Business Terms, Don’t Get Caught Out

Given all of the past few months, which have been both surreal and challenging as we all battle with home schooling, isolation and technology – it is good to see businesses focusing on building smarter, growing sustainably and recovering with resilience.

However, oversight needs to be had for the Terms & Conditions of businesses to make sure they are bespoke, reviewed, up to date and effective to both control risk and in line with risk appetite.

On this subject and as a quick example, you may have missed much on the Corporate Insolvency and Governance Act 2020 (the “Act”) which has introduced  major changes to the current insolvency legislative framework.

This has particular relevance for companies who may be affected by an insolvent supplier as it introduces new protections for insolvent companies against creditors wishing to exercise termination rights within supply contracts and against more aggressive creditor action.

For businesses in the role of suppliers, the headline here is that they can no longer terminate contracts, refuse to supply goods or services or amend payment terms with an insolvent customer due to its insolvency, save in limited circumstances.

The new protection – what is it?

It imposes a general prohibition on the unilateral termination of the contract or supply or “any other thing” as a result of the company becoming subject to a relevant insolvency procedure. Further, suppliers cannot make it a condition of their continued supply that any arrears on outstanding charges are met.

What other headlines are there in the Act?

The Act has a mix of reforms in it, some of which are intended to be temporary and as a response to the global coronavirus pandemic, and some which are permanent.

The driver behind these changes will be offering protection to those sectors such as Retail and Hospitality, that have been so affected by the pandemic.

What are the temporary reforms?

These are summarised as:

  • Suspension of liability for wrongful trading.
  • General meetings of companies can be held “by any other means”, whether permitted by its articles of association or not.
  • Restrictions on the use of statutory demands and winding up petitions – bear in mind though that this may not apply if the creditor can demonstrate it has reasonable grounds that either coronavirus has not had a financial effect on the company, or the grounds on which its winding up petition is made would have arisen even if coronavirus had not had a financial effect on the company.

What are the permanent reforms?

These are summarised as:

  • A company will be able to benefit from a moratorium from creditor action without entering into administration.
  • Termination clauses in supplier contracts will cease to apply on insolvency.
  • A new restructuring procedure will be introduced.

Issues to bear in mind

The key risk here has to be minimising financial exposure. With this in mind, businesses should:

  • Ensuring payment terms are as tight as possible and keep track of overdue payments.
  • Review closely overdue invoices and take action before the debtor becomes insolvent in order to avoid any termination clauses becoming ineffective.
  • Review the terms of agreement – there may be other options in the event of wishing to terminate for non-performance that are not related to insolvency. However, this will be down to the terms and the courts will not allow the parties to step outside of it. An example of this is the recent case of Medina Dairy Ltd v Nampak Plastics Europe. In it, Nampak supplied Medina with bottles under a commercial contract. The contract provided for Nampak to have rights to suspend and/or terminate the contract if Medina was late in paying and after following a formal notice procedure. Medina was late in paying a substantial amount of money, and Nampak then threatened Medina with a suspension of supplies, unless Nampak agreed to new payment terms and a new price. The High Court awarded an injunction to stop Nampak acting in this way. It had rights under the contract to suspend or terminate, but it should not have tried to impose new terms. Any new terms would need the agreement of both parties.

The key conclusion here is that any business needs to be sure to follow the contractual process, or if it wants additional rights, such as to change the payment terms or pricing in the event of a contractual breach by the other party, these rights need to be included in the contract when it is originally drafted.

We work with our clients to make sure their terms are bespoke, reviewed, up to date and effective to control their risk and in line with their risk appetite.

Please drop me an e mail or call if you need any further details.

Stay safe and well.