Payment Terms Clause: What to Write Before the First Invoice Goes Late

By Prakhar Rai, Founder, My Legal Pal. Advocate, Bar Council of India. LL.B, NLSIU Bangalore. Master of Business Laws.

Quick answer: A good payment terms clause answers five questions in plain words: how much, when it falls due, what triggers the invoice, what happens if it’s late, and how a disputed invoice is handled. Most payment fights come from one of those five being vague. In India, a micro or small supplier also has a statutory payment deadline that your contract can’t extend.

Key takeaways

• Tie the due date to a trigger you can prove, such as delivery, acceptance or a milestone, not to a vague “completion”.
• A late fee or interest rate has to be reasonable. A punishing rate invites a court to cut it down.
• If your supplier is a registered micro or small enterprise in India, the MSMED Act sets a payment deadline of 45 days at most, and a tax rule backs it up.
• Say what happens to a disputed invoice. Without that, one bad line item can freeze the whole payment.
• Write who bears taxes and bank charges, especially in cross-border deals.

I read a lot of contracts where the scope of work runs for six pages and the payment clause is two lines. Then the invoice goes unpaid and everyone discovers the two lines don’t answer the one question that matters: was this actually due?

When a payment dispute reaches me, it is rarely about whether the work was done. It is usually about whether the clause said the money was due yet.

This article is about drafting the clause so you don’t need the dispute. If you’re already chasing money, our guide on what to do when a client stops paying after signing covers the recovery side.

What a payment terms clause has to cover

Think of it as five parts. If one is missing, that’s where the fight will happen.

1. Amount and currency. A fixed fee, a rate, or a formula. If the currency isn’t the one you’re paid in, say which exchange rate applies and on what date.
2. Trigger. What lets the supplier invoice: signing, delivery, a milestone, acceptance, or a calendar date.
3. Due date. A number of days from a defined event, for example “30 days after the buyer receives a valid invoice”.
4. Late consequences. Interest or a fee, and whether the supplier can pause work.
5. Disputes. How a disputed invoice is raised, and whether the undisputed part must still be paid.

Common payment structures, and where each one goes wrong

Whichever you pick, link payment to acceptance. If a deliverable is accepted when the buyer says so, add a deemed acceptance rule: if the buyer doesn’t reject it with reasons within a set number of days, it counts as accepted. That one sentence removes a lot of delay. Our guide to the statement of work shows where acceptance criteria sit in a larger contract.

Late payment: interest, fees and what the law allows

Keep it reasonable. In India, the Contract Act lets a court award reasonable compensation for breach even when the contract names a higher figure, so a late fee that looks like a penalty can be reduced. The same logic applies to fixed sums. Our piece on liquidated damages explains how courts treat these.

India: the MSME rule. If your supplier is a registered micro or small enterprise, section 15 of the MSMED Act, 2006 requires payment within the agreed period, and in no case beyond 45 days from acceptance or deemed acceptance of the goods or services. Where there is no written agreement on the period, the limit is 15 days. Section 16 adds compound interest at three times the RBI bank rate, with monthly rests, and the Act applies despite anything in the contract. Section 43B(h) of the Income Tax Act, 1961, in force from assessment year 2024-25, also delays the tax deduction for amounts owed to micro and small suppliers beyond that limit until they are actually paid. If you buy from small Indian suppliers, a 60-day clause may not be safe. Check the supplier’s registration and when it was obtained, because registration timing can affect coverage.

United Kingdom. Business-to-business debts carry statutory interest of 8% above the Bank of England base rate, plus fixed compensation sums, under the Late Payment of Commercial Debts (Interest) Act 1998. Parties can agree their own remedy only if it is a substantial remedy for late payment. Check the current rates before you quote them.

United States. There is no single federal rule for late fees between businesses. State law governs the interest cap and how a late fee is treated, so the contract’s governing law matters. If you serve US customers from India, check the state before you copy a late-fee rate from a template.

Things people forget to write

• Who pays the tax and bank charges. In cross-border payments, state whether the amount is net of withholding tax, and whether the buyer must gross up. Get a tax adviser to confirm the mechanics for your corridor.
• Set-off. Can the buyer deduct a claim from your invoice? If you’re the supplier, restrict this. If you’re the buyer, preserve it.
• Suspension. A right to pause work after notice for non-payment is cheaper than a lawsuit.
• Invoice details. Require a valid invoice with a purchase order number or reference, and say invoices sent to the wrong address don’t start the clock.
• Disputed invoices. The buyer notifies the dispute within a fixed number of days, pays the undisputed part, and both sides escalate the rest.

Sample wording to adapt

These are starting points, not final text. Your deal, governing law and the supplier’s status change what’s right.

“The Supplier will invoice upon acceptance of each Milestone. Each invoice is payable within thirty (30) days of the Buyer’s receipt of a valid invoice. A Milestone is accepted on written approval, or if the Buyer has not rejected it in writing with reasons within seven (7) days of delivery.”

“If the Buyer disputes any part of an invoice in good faith, it will notify the Supplier in writing within ten (10) days, stating the reasons, and will pay the undisputed part by the due date.”

“Amounts not paid when due carry interest at [rate] per month from the due date until payment, to the extent permitted by law.”

Check before you sign

• Is the trigger for each invoice something a stranger could verify?
• Does the due date run from a defined event, not a vague one?
• Is there a deemed acceptance rule?
• Is the late rate reasonable and lawful in the governing law?
• If the supplier is a small Indian business, does the term respect the MSMED limit?
• Does the clause say who bears taxes and bank fees?
• Is there a way to handle a disputed line item without freezing everything?

If you want someone to tighten these terms in a real draft, that’s what our contract drafting team does, and we can review an existing agreement through contract review and revision.

Quick answers

What is a standard payment term? Net 30 is common, meaning payment is due 30 days after the buyer receives a valid invoice. It isn’t a legal standard. The right number depends on your cash flow, the buyer’s size and, in India, whether the supplier is a registered micro or small enterprise.

Can I charge interest on late payments if the contract is silent? Sometimes, but it’s uncertain and depends on the law and the facts. A contract that states the rate gives you a clear claim and avoids an argument.

Is a late payment fee enforceable? Generally, if it’s a reasonable estimate of the loss and not a penalty. Courts in India can award reasonable compensation instead of the named sum.

Should I ask for an advance? For custom work or a new client, usually yes. Pair it with a clear refund rule if the project stops, so the advance doesn’t become a dispute of its own.

A note on who we are

My Legal Pal is an international team of contract lawyers with US law experience. We aren’t a US law firm, and we aren’t a local firm in every country mentioned above. This article is general information and not legal advice on your facts. Have a lawyer qualified in the governing jurisdiction check the details before you act.

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About the author. Prakhar Rai is an advocate enrolled with the Bar Council of India and the founder of My Legal Pal. He holds an LL.B from NLSIU Bangalore and a Master of Business Laws, and works on contract drafting, review and disputes for founders and businesses across borders. Full profile