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Managing Your Contracts Post – Lockdown

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In anticipation of the easing of the COVID-19 lockdown restrictions, business owners are now starting to focus on what will happen next, which will hopefully be the anticipated business “bounce back”.

Many businesses have been in an unprecedented state of suspended animation during the lockdown period in the hope that they will be able to survive just long enough to be able to start trading once conditions ease and the economy restarts. Through a combination of furloughing staff and changes in demand, some businesses have been able to effectively hibernate for the last few months. However, as the country starts to emerge from lockdown, customers and clients will look to their suppliers to resume the supply of goods and services.

Many business owners are likely to find themselves grappling with a wide range of issues over the next few months, including commercial, financial and legal.

The UK Government has published guidance which encourages “responsible and fair behaviour” in performing and enforcing contracts, where there has been a material impact from COVID-19. However, in spite of that guidance, many businesses are likely to have to take legal action to enforce their contractual rights.

Stephen Thompson explores some of the legal issues that business owners are likely to need to address over the next few months:

My customer owes me money and is offering to pay by instalmentsif a customer if able to pay you something now, it may be worth entering into some sort of payment plan. Otherwise, in the worse case scenario, you may end up recovering nothing if they end up going insolvent.

I can’t pay all of my suppliers – can I prioritise one over another?” – it is worth trying to agree a payment plan with your suppliers. However, if you are potentially trading whilst insolvent, you will need to be very careful about incurring further credit with suppliers or “preferring” one over another. Both of those situations could result in legal difficulties personally for the directors in the future.

One of our supply contracts is no longer profitable. Can I walk away from it because of COVID-19?” –  whether or not a contract to which you are a party is still profitable or not, you cannot simply walk away from it without some legal justification. If the contract has a “force majeure” clause that might provide you with an exit route. However, you should always take legal advice before taking any steps.

Can I renegotiate the terms of contract which is no longer commercially viable because of the crisis?” – it is perfectly acceptable to renegotiate the terms of a contract if the other party or parties are happy to do so. However, if you do change the contract terms, consider whether there is a knock-on effect elsewhere, whether within the same contract or in relation to related contracts.

“What are the proposed new insolvency rules and will they help me?” – the Government has started to release details of the proposed changes to the insolvency rules to help businesses deal with the effects of the COVID-19 crisis, which include the following:

  • temporary suspension of the wrongful trading rules
  • a short standalone “moratorium” to allow viable companies an opportunity to explore rescue or restructure options
  • protection of supplies by restricting the ability of suppliers to terminate for insolvency reasons
  • a new restructuring vehicle

If you would like more information on this or a related topic, please contact Stephen Thompson: [email protected] or visit www.darwingray.com/corporate-commercial