Lubecka.Law Blog

Payment terms in a contract with a foreign contractor - how to define them?

One of the most important points that needs to be clarified in a B2B contract concluded with a foreign contractor are the terms of payment of the agreed remuneration.

Payment after delivery of the subject of the contract or prepayment? And if so, what should be its amount?

Which solution to choose? Read below.

Determining the amount of the agreed remuneration is not enough

The agreement of the parties regarding the amount of contractual remuneration agreed between them is not sufficient. It is still necessary to agree on the terms on which the remuneration is to be paid.

In contracts that involve the supply of specific goods, it is crucial to establish the terms of payment for the agreed compensation. This is especially important due to the expenses incurred for the execution of the contract, such as purchasing necessary materials, raw materials, or paying employees and associates involved in the process. For foreign contractors, delivering goods is closely tied to the investment made by the entrepreneur while initiating the fulfillment of a particular order.

Payment terms - what solutions are worth considering?

Determining the terms of payment of the agreed remuneration for the supply of goods usually takes one of the following forms:

  • Payment after completion and delivery of the subject of the contract to the contractor.
  • Prepayment which is payment of a part of the agreed remuneration before performance and delivery of the subject of the contract.
  • Payment of the entire agreed remuneration prior to the completion and delivery of the subject of the contract.

Determining when to apply each of the available payment terms solutions?

The terms of payment of the agreed remuneration decided by the parties in a particular case depends, to a large extent, on the negotiating power of each of them, as well as the calculation of the risk with which the contractor decides to conclude a specific contract.

This risk will be higher if the parties agree that the payment of the agreed remuneration will take place only after the completion and delivery of the subject of the contract. Reporting reservations of the quality of the done work is a common procedure aimed at delaying the payment of the agreed remuneration or questioning its amount.

The greater the prepayment, the lower the risk for the contractor

This risk is adequately minimized if the parties agree on an appropriate amount of prepayment on account of the performed contract. The amount of the prepayment can depend on the amount of costs that the contractor must incur in order to perform the subject of the contract and its negotiating power.

When the parties agree to the obligation of paying the entire agreed remuneration before the complete delivery, it significantly reduces the contractor’s risk associated with initiating the performance of the contract. While there is a possibility that the ordering party may raise objections about the quality or timeliness of the delivered subject matter, the risk of pursuing any related consequences is transferred to the ordering party. By securing payment in advance, the contractor minimizes their risk.

In practice, the parties often opt for a mixed system, in which a part of the remuneration is paid before the performance of the subject of the contract as prepayment, another part after the completion of the subject of the contract or reaching the milestone agreed by the parties related to the implementation of a given stage of the contract, and the last part – after delivery of the subject of the contract to the ordering party.

Examples of payment terms

  • 10% of remuneration as prepayment
  • 70% of the remuneration after the completion of the subject of the contract
  • 20% of the remuneration after the delivery of the subject of the contract to the ordering party

Which of the solutions is the best?

The best solution in terms of agreeing on the terms of payment of remuneration for the supply of goods to a foreign contractor is one that allows the parties to conclude the transaction under conditions of controlled risk. Trading practice shows that the arrangements for payment terms often require compromises, which the parties decide to make in order to conclude a contract. It is important that the conditions are defined in such a way that failure to pay remuneration for the performance of a given contract does not jeopardize the contractor’s presence on the business market.

Joanna Lubecka
attorney

02

Contact

Law Firm in Poznan

ul. Nowowiejskiego 53/2
61-734 Poznań
Fill in the form

    Information clause on processing of personal data.

    * required fields.

    lubecka.law 2023©
    Wdrożenie i rozwój: Fisze