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13th July 2020



Can I cancel an order if customer goes bust?

It’s always been the case that if you want the right to terminate a contract or cancel an order when a customer goes bust or doesn’t pay, the contract or your applicable terms and conditions must expressly allow you to do so. Most well-drafted contracts contain this language, but as Kate Westbrook, head of Commercial at Thrings, explains, recent changes in the law aimed at helping companies weather the COVID-19 storm mean a supplier’s rights to terminate is now more limited.

The new laws mean that once its corporate customer enters into administration, receivership, liquidation or the newly created concept of a ‘moratorium’, a supplier cannot:

  • terminate a supply contract for any reason, or impose different payment terms, unless the customer or the court gives permission;
  • put a customer ‘on stop’ or insist on cash on delivery; or
  • insist on a payment of arrears before continuing to make supplies.

The new provisions aim to protect a business which might otherwise be able to recover from the precarious financial position it finds itself in by avoiding termination of contracts or payments that go against the usual cashflow profile. Of course, this may cause significant financial difficulties for the supplier as not being able to recover all of the old debt or cease supply is likely impair its own cashflow in what may already be difficult times. Once the insolvency process is entered, the supplier will only be paid that pre-process debt if it successfully pays a dividend to the supplier and the other creditors of the business[1].

If you continue to make supplies during the process, under a new or existing agreement, you will be paid in priority to all the customer’s arrears. This is because your new suppliers are treated differently once the customer is in an insolvency process. The timing for payment depends on the agreed terms and conditions and the insolvency process involved. You cannot impose new payment terms if you are supplying under an existing contract, but you can if you are entering into a new one (which would include accepting a purchase order not placed under an existing contract).

If you can convince the court that continuing to supply will create ‘hardship’, you may be granted a right to terminate the contract. However, an application to court will add extra cost to the process, and it is recommended you seek advice on this.

Given the changes in the law, any business supplying goods or services should take the following actions immediately:

  • review your terms and conditions and, where possible, renegotiate contract terms to create a right to terminate where you have reason to believe the customer is struggling financially – to give you a greater chance of being able to terminate before a customer starts a formal insolvency process;
  • re-negotiate payment terms/credit limits now with customers you think might be at risk of going through an insolvency process;
  • double down on your credit control processes so you get as much warning as possible of customer financial difficulties.

Businesses mostly receiving supplies of goods and services can expect to see a tightening up of credit control processes or supplier’s pressing the trigger on termination clauses earlier than they might do otherwise. For these businesses, communication is the best route to avoid your supplier making decisions that could disrupt the receipt of supplies. As business slowly – and cautiously – emerges from hibernation, there may be a way that we can carefully and considerately trade, whilst reducing the risks within what is often a trusted and symbiotic supply chain partnership.

To find out more about anything covered in the article, or to discuss any aspect of the potential impact of the coronavirus pandemic on commercial contracts, please contact Kate Westbrook or another member of Thrings’ Commercial Contracts team.

[1] For a temporary period until September, the new laws will not apply if you qualify as a small entity (if you fall within two of the following criteria: turnover <£10.2m; balance sheet <£5.1m; and employees <50). This means you have a short period of time to review your contracts and seek to terminate or renegotiate terms with those customers who are already in an insolvency process.

 

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