[Updated 11 Dec. 2021: For more on this topic, see this July 2018 post and this April 2020 post.]
For a while now, I’ve asked myself what category of contract language to use when providing for one party to invoice the other. Here are the possibilities:
Language of obligation: Widgetco shall invoice Acme monthly in arrears for purchases under this agreement.
That doesn’t make sense, as it suggests that Acme could bring a claim for breach if Widgetco doesn’t invoice Acme monthly.
Language of discretion: Widgetco may invoice Acme monthly in arrears for purchases under this agreement.
That’s not right either, as it suggests that each month Widgetco might say to itself, Yes, Acme owes us money, but do we really want to issue an invoice this month? Instead, invoicing is a matter of routine.
Language of policy: Widgetco will invoice Acme monthly in arrears for purchases under this agreement.
Nope. Language of policy (using will) is for stating the ground rules of a contract—stuff that is or will be, without anyone’s intervention. By contrast, invoicing requires party action.
Language of obligation used to express a condition: For Widgetco’s invoices for purchases under this agreement to be valid, Widgetco must issue them to Acme no sooner than monthly in arrears.
It’s cumbersome. And more to the point, it would be odd to have a condition to validity be the only way you address invoicing.
So here’s my current favorite:
Language of declaration: Acme acknowledges that Widgetco invoices purchasers of widgets monthly in arrears.
Boom. It reflects the reality that Widgetco’s invoicing of Acme isn’t something unique to this transaction. Instead, it’s a function of Widgetco’s invoicing system. Of course, you won’t find a single contract that uses anything like this, but that certainly doesn’t worry me.
What do you think?
(For the complete analysis of the categories of contract language, see chapter 3 of A Manual of Style for Contract Drafting.)
I think language of obligation still has its use, even though the likelihood of suing for breach is low. If an organization had its expenses audited by a taxation authority it might want to be able to enforce an obligation for a party to provide invoices. We saw a higher volume of audits in the last 6 months in Canada, especially in relation to deductions claimed for professional fees where (I assume) the failure to provide supporting invoices to the taxation authority could result in a denial of past deductions.
I suggest that if for some reason a buyer needs regular invoices, it should be made explicit what’s going on. I’d probably use language of declaration and address in some sort of risk-allocation provision the consequences of irregular invoicing.
would language of intention work in this context?
“Widgetco intends to invoice Acme monthly in arrears for purchases under this agreement.”
Signifying that invoicing monthly in arrears is what the parties are planning, but whether that’s how it pans out will depend on the details of the relationship
Nice idea, but I don’t think it makes sense: when Widgetco invoice Acme is entirely under Widgetco’s control.
I would delete “Acme acknowledges that”. You noted in a recent discussion that Acme’s acknowledgement is redundant since it “acknowledges” the statement by agreeing to the contract.
No, this isn’t an instance of “throat clearing.” Instead, Acme is acknowledging an aspect of Widgetco’s business.
I’m not persuaded that language of obligation is inappropriate. Invoicing provisions are frequently coupled with claim waivers if the invoice isn’t challenged within a fairly short time. Language of acknowledgment as you’ve stated it allows too much leeway for Widgetco to change its policy, while Acme could be prejudiced if it has to review, say, six months of invoices within a matter of days. So what if failure to invoice monthly constitutes a breach? In fact, if Widgetco suddenly decides to start invoicing monthly (or some other interval) in *advance,* Acme should have some grounds for crying foul. Otherwise, no harm no foul if Widgetco *occasionally* lapses from its schedule.
If you’re going to have any form of acknowledgment about invoicing, the acknowledgment should come from Widgetco rather than Acme: Widgetco acknowledges that Acme requires invoicing monthly in arrears. I still think that’s inferior to an obligation, though.
I’m sensing a gravitational pull to language of obligation.
Regarding your language of declaration, it’s fake, as it’s not acknowledging a fact.
If the invoicing arrangement is favourable to the buyer (by being monthly in arrears), then a declaration from the buyer might leave the buyer without a clear right to refuse an invoice which is issued earlier. In order to protect the benefit of a favourable invoicing arrangement, I think the declaration needs to come from the supplier – as Vance Koven suggests.
Where the issuing of invoices forms part of a broader chain of events or interconnected supplies, the language of obligation seems appropriate. In these circumstances, it might be important for the buyer to have each invoice arrive by a particular time.
