Withholding Payment for Disputes

Many people confuse withholding payments in the event of a dispute with set-off. Set-off is
Is a common law right where accounts payable may be offset against accounts receivable. The common law right of set-off does not apply in the event of a dispute. A dispute is a claim, it is not an account receivable. Buyers may want to withhold payments for a number of reasons, some of which may be reasonable while others may not. Suppliers that don’t want buyers to withhold payments may try to include language in the agreement to the effect that in the event of a dispute, the buyer must still make all payments in accordance with the payment terms. What this will do is not prevent the buyer from withholding payments, but it would subject the buyer to damages for the breach of that commitment and would require the supplier to pursue the issue in court or arbitration to get an enforceable award.

The key for the Suppliers in withholding is you simply do not want the unscrupulous buyer from withholding amounts that are much larger than the item in dispute and you don’t want them unreasonably delaying the coming to agreement where they would have free use of your money in the interim. The key for the Buyer is if you have a problem you don’t want to pay the supplier all the money and then have to chase or sue them to collect.

This is clearly a situation where you want the contract term to drive the desired behavior. A potential solution should limit the amount being withheld to only what would be a reasonable value for what is under dispute. Second you want the terms to drive closure of the dispute as fast as possible.

Here is an example of what I mean by using terms to drive behavior: *

1. “In the event of a dispute Buyer may withhold only the reasonable value of the amount under dispute”. This prevents them from withholding the complete payment and limits it to only the value of the dispute. It also requires reasonableness in establishing the value.

2. “The parties will immediately make authorized personnel available to meet and make good faith attempts to resolve the dispute”. This would prevent the parties from delaying the settlement. It also requires that they act in good faith.

3. “If within thirty calendar days the dispute is not resolved, either party may request binding arbitration. If the parties cannot agree upon an arbitrator they will ask the ___________ Arbitration
Association to appoint an independent arbitrator. “ You want to avoid delay.

4. The cost of arbitration shall be shared on a pro-rata basis based upon the percentage of the claim amount awarded.” This would drive both parties to be more reasonable in their discussions as they know if it went to arbitration and they were wrong they would also have the cost of the arbitration to pay.

5. “For monies retained by Buyer, any amount in excess of the amount the parties agreed or arbitrator agreed, Buyer shall pay Supplier interest at the rate of ____ percent commencing from the date the payment should have been made.” This would drive the Buyer to both be reasonable in what they withhold and to settle sooner as its no longer free money to them.

6. “Payment of monies due Supplier based upon agreement of the parties or the decision of the arbitrator plus interest shall be paid within ten calendar days after the date of such agreement or arbitrator decision.” As the customer is already late in paying, you wouldn’t want the normal payment terms to apply.

There may be times when a customer simply feels that the supplier won’t bother to sue them or when the Supplier may not want to use arbitration. In that case think about what behavior the following would drive:

“In the event of a dispute, Buyer may withhold only the reasonable value of the amount under dispute. The parties will immediately make authorized personnel available to meet and make good faith attempts to resolve the dispute. If within thirty calendar days the dispute is not resolved, Supplier may commence an action for breach of the agreement. The reasonable legal fees of both parties shall be shared on a pro-rata basis based upon the court’s determination of the amount due. For example, if the court found the customer to have wrongfully withheld the complete payment, customer would be responsible for payment of their, and the Supplier’s legal fees. If the court found that customer wrongfully withheld half of the payment, each party would be responsible to pay half. For monies retained by Buyer any amount in excess of the amount the parties agreed or the court awarded, Buyer shall pay Supplier interest at the rate of ____ percent commencing from the date the payment should have been made. Payment of monies due Supplier based upon agreement of the parties or the court award plus applicable attorney’s fees plus interest shall be paid within ten calendar days after the date of such agreement or arbitrator decision. ”*

In the example the cost of not being reasonable and coming to agreement goes up dramatically and that should drive the parties to behave more reasonably in trying to settle the dispute.

While this can manage the impact, it doesn’t avoid disputes.

* Note: Language provided is always an example. Always check with your local contracts or legal personnel to make sure that language will be enforceable in your jurisdiction.


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