A payment term dispute in a Minnesota sale of goods is decided first by what the buyer and seller actually agreed. Minnesota’s version of the Uniform Commercial Code (“UCC”) then fills any gap, ranks the evidence of what was agreed, and supplies each side’s remedies. “Unless the context otherwise requires,” and with listed exceptions, Article 2 of the UCC, codified in chapter 336 of the Minnesota Statutes, “applies to transactions in goods” (Minn. Stat. § 336.2-102(1)). Its default rules on when payment is due, how it is made, and whether a buyer may inspect first apply “Unless otherwise agreed,” so your purchase order, acknowledgment, invoices, and supply agreement come first. A check marked “paid in full” is governed by Article 3 of the same chapter.

This article covers business-to-business sales of goods under Minnesota business contract law. Two limits on scope matter. If a contract mixes goods and services and the goods do not predominate, only the Article 2 provisions that “relate primarily to the sale-of-goods aspects of the transaction apply” (§ 336.2-102(2)(a)). And if your contract chooses another state’s law, that choice may control under Minn. Stat. § 336.1-301(a), as the last question below explains.

How does Minnesota law decide what the payment term is in a sale of goods?

The express terms of your agreement and any course of performance, course of dealing, or usage of trade “must be construed whenever reasonable as consistent with each other” (Minn. Stat. § 336.1-303(e)). If that construction is unreasonable, “express terms prevail” (§ 336.1-303(e)(1)), except that a course of performance can show a waiver or modification of a term under subsection (f), covered below.

Minnesota’s code defines a course of dealing as “a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct” (§ 336.1-303(b)). A course of performance exists when “the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party” and the other party, “with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection” (§ 336.1-303(a)). Terms “set forth in a record intended by the parties as a final expression of their agreement with respect to such terms as are included therein” “may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented” by course of performance, course of dealing, or usage of trade (Minn. Stat. § 336.2-202). Evidence of consistent additional terms is also allowed “unless the court finds the record to have been intended also as a complete and exclusive statement of the terms of the agreement” (§ 336.2-202(b)).

I suggest starting any payment dispute by putting the documents in date order (the quote, the purchase order, the acknowledgment, each invoice, and the payment history), because that record shows which terms were agreed and which were only proposed.

When is payment due, and in what form, if the contract does not say?

If the contract is silent, payment “is due at the time and place at which the buyer is to receive the goods” (Minn. Stat. § 336.2-310(a)). On credit terms such as net 30, the credit period “runs from the time of shipment,” but “postdating the invoice or delaying its dispatch will correspondingly delay the starting of the credit period” (§ 336.2-310(d)).

The form of payment is flexible. Under Minn. Stat. § 336.2-511(2), “Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.” A seller may insist on legal tender only if it gives the buyer the time reasonably necessary to get it. I suggest stating any required payment method in your terms of sale, because otherwise any method current in the ordinary course of business is sufficient. A check is not final payment: “payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment” (§ 336.2-511(3)).

Timing also runs in the other direction. “Unless otherwise agreed tender of payment is a condition to the seller’s duty to tender and complete any delivery” (§ 336.2-511(1)). Unless the contract says otherwise, a seller does not have to complete delivery until the buyer tenders payment.

How do a purchase order and an invoice with different payment terms fit together?

Between merchants, an additional payment term in the seller’s acceptance or written confirmation becomes part of the contract unless the buyer’s offer limited acceptance to its own terms, the new term materially alters the deal, or the buyer objects within a reasonable time (Minn. Stat. § 336.2-207(2)). The objection exception covers notice “given within a reasonable time after notice of them is received” (§ 336.2-207(2)(c)).

Whether an added interest charge or a shorter due date would “materially alter” the deal depends on the facts. That analysis, and the treatment of an invoice term that differs from the purchase order’s term (§ 336.2-207(1) refers to “terms additional to or different from those offered or agreed upon”), are in how Minnesota decides whose form governs. I suggest that a buyer object in writing to any invoice payment term it does not accept, because a timely objection keeps the term out under subsection (c) without a fight over materiality.

Interest gets separate treatment. The Minnesota Court of Appeals has stated that “liability for interest is purely a matter of contract, requiring a promise to pay it” (American Druggists Insurance v. Thompson Lumber Co., 349 N.W.2d 569 (Minn. Ct. App. 1984)). It then applied the account stated rule that “A party’s retention without objection for an unreasonably long time of a statement of account rendered by the other party is a manifestation of assent” and found no factual dispute over a contractor’s liability for finance charges stated on invoices it never complained about. Stating that “Under Minn.Stat. § 334.01, interest cannot be compounded,” the same court cut the award to simple interest. “The interest for any legal indebtedness shall be at the rate of $6 upon $100 for a year, unless a different rate is contracted for in writing” (Minn. Stat. § 334.01 subd. 1). Subject to exceptions it lists, “no limitation on the rate or amount of interest, points, finance charges, fees, or other charges applies to a loan, mortgage, credit sale, or advance made under a written contract, signed by the debtor, for the extension of credit to the debtor in the amount of $100,000 or more,” and that contract is “exempt from the other provisions of this chapter” (§ 334.01 subd. 2). The limits on late fees and rates are covered in adding interest to invoices in Minnesota.

