payment terms set out how much is owed, when it is due, what happens if it is late, and what a customer may withhold. "Net 30" means payment is due 30 days after the invoice date. The clauses that actually determine whether you get paid are the late-interest rate, the right to suspend service, and the definition of a properly submitted invoice.
When does the clock start?
"Net 30" is ambiguous unless the trigger is defined. Thirty days from the invoice date, from receipt of the invoice, from delivery, or from acceptance are all different — and the gap between them can be weeks.
Acceptance-based triggers are the riskiest for suppliers, because payment cannot start until the customer signs something off. If acceptance is the trigger, add a deemed-acceptance provision: acceptance occurs automatically if no written objection is received within a set number of days.
Late fees and interest
A late-payment charge should be compensation, not punishment. Courts in several jurisdictions will strike down a rate that looks like a penalty rather than a genuine pre-estimate of loss.
Common approaches are a monthly percentage (1% to 1.5% per month is typical in commercial contracts), a statutory rate where legislation provides one, or a base rate plus a margin. Some jurisdictions give suppliers a statutory right to interest and fixed recovery costs on late commercial payments even without a contractual clause — worth checking locally.
The disputed-invoice mechanism
Without a defined process, a customer can withhold an entire invoice over a small disagreement. A good clause requires the customer to pay the undisputed portion, raise the dispute in writing within a set period with reasons, and work with the supplier to resolve it inside an agreed window.
From the customer's side, make sure there is a dispute mechanism at all. A clause requiring payment in full with no set-off and no deduction, with no dispute route, leaves you paying first and arguing later.
Suspension and stop-work rights
A supplier's most effective remedy is usually not litigation but the right to stop working. Look for how many days overdue triggers suspension, whether written notice is required first, and whether service resumes automatically on payment.
Customers should ensure suspension requires clear notice and a cure period, and that it cannot be triggered by an invoice that is genuinely in dispute.
Set-off, taxes, and the small print
Several short provisions carry real money:
- Set-off: can the customer deduct amounts it claims are owed? Suppliers usually exclude this; customers usually want it preserved.
- Taxes: are the fees inclusive or exclusive of VAT, GST, or sales tax? "Plus applicable taxes" is the standard supplier position.
- Withholding tax: in cross-border deals, who bears it? A gross-up clause shifts it to the customer.
- Currency and bank charges: which currency, and who pays transfer fees?
- Expenses: pre-approved only, or reimbursed at cost with receipts?
- Price escalation: fixed for the term, or indexed?
Sample clause language
Illustrative wording, written for this guide — not copied from any real contract.
Customer shall pay all invoices within fifteen (15) days of the invoice date, without set-off, deduction, or withholding of any kind. Overdue amounts accrue interest at five percent (5%) per month, compounded monthly. Supplier may suspend all services immediately and without notice if any amount is unpaid. All fees are non-refundable under all circumstances.
Sixty percent annualised interest is very likely to be treated as a penalty. No dispute mechanism, no notice before suspension, and no set-off even for amounts the supplier admits it owes.
Customer shall pay each undisputed invoice within thirty (30) days of receipt. Customer may withhold payment of any amount disputed in good faith provided it notifies Supplier in writing within fifteen (15) days of receiving the invoice, setting out the basis of the dispute, and pays all undisputed amounts when due. Overdue undisputed amounts accrue interest at one and one-half percent (1.5%) per month or the maximum rate permitted by law, whichever is lower. If any undisputed amount remains unpaid thirty (30) days after written notice, Supplier may suspend the Services until payment is received.
Clear trigger, a real dispute route, a lawful interest rate, and suspension available only after notice and only for undisputed sums.
Red flags to look for
- Interest rates that annualise to something punitive.
- No process for disputing an invoice.
- "Without set-off or deduction" with no carve-out for agreed credits.
- Immediate suspension with no notice or cure period.
- Payment triggered by acceptance with no deemed-acceptance backstop.
- Fees silent on tax, leaving a VAT or GST argument later.
- Unlimited price escalation at the supplier's discretion.
- Prepaid fees non-refundable even where the supplier terminates.
What to ask for
- Define exactly when the payment clock starts.
- Add deemed acceptance after a set number of days.
- Cap late interest at a defensible commercial rate.
- Add a disputed-invoice process requiring payment of undisputed amounts.
- Require written notice and a cure period before suspension.
- Clarify tax treatment and who bears withholding tax.
- Fix prices for the initial term and cap any later escalation.
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Frequently asked questions
What does Net 30 mean?
Payment is due 30 days after the trigger date. The contract should say whether that is the invoice date, the date the invoice is received, or the date of delivery or acceptance — they are not the same.
What is a reasonable late payment fee?
In commercial contracts, 1% to 1.5% per month is typical. Many jurisdictions cap the enforceable rate, and rates that look punitive rather than compensatory can be struck down.
Can a customer withhold payment over a dispute?
Only if the contract allows it, or if there is a legal right to do so. Well-drafted clauses let the customer withhold the genuinely disputed portion while paying everything else on time.
What is a set-off clause?
It governs whether a party can deduct money it is owed from money it must pay. Suppliers usually try to exclude set-off; customers usually want to keep it.
Related guides
This guide is general educational information about how these clauses usually work. It is not legal advice, and contract law differs by jurisdiction. For a decision that matters, speak to a qualified lawyer.