Essential Considerations for Payment Terms in South African Contracts

Nicolene Schoeman-Louw | SchoemanLaw Inc  

Category: Dispute Resolution | Contract Drafting   

Introduction 

When drafting contracts in South Africa, it is crucial for both vendors (i.e. suppliers) and buyers (i.e. clients or customers) to carefully structure payment terms to protect their respective interests. By following some vital strategic recommendations, vendors can ensure timely payments and avoid payment disputes, while buyers can establish favourable payment conditions and protect their financial position. 

For Vendors 

Payment Due Dates: As a vendor, setting clear payment due dates is essential to maintain a healthy cash flow. Consider proposing 30 days to encourage prompt payments from buyers. However, be open to negotiating reasonable compromises to accommodate the buyer's need for administrative tasks and cash flow management. Overall Payment Schedule: When structuring the payment schedule, favour options that provide a predictable income stream. Communicate the advantages of such payment frequencies to buyers, emphasizing the potential for improved service delivery and responsiveness. Payment Disputes: Acknowledge that payment disputes may arise, and addressing them in your contract is crucial. Specify that buyers can dispute invoices in good faith, but emphasize the importance of resolving disputes promptly. Include provisions that allow you to withhold services or goods during a disagreement, ensuring leverage for negotiation while seeking a fair and mutually beneficial resolution. Dispute Notice Deadlines: To protect your rights as a vendor, establish reasonable notice deadlines for buyers to dispute invoices. This allows sufficient time for buyers to identify and report any invoicing errors promptly, preventing delayed disputes that may hinder your cash flow. Interest or Penalties: It is customary for vendors to seek interest or penalties on late payments. While including such provisions is understandable, consider negotiating a more extended grace period before interest accrual begins, such as 90 days, and be open to reducing the interest rate. Striking a balance between protecting your business interests and fostering a cooperative relationship with buyers is critical. Expenses: Regarding expenses, vendors should strive to recover any reasonable and necessary costs incurred while providing services or goods. Clearly outline the types of payments that can be charged to buyers, supported by receipts and pre-approved in writing. Ensure compliance with buyer's travel policies and pass through these expenses at cost without any markup. 

For Buyers 

Payment Due Dates and Overall Payment Schedule: As a buyer, negotiate payment due dates that align with your cash flow management. Carefully evaluate the payment schedule proposed by vendors. Negotiate payment in arrears to ensure you receive goods or services before making payments. Determine the frequency of payments that best suits your cash flow, such as quarterly or monthly payments. This gives you more control and the ability to withhold payment in case of service or quality disputes. Payment Disputes: Include provisions that allow you to dispute invoices in good faith. Request that payment obligations apply only to "undisputed" or "correct" invoices. It is crucial to have the option to withhold funds during a dispute to incentivise vendors to address any issues promptly and fairly. Interest or Penalties: Vendors may seek to impose interest or penalties on late payments. Negotiate to remove or minimize these provisions, especially if you have a strong credit standing. If interest cannot be eliminated, request a more extended grace period before interest accrual starts and strive to reduce the applicable interest rate to a fair and reasonable percentage. 

Conclusion 

Both vendors and buyers in South Africa should approach contract negotiations with careful consideration of payment terms. By following the advice provided from their respective perspectives, vendors can establish favourable payment conditions, protect their cash flow, and foster positive business relationships. Simultaneously, buyers can negotiate terms that align with their cash flow management, dispute resolution requirements, and financial protection. Seeking legal guidance and engaging in open communication will facilitate crafting adequate payment provisions that benefit all parties involved. 

Contact an Attorney at SchoemanLaw for assistance and all your contract needs. 

Nicolene Schoeman-Louw | SchoemanLaw Inc 

Category: Dispute Resolution | Contract Drafting   

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