What happens when the price itself is disputed or left open?

A buyer and seller who intend to be bound can form a contract without a settled price, and the price is then “a reasonable price at the time for delivery” if nothing was said about price, the parties failed to agree on it, or an agreed outside benchmark was never set (Minn. Stat. § 336.2-305(1)). That rule applies unless the parties intended not to be bound until a price was agreed, as explained below.

This can come up when goods ship on a rush order before anyone confirms pricing, or when the contract ties the price to an outside benchmark that is never set. If the contract lets one side set the price, “A price to be fixed by the seller or by the buyer means a price for the fixer to fix in good faith” (§ 336.2-305(2)).

The rule has a limit that cuts the other way. “Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract” (§ 336.2-305(4)). In that case the statute requires the buyer to return the goods, or pay their reasonable value if it cannot, and the seller to return any price paid. Emails stating that an order is subject to final pricing are evidence of which way your deal falls.

How can accepting late or partial payments change the payment term?

When a contract calls for repeated payments and a seller, knowing of late or short payments and having the opportunity to object, keeps accepting them without objection, that conduct can form a course of performance. Under Minn. Stat. § 336.1-303(f), a course of performance “is relevant to show a waiver or modification of any term inconsistent with the course of performance.” That subsection is “Subject to section 336.2-209,” whose waiver exception the Minnesota Supreme Court has called narrow.

Three rules from Minn. Stat. § 336.2-209 frame the question. An agreement changing a goods contract “needs no consideration to be binding” (subsection (1)). A signed agreement requiring changes in a “signed writing or other signed record” cannot be changed another way, “but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party” (subsection (2)). But a change that fails that test “can operate as a waiver” (subsection (4)).

The Minnesota Supreme Court has held that this waiver “exception is narrow, however, and any waiver under subsection 2-209(4) must satisfy the rules and principles of Minnesota law regarding waiver,” and that “Knowledge and intent are essential elements of waiver” (Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359 (Minn. 2009)). The court also recognized that intent to waive may be inferred from conduct. More on these clauses is in no-oral-modification clauses.

The fix for a seller is in subsection (5): a waiver affecting future performance can be retracted “by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.” Written objections matter on both sides. In one commission dispute I analyzed, the company’s main defense was the representative’s years of accepting reduced payments, and the representative’s written objections to management were the key evidence against that defense.

When can a buyer withhold or deduct payment for problem goods?

A buyer may inspect goods before paying unless the contract says otherwise or calls for C.O.D. or similar terms (Minn. Stat. § 336.2-513). Once the buyer accepts goods, it “must pay at the contract rate for any goods accepted” and may deduct its damages from the seller’s breach, after notice, only from the price still due under the same contract (Minn. Stat. § 336.2-607(1); Minn. Stat. § 336.2-717).

The order of events matters:

  1. Inspection. The buyer “has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner” (§ 336.2-513(1)). The details are in the buyer’s right to inspect before accepting.
  2. Rejection. “Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller” (Minn. Stat. § 336.2-602(1)).
  3. Notice of breach after acceptance. The buyer “must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller of breach or be barred from any remedy” (§ 336.2-607(3)(a)). “The burden is on the buyer to establish any breach with respect to the goods accepted” (§ 336.2-607(4)).
  4. Deduction. “The buyer on notifying the seller of an intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract” (§ 336.2-717).

The words “under the same contract” limit the deduction. A complaint about last year’s order is not a statutory basis for short-paying this year’s invoice under a separate contract. Retailer deductions raise their own contract terms, covered in deductions a retailer takes from your invoices.

When the contract requires payment before inspection, a defect “does not excuse the buyer from so making payment unless” the defect “appears without inspection” or a narrow documentary exception applies (Minn. Stat. § 336.2-512(1)). That payment “does not constitute an acceptance of goods or impair the buyer’s right to inspect or any of the buyer’s remedies” (§ 336.2-512(2)). In Tonka Tours, Inc. v. Chadima, 372 N.W.2d 723 (Minn. 1985), the Minnesota Supreme Court recognized that rule but upheld a finding of acceptance. The corporate buyer had paid the full price at closing knowing the agreed repairs were unfinished, agreed to an escrow for them, and selected the mechanic.

How does a check marked “paid in full” affect a disputed invoice?

