Is it time to review your termination clause in your supply contracts?
We previously wrote a blog on the Corporate Insolvency & Governance Bill.
The Corporate Insolvency & Governance Act 2020 (“Act”) came into force on 26 June 2020 and applies to all existing and new contracts from that date. The Act introduced a number of temporary measures in response to the Covid-19 crisis, as well as new permanent reforms of the UK insolvency regime. We have been monitoring the guidance to ensure we keep clients up to date as developments unfold.
One of the new permanent measures introduced by The Act provides for the protection of supplies of goods and services and may affect termination clauses in your terms and conditions and your contracts with customers and suppliers.
In simple terms the key changes mean that a supplier will no longer be able to rely on clauses in a contract which allow for the supplier to terminate a supply contract for the reason:-
- that the customer has entered into an insolvency or formal restructuring procedure; and
- of a past breach of contract (i.e. non-payment of invoices) once the customer has entered into an insolvency or formal restructuring procedure.
In practical terms these changes mean that (subject to certain exclusions), suppliers will have no choice but to continue to supply to a customer under their supply contracts once the customer enters into an insolvency or restructuring procedure, even where there are pre-insolvency arrears. They will also be prevented from making the payment of such arrears a condition of continued supply.
Many of our clients at 2020 Business Law may fall into the ‘Small Suppliers’ exemption. This is a temporary exemption in response to Covid-19. The exemption initially applied between the Act coming into force and 30 September 2020. This has just been extended until 30 March 2021.
What steps can my company take to protect itself?
- Keep an eye on the financial circumstances of your customers, i.e. regularly monitor their credit rating;
- If it looks like your customer will enter into a formal insolvency or restructuring procedure take swift action to terminate the contract if possible and allowed under the contract.
- If your customer has entered into an insolvency or restructuring procedure you may be able to apply to the court to terminate the contract on the basis of your own undue financial hardship.
How can 2020 Business Law help you?
We can review your terms and conditions to ensure they are as up to date in the current climate and offer you as much protection as possible.
You may wish to consider including the following in your terms and conditions:
- An obligation for your customer to notify you of any change in their financial circumstances.
- An option for you to terminate the supply contract before a formal insolvency or restructuring takes place. For example, an option to terminate if there is an intention by your customer to appoint administrators or if they become balance sheet insolvent.
- Earlier and shorter payment terms.
- A parent company or director guarantee.
If you need any help get in touch with us on firstname.lastname@example.org or 01980 676875.