But, more generally, I find the language of discretion to be the category which reflects the reality of the situation. Invoicing is something which a supplier chooses to do. Of course, the supplier has a commercial incentive to do so at the earliest opportunity, but there are many factors which can result in an invoice being delayed. From the buyer’s perspective, it doesn’t want the invoice issued earlier than expected. So the supplier’s discretion should only arise following an agreed trigger point (month end, received order, delivery etc.) In some circumstances, the buyer might want protection against an invoice being issued very late. If so, the contract could set out the consequences of an invoice being issued after a certain date.
If the actual payment provision uses the invoice date (or invoice receipt date) as the trigger (as is typical), then this language controls how frequently the customer must pay and whether the payment must be in arrears or in advance. Based on that, I’d use language of discretion, recognizing that the customer is essentially giving the vendor permission to time its liability within some constraints. However, I might rephrase it to say “no more frequently than monthly but only in arrears.”
But if the provision was highly negotiated and the customer was relying on a specific billing cycle in a way where breach could cause damages, then I’d probably flip to language of obligation.
Yes, one has to take into account the related provisions.
My premise is that Widgetco sells zillions of widgets, a commodity product. Acme is just one of innumerable customers. This is the way it works, Acme: take it or leave it.
If it’s a bespoke deal and the customer has particular needs, sure, I’d use language of obligation.
In that context I think language of declaration makes sense.
There are two ways a drafter can use a ‘checklist of the categories of contract language’:
(1) To take an inchoate idea or topic and help convert it into an actual deal point, and
(2) To take a fully-baked deal point (proposed or already agreed) and find the right contract language to express it.
This exercise is one of the former, I think, since ‘providing for one party to invoice the other’ isn’t a fully-baked deal point.
Presumably another provision in this notional contract imposes a duty on Acme to pay Widgetco’s invoices within some period after their issuance or receipt. Acme’s acknowledgment that Widgetco has, prior to signing, had a practice of monthly invoicing would do no more than subvert any post-signing complaint by Acme that monthly invoicing is too frequent.
The acknowledgment does not address what happens if, for example, Widgetco skipped a month’s invoice and doubled up the following month.
If that outcome is the deal point, language of acknowledgment is a good way to express it. If not, the deal point needs to be more sharply defined before choosing the best contract language for it.
Frankly, I’m wondering why you need to record the invoicing; why not simply provide that the customer must pay within say 30 days of any invoice. There is no obligation to invoice, risking breaches, as you say. If we issue, it creates the payment obligation.
I agree with the voices arguing for obligation language. I work for a large global company with lots of invoicing requirements for tax, audit, ethics and budgeting reasons–invoice timing and content is important for us in many cases. Since we live in the real world of contract templates, we have to use the language of obligation to cover most cases, even though sometimes it would be OK to be less strict.
I think the reason you raise this is because saying “may invoice” for a fundamental obligation of the customer feels somehow too woolly or non-committal. Invoicing is a serious thing and somehow demands a firmer tone.
I have this debate with sales and finance people at work (we act as supplier) and have had to regularly justify the discretionary approach – I see no way around it. The only alternatives I accept in these discussions are “Supplier can invoice” or “Supplier has the right to invoice”, but these are just alternatives to saying “may”, and I prefer to keep just one verb for discretionary entitlements in the contract.
In the end, it is a right and the invoicing clause seeks to curtail that right by setting conditions (dates or events) on when the invoice can come. If the customer is concerned about late invoices it could set end dates by which all invoices must be received , but in my experience this is unusual – the supplier has economic incentives that motivate it to invoice quickly.
A further problem I see creating an obligation to invoice is that it could also imply if we miss that date there is no further opportunity to invoice. No one really intends this but I don’t know of any legal authority ruling it out. I struggle to see how saying “will invoice” is any different to shall – I have generally assumed will is equivalent to shall or must?
The declaration idea is good attempt but it doesn’t the solve the debate. Yes, this point is acknowledged, but legally does this prevent an earlier invoice? It sounds as if it is declaring the supplier’s business practice, but somehow the supplier could amend this when it chooses.
What about expressing as a negative – “Supplier shall not issue an invoice before XYZ”? This sounds suitably firm but maintains the right to issue it on or after the conditional point is reached.
It would be easier to use “in arrear” (which always means payment at the end of the period) rather than “in arrears” (which most of the time means late payment, but sometimes means payment at the end of the period).
This distinction is way too subtle.