Depositing a check sent as full payment of a disputed invoice can discharge the rest of the claim. Under Minn. Stat. § 336.3-311, that happens when the buyer in good faith sent the check as full satisfaction, the amount was “unliquidated or subject to a bona fide dispute,” the seller obtained payment, and the check or a written note with it carried a conspicuous full-satisfaction statement. The statute’s two exceptions, and the rule that overrides them, turn on timing: a statement the seller sent within a reasonable time before the buyer sent the check, a repayment within the period the statute sets, and what the seller knew within a reasonable time before collecting the check.

Unless one of two exceptions applies, the claim is discharged once those subsection (a) proofs are made and the check or an accompanying written communication contained a conspicuous full-satisfaction statement (§ 336.3-311(b)). First, an organization can send, within a reasonable time before the tender, a conspicuous statement naming a “designated person, office, or place” for communications about disputed debts; a check that does not reach that place does not discharge the claim (§ 336.3-311(c)(1)). Second, a seller can repay the amount of the check within the period subsection (c)(2) sets, but “This paragraph does not apply if the claimant is an organization that sent a statement complying with paragraph (1)(i).” The (c)(2) period is short, so I suggest reading the current text the day a disputed check arrives. Neither exception helps if, within a reasonable time before collection of the check began, the seller or its agent responsible for the disputed account knew that the check “was tendered in full satisfaction of the claim” (§ 336.3-311(d)).

Webb Business Promotions, Inc. v. American Electronics & Entertainment Corp., 617 N.W.2d 67 (Minn. 2000), arose from a goods sale. The buyer deducted repackaging and shipping costs from an invoice and sent a check with a letter saying that cashing it meant final settlement, and the seller deposited it. The Minnesota Supreme Court held “that once the elements of section 336.3-311(a) and (b) are met, mutual agreement of the parties to enter into an accord and satisfaction is presumed as a matter of law.” It also held that a dispute over the amount owed is not bad faith. The court did not decide that the seller’s claim was discharged; it sent the case back for findings on good faith in the tender and on whether ambiguous wording rebutted the presumption.

I suggest that a seller read every letter that comes with a short payment before depositing the check, because the deposit can end the dispute on the buyer’s number. More on that choice is in accepting a payment under protest.

What can a seller do when a buyer misses a payment?

When a buyer “fails to make a payment due on or before delivery,” the seller may withhold delivery and cancel as to the goods directly affected, and as to the whole undelivered balance if the breach is of the whole contract (Minn. Stat. § 336.2-703). For goods already accepted, the seller may sue for the price (Minn. Stat. § 336.2-709(1)(a)).

On credit terms, the overdue invoice is for goods already shipped, and one tool for protecting future orders is a demand for adequate assurance. Under Minn. Stat. § 336.2-609(1), “When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until such assurance is received may if commercially reasonable suspend any performance for which the person making the demand has not already received the agreed return.” Subsection (4) states the consequence of silence: “After receipt of a justified demand failure to provide within a reasonable time not exceeding 30 days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.” Separately, under Minn. Stat. § 336.2-702(1), “Where the seller discovers the buyer to be insolvent the seller may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this article (section 336.2-705).” A buyer’s bankruptcy petition operates as a stay under 11 U.S.C. § 362(a).

Installment contracts add a threshold. A contract “which requires or authorizes the delivery of goods in separate lots to be separately accepted” is an installment contract (Minn. Stat. § 336.2-612(1)). Under § 336.2-612(3), “Whenever nonconformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole.” Under the same subsection, “the aggrieved party reinstates the contract by accepting a nonconforming installment without seasonably notifying of cancellation or by bringing an action with respect only to past installments or by demanding performance as to future installments.” I suggest deciding whether to cancel before sending a demand for future performance, because that demand can reinstate the contract. In one matter, a supplier kept filling a large retail customer’s orders while invoices went well past due, and my demand letter sought payment of the unpaid invoices and said a lawsuit would also seek prejudgment interest.

“Except as otherwise provided by contract or allowed by law,” Minn. Stat. § 549.09 subd. 1(b) governs “preverdict, preaward, or prereport interest on pecuniary damages,” and it bars that interest on “judgments or awards not in excess of the amount specified in section 491A.01” (§ 549.09 subd. 1(b)(4)). That interest runs “from the time of the commencement of the action or a demand for arbitration, or the time of a written notice of claim, whichever occurs first,” and a written notice starts it only if the action is commenced within the period subdivision 1(b) sets. If the buyer never objected to your statements, an account stated claim may also be available. Large customers that demand long terms raise further issues, covered in net-60 and net-90 terms with large customers.

How do contract clauses limit remedies in a payment dispute?

Your contract can change the remedies Article 2 provides. Under Minn. Stat. § 336.2-719(1)(a), “the agreement may provide for remedies in addition to or in substitution for those provided in this article and may limit or alter the measure of damages recoverable under this article.”

