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Ask a Lawyer // December 2015

Written by
Matthew S. Johnston
Published
December 9, 2015
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Starting this month, we’re introducing the Ask a Lawyer column, brought to you by our chapter member, Matthew S. Johnston, Esq. Attorney. Look for this informative column each month. Plus, we’ll be including it in our monthly e-newsletters, too. If you haven’t already signed up for that, do so here (or scroll down to the bottom of the page, and look for the sign-up box on the right).  

Have a question or topic that you’d like Matt to tackle in an upcoming Ask a Lawyer? Shoot us an email at info@aigablueridge.org.

 


 

At some point in time in your graphic design business, you will experience the pain and annoyance of not getting paid on time (it happens to lawyers all the time). The problem of getting paid on time rarely starts when the client didn’t pay the invoice. Often, the root cause of the problem is contractual in nature, meaning the Client contract does not adequately incentivize on-time payment.

Designers, indeed all business owners, should clearly communicate the expectations regarding payment. Many client contracts I have reviewed and revised will have some version of this Invoice clause (this actually comes from the AIGA model contract):

Invoices. All invoices are payable within ________ (__) days of receipt. A monthly service charge of 1.5 percent (or the greatest amount allowed by state law) is payable on all overdue balances. Payments will be credited first to late payment charges and next to the unpaid balance. Client shall be responsible for all collection or legal fees necessitated by lateness or default in payment.

On first reading, most people would shrug and say, “Well what’s wrong with that?” This short paragraph is riddled with problems from a contractual point of view. The language screams passivity and practically invites collections problems. Here are three simple improvements that protects you when clients don’t pay on time.

 

1. LABEL CLAUSE PROPERLY.

Calling the provision invoice does not draw attention to what you, the designer is really worried about—getting paid. So do something very simple and communicate clearly by calling the provision “Invoices and Payment.”

 

2. ACTIVELY IMPOSE ON THE CLIENT THE OBLIGATION TO PAY BY A DEFINED TIME.

Three quick problems exist with just the first sentence in the provision:

  • The above provision doesn’t name the Client as having an obligation to pay (don’t assume something like this is understood)
  • The word “payable” does not convey any action or imperative to act. The sentence is more of a definition than an obligation.
  • There is the vagueness of “receipt”. How can a business know when a customer “receives” an invoice? A business knows for certain the date of an invoice and nothing else.

Just asking a few questions helps develop a better sentence. Who must pay? The customer must pay. When does the company want to be paid? Within X days of the date of the invoice. Those two answers lead to a simple, better sentence:

Customer shall pay all invoices within ___ calendar days of the invoice date.

The above sentence is short, clear, active, declarative, and easy to measure. So what happens when the client doesn’t fulfill their obligation?

 

3. CLEARLY DEFINE LATE PAYMENT PENALTIES.

Designers should look to incentivize on time payment. In AIGA’s sample contract, we can see an attempt to incentivize on-time payment (“A monthly service charge of 1.5 percent (or the greatest amount allowed by state law) is payable on all overdue balances”). Again, the sentence is passive to the point of inactivity. The clause contains no escalating penalties. The language creates an ambiguity which may lead to a dispute, such as the difference between a service charge and the undefined late payment charge.

Clearly defined late penalties incentivize early payment or at least punish late payment. Three basic levels would be:

  • a late fee for payments received after the due date (with time for the mail to catch up),
  • interest accruing at a stated (reasonable) interest rate for payments more than 30 days late, and
  • attorney or collections agency fees after 90 days late.

For example, a penalty provision might look like this:

If Designer receives payment from Client more than 15 days after the invoice date, Designer may impose a late fee of $50.00. If Designer receives payment from Client more than 30 days after the invoice date, Company may assess interest equal to one percent of the unpaid balance for each month or portion of a month the balance is unpaid. Interest accrues retroactively from the due date. If Client has not paid an invoice for more than 90 days, Company may refer collection of the unpaid amount to an attorney or collections agency. If Client’s unpaid invoices are referred to an attorney or collections agency, Client shall pay all reasonable attorney’s fees or collections agency fees in addition to the late fee and accrued interest.

The provision may seems a little wordy, but the three penalties are clearly stated and escalate appropriately. Here is an example of the penalty provision in action.

Designer invoiced the Client for $1,500 on August 1, 2015. The due date is August 11, 2015. Client does not pay until December 15, 2015. Client may be obligated to pay the following:

Invoiced Amount    $1,500.00
Late Fee assessed on August 16, 2015    $50.00
Interest (1% per month ($15.00) for 4 months and one partial month)    $75.00
Attorney Fees (estimated)    $125.00
Total Owed    $1,750.00

Because the penalties are written as “may,” the Designer has the option to assess or not assess any of the penalties.

Encourage the client to pay on time by clearly stating their obligation and the clear consequences for failing to meet their obligation. By clearly spelling out the penalties for late payment in the client contract, you can either incentivize on-time payment or at least punish late behavior.

 


 

BIO Disclaimer
Matt Johnston operates his own law firm in Frederick with a focus on small business representation, copyright and trademark law, and dispute resolution. Many of Matt’s clients are designers and creative professionals who have concerns overlapping Matt’s practice areas. Matt concentrates on making contracts of all types better written and helping designers with the legal side of the design business. As a benefit to AIGA members, Matt offers a 10% discount on all consultation appoints, flat fee projects, and hourly fees.
The content of this column is for educational and informational purposes only and should not be construed as legal advice applicable in all situations. No attorney-client relationship is created through this column. If you need confidential legal advice, Matt is available for private and privileged consultations.
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