Withheld payments: Overview, definition, and example
What are withheld payments?
Withheld payments refer to amounts of money that are due but have been intentionally not paid, either temporarily or permanently, by one party to another. This withholding can occur for various reasons, such as non-fulfillment of contractual obligations, disputes over the quality of goods or services, or as a result of legal or regulatory requirements. In some cases, payments are withheld as a way to ensure compliance with the terms of a contract, such as withholding a portion of payment until work is completed or certain conditions are met.
In business contexts, withheld payments might be seen in construction contracts, service agreements, or between buyers and sellers when there is a concern over performance or delivery.
Why are withheld payments important?
Withheld payments are important because they can act as a form of protection for the payer, ensuring that obligations are met before full payment is made. For businesses, withholding payment may serve as a safeguard to ensure that the other party adheres to the terms of the contract, such as completing work on time or meeting quality standards.
For businesses receiving payments, understanding when and why payments may be withheld is crucial to managing cash flow and ensuring that payment terms are clear and fair. Withheld payments can also lead to disputes, so clear communication and agreement on payment terms are essential.
Understanding withheld payments through an example
Imagine a construction company that has been hired to build an office building. The contract includes a provision that the company will receive full payment once the project is completed. However, the contractor fails to meet a specific milestone, and the project is delayed. The client, under the terms of the contract, decides to withhold a portion of the payment until the contractor catches up with the work. This ensures that the contractor fulfills their obligations before receiving full compensation.
In another example, a freelance graphic designer submits a project to a client. The client withholds a final payment until the designer makes specific revisions to the project. The withheld payment acts as an incentive for the designer to fulfill the agreed-upon terms of the contract, such as meeting design expectations or deadlines.
An example of a withheld payment clause
Here’s how a withheld payment clause might appear in a contract:
"The Client shall withhold 10% of the total payment until all project milestones have been completed to the Client’s satisfaction. The withheld amount will be released upon successful completion and delivery of all deliverables as outlined in Section 4 of this Agreement."
Conclusion
Withheld payments are a useful tool for ensuring that contractual obligations are met before full compensation is made. For businesses, understanding when and why payments can be withheld—and how to protect against wrongful withholding—is crucial for managing cash flow and maintaining positive business relationships. Clear contract terms regarding withheld payments help prevent disputes and provide both parties with assurance that their interests are protected.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.