That power is “Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages” (§ 336.2-719(1)). Under Minn. Stat. § 336.2-718(1), “A term fixing unreasonably large liquidated damages is void as a penalty.” The other limits are these. A stated remedy is optional “unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy” (§ 336.2-719(1)(b)). “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter” (§ 336.2-719(2)). And “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable” (§ 336.2-719(3)).

Article 2 also sets its own deadline for suing on a contract for sale in Minn. Stat. § 336.2-725. The original agreement may shorten that period within the floor the statute sets, but it “may not extend it.” I suggest checking the current text and your contract before relying on any period, because a missed deadline ends the claim.

Can a buyer refuse to pay an entire invoice because part of the shipment was defective?

Not for accepted goods: it owes the contract rate (Minn. Stat. § 336.2-607(1)) but, after notice, may deduct damages from the price still due under the same contract (§ 336.2-717). Not notifying the seller of breach within a reasonable time after it discovers or should have discovered the breach bars any remedy (§ 336.2-607(3)(a)). Subject to installment rules and unless otherwise agreed under contractual limitations of remedy (§§ 336.2-718, 336.2-719), it may reject nonconforming goods wholly or by commercial unit (§§ 336.2-601, 336.2-612), rejecting timely with seasonable notice (§ 336.2-602(1)). Revocation needs substantial impairment, timely action, and more (§ 336.2-608).

Is a late fee printed on our invoice binding if the customer never objected?

It can be. If the invoice works as a written confirmation, an additional term between merchants becomes part of the contract unless the offer limited acceptance to its own terms, the term materially alters the deal, or the buyer objected within a reasonable time after notice of it (Minn. Stat. § 336.2-207(2)). A Minnesota court also treated retention of invoices stating a finance charge, without objection for an unreasonably long time, as assent, while disallowing compounded interest under Minn. Stat. § 334.01. Under Minn. Stat. § 336.2-718(1), a term fixing unreasonably large liquidated damages is void as a penalty.

Can we hold the next shipment until a customer who is behind pays?

For a missed payment due on or before delivery, Minn. Stat. § 336.2-703 lets the seller withhold delivery of the goods directly affected. With reasonable grounds for insecurity, a written demand for adequate assurance (§ 336.2-609(1)) lets you suspend performance not yet paid for until assurance is received, if commercially reasonable. No adequate assurance within a reasonable time after a justified demand is a repudiation. A seller discovering the buyer’s insolvency may refuse delivery except for cash, including payment for all goods delivered under the contract (§ 336.2-702(1)). A buyer’s bankruptcy petition operates as a stay (11 U.S.C. § 362(a)).

Do we lose the right to collect on time if we kept shipping after missed payments?

Not automatically. A waiver of a term for future performance can be retracted by reasonable notice that strict performance will be required, unless retracting would be unjust because the customer materially changed position in reliance (Minn. Stat. § 336.2-209(5)). Accepting an improper payment does not prejudice your right to demand adequate assurance of future performance (Minn. Stat. § 336.2-609(3)). The Minnesota Supreme Court calls the waiver exception in Minn. Stat. § 336.2-209(4) narrow and treats knowledge and intent as essential elements of waiver, though intent to waive may be inferred from conduct.

Must a buyer pay before inspecting goods shipped C.O.D.?

Yes, unless the contract says otherwise. Under Minn. Stat. § 336.2-513(3)(a), a buyer is not entitled to inspect before paying when the contract calls for delivery C.O.D. or on similar terms. Under Minn. Stat. § 336.2-512, a defect excuses that payment only if it appears without inspection, and paying does not count as accepting the goods or give up the buyer’s right to inspect or its remedies.

Does Minnesota law apply if our contract picks another state's law?

It may not. Under Minn. Stat. § 336.1-301(a), when a transaction bears a reasonable relation to Minnesota and to another state, the parties may agree that the other state’s law governs their rights and duties. If the clause is effective, that state’s law governs the payment dispute. Without an effective choice, Minnesota’s Uniform Commercial Code applies to transactions bearing an appropriate relation to Minnesota (Minn. Stat. § 336.1-301(b)).

Resolving a Payment Term Dispute

A payment term dispute in a Minnesota sale of goods turns on the documents: what the purchase order and invoices said, who objected and when, and what the payment history shows. Minnesota’s UCC fills the gaps, lets a buyer deduct damages only after notice and only under the same contract, and gives a seller tools to stop shipping, demand assurance, and sue for the price. A buyer that accepted goods and does not notify the seller of breach within a reasonable time after it discovers or should have discovered the breach is barred from any remedy. A short payment with a full-settlement note deserves a careful read before it is deposited. For related issues, see my contracts practice. If you would like me to analyze a disputed invoice or a customer’s payment terms and tell you where you stand, email [email protected] with a brief description. I will start an intake and conflict check before you send any confidential documents.