North Carolina Distribution Agreements: Get Paid On Time

Why Timely Payment Clauses Matter

Cash flow is the lifeblood of any distribution relationship. Clear payment terms reduce disputes, support predictable operations, and strengthen business relationships. In North Carolina business-to-business deals involving goods, parties generally have broad freedom to set commercial terms by contract. If the agreement is silent, default rules under North Carolina’s version of the Uniform Commercial Code (UCC) may apply, including that payment is due at the time and place the buyer receives the goods unless otherwise agreed (N.C. Gen. Stat. § 25-2-310).

Core Payment Terms to Include

• Payment timing: Define when invoices are issued and when payment is due (e.g., pro forma deposits, net terms, or milestone schedules). Align invoice timing with delivery triggers.
• Acceptable payment methods: Wire, ACH, check, escrow, or trade credit; specify routing details and who bears transfer fees.
• Pricing and adjustments: State unit prices, discounts, rebates, chargebacks, freight terms, and who bears taxes and surcharges.
• Late charges and interest: State a commercially reasonable interest rate and any late fees, compliant with applicable law and the agreement’s chosen law.
• Setoff limitations: Clarify whether the distributor may net or withhold amounts; consider a clear no-setoff clause if appropriate.
• Credit terms and security: Condition credit on satisfactory review; consider guaranties, UCC security interests, letters of credit, or retention-of-title treated as a security interest under Article 9 where compliant.
• Disputed invoices: Require prompt written notice, partial payment of undisputed amounts, and a defined process and timeline for resolution.
• Suspension and termination: Reserve rights to suspend shipments or terminate for nonpayment, with clear notice and cure procedures.
• Currency and exchange risk: Specify U.S. dollars, an exchange-rate source, and who bears conversion costs for cross-border deals.

North Carolina UCC Considerations

Many distribution agreements primarily involve the sale of goods, making Article 2 of the North Carolina UCC (Sales) relevant to pricing, delivery, and payment. Clear written terms help avoid default rules that might not reflect your intent, particularly with competing forms. The UCC’s battle of the forms rule can change or omit terms unless your documents are aligned (N.C. Gen. Stat. § 25-2-207). Default payment rules apply only unless otherwise agreed (N.C. Gen. Stat. § 25-2-310), so state your terms expressly.

Protecting Your Right to Payment

• Credit underwriting: Use financial statements, trade references, and ongoing monitoring; revisit limits if risk changes.
• Security interests: For credit sales, consider a perfected purchase-money security interest in inventory or other collateral; follow Article 9 filing and, where applicable, notice requirements (N.C. UCC Article 9).
• Personal or parent guaranties: Improve recovery prospects if the distributor is thinly capitalized; ensure guaranties are in writing and properly authorized.
• Escrow or letters of credit: For larger or international transactions, use standby LCs or escrow arrangements to secure payment.
• Retention of title and consignments: Evaluate title-retention or consignment structures, recognizing they are generally treated as security interests under Article 9 and require compliance to be effective against third parties.
• Delivery and risk of loss: Use clear shipment/destination terms or Incoterms to allocate risk and trigger invoicing.

Late Payment Remedies and Interest

Define late fees and interest, including accrual start date, compounding or simple interest, and how partial payments are applied. Address recovery of reasonable collection costs and attorneys’ fees as permitted by law, and state your right to suspend performance after notice if invoices remain unpaid. If you choose a governing law other than North Carolina, confirm late-charge compliance under that law.

Handling Disputes Efficiently

• Notice and cure: Provide a short, written notice process for nonpayment and a defined cure period before suspension or termination.
• Dispute resolution: Choose forum, governing law, and method (litigation or arbitration). Consider mediation for speed and cost control.
• Evidence exchange: Require prompt exchange of key documents (purchase orders, delivery receipts, quality reports, and account statements) to narrow issues quickly.

Practical Drafting Tips

• Make payment mechanics unambiguous: State due dates, bank details, and remittance instructions in one place.
• Align commercial documents: Ensure invoices, purchase orders, and confirmations reflect the same terms; expressly control conflicting terms.
• Automate: Use EDI or portal invoicing with receipt confirmations.
• Early-pay incentives: Offer small discounts for prompt payment and reserve the right to revoke discounts if invoices become overdue.
• Chargeback discipline: Limit the timing and scope of deductions; require documentation and prior approval for non-price chargebacks.
• Audit rights: Permit periodic audits of deductions and promotional spend.

When Nonpayment Becomes a Legal Issue

If a distributor repeatedly pays late or refuses to pay, follow the agreement’s notice provisions and preserve evidence. Options may include suspending shipments, accelerating amounts due, drawing on security, or pursuing litigation or arbitration. In some cases, a short-term forbearance or payment plan with additional security can stabilize the relationship while protecting your rights.

FAQ

Do North Carolina default rules require payment on delivery?

By default, payment is due at the time and place the buyer receives the goods unless the parties agree otherwise.

Can I charge interest on late payments?

Yes, if the contract specifies a commercially reasonable rate and complies with applicable law. State the accrual start date and method.

How do I limit deductions and chargebacks?

Require prior written approval, documentation, and time limits, and prohibit setoff except as expressly permitted.

What security can I use to reduce nonpayment risk?

Consider guaranties, perfected security interests, letters of credit, or escrow arrangements, depending on deal size and risk.

How We Can Help

We draft and negotiate North Carolina distribution agreements that prioritize timely payment, align operational documents, and build in effective remedies. Whether you are setting up a new channel or tightening an existing one, we can help design practical, enforceable payment terms and risk protections tailored to your business. Contact us to get started.

Key North Carolina Sources

• North Carolina UCC, Chapter 25, Article 2 (Sales)
• N.C. Gen. Stat. § 25-2-207 (Additional terms in acceptance or confirmation)
• N.C. Gen. Stat. § 25-2-310 (Open time for payment or running of credit)
• North Carolina UCC, Chapter 25, Article 9 (Secured Transactions)

Last reviewed: 2025-10-30

Disclaimer: This blog is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Laws change and outcomes depend on specific facts; consult a licensed North Carolina attorney about your situation.