Up Again Germany: Suppliers and Contractors

Restructuring

1. Navigating the supply chain in a distressed market:

a. My company supplies goods and I am concerned about the solvency of my customers. Are there any steps I can take to mitigate risk/my exposure?

Below are some measures that may help reduce and mitigate risks:

  • Monitor customers' performance (e.g. do payments occur on time?) allowing you to react, e.g. take specific measures or stop supplying.
  • Retain title to goods supplied until all payments due from the customer are made; include assignment of customer’s trade receivables where feasible (though this may conflict with factoring or other finance arrangements).
  • Ask for a bank guarantee or letter of comfort by a (solvent) parent company securing payments for supply.
  • Ensure that supply and payment occur within a short period of time (two to four weeks) to mitigate clawback risks if the customer becomes insolvent.

Switch to advance payments if feasible (the most secure option); be aware this may cause liquidity issues with the customer.

b. My company relies upon the supply of goods/services and I am concerned about the solvency of my supplier? Are there any steps I can take to mitigate risk?

Below are some measures that may help reduce and mitigate risks:

  • Monitor suppliers' performance (i.e. late supplies or quality deficiencies) in order to react and prepare or take further measures.
  • Increase your own stock with extra orders from suppliers to avoid immediate business interruption.
  • Ensure proper documentation and identification (according to the applicable law, for example separate and/or mark your goods), in particular regarding machines, tools, moulds, technical papers and knowhow you provided to the customer but which remain in your property.
  • Plan, prepare or even initiate first steps of a replacement scenario. Consider whether there are any alternative suppliers and what the timeframe would be for them to replace one of your existing suppliers. In the case of single-source suppliers or high replacement or interruption costs, consider measures to support the supplier.
  • Ensure that supply and payment occur within a short period of time (two to four weeks) to mitigate clawback risks if the supplier becomes insolvent.

Exclude retention of title clauses for the benefit of the supplier as far as feasible.

Litigation and Regulation

2. How will legal disputes that have arisen as a result of COVID-19 or its effects (for instance, in relation to force majeure) be affected by restrictions being lifted and resuming business operations in whole or in part? 

This depends on the particular circumstances of each case. The extent to which lifting the restrictions and the possibility of continuing operations will affect legal disputes depends several factors, including the specific legal issue in the dispute (withdrawal from the contract, entitlement to damages, entitlement of invoking impossibility) and to what extent this legal consequence was justifiably triggered by COVID-19 in the first place.

3. How should you manage those disputes once COVID-19 restrictions are lifted?

Reassess the situation with your legal adviser and examine how and to what extent the new situation has affected the legal dispute (e.g. whether a right of withdrawal still exists or the obstacle to performance no longer exists). Since there are economic losses on both sides, the contracting parties should cooperate rather than confront each other, and try to reach a mutually acceptable solution.

4. What should you do when restrictions are lifted if you have suffered loss under a contract as a result of COVID-19 or the restrictions, but have not yet taken legal action in relation to that loss?

Assess the validity of the claims with your legal adviser. Bringing a claim for financial damages remains possible even after the lifting of the restrictions, subject to the statute of limitation.

5. Is there any risk of mass claims being brought against your business? If so, how would such claims be brought? Are third party funders able to fund such claims?

In general, the risk of mass claims is relatively low, as Germany traditionally follows a very restrictive approach regarding such mass claims (unlike, say, in the US). One possibility would be a model declaratory action brought by a qualified institution, such as consumer association. Third-party funding may be permissible under conditions.

6. What should I do about recording contractually or otherwise any of the changes  put in place during the COVID-19 lockdown period?

In light of (future) potential disputes, keep a record of contractual or other changes. When preparing a claim or a defence against a claim, such facts may need to be substantiated in detail (e.g. for invoking impossibility of performance, correspondence with suppliers regarding delivery delays or official decrees/official letters on closure, and any relevant telephone notes).

7. Any return to normal will likely not be as immediate as the impact of COVID-19 when it started  (e.g, sales/orders will take time to ramp up, raw materials will take time to flow through supply chains, etc.) what should I think about and do to best manage this in my contracts?

Generally, check rigid contractual deadlines/other contractual obligations for compliance and enter into an open dialogue with the contractual partner about possible delays/difficulties and a possible need for contract adaptation.

8. What additional protections or changes to existing provisions (e.g. force majeure) should I put into any new supply arrangements having regard to COVID-19?

Depending on the circumstances, it may be advisable to define a pandemic disease explicitly as a force majeure event in future contracts (if this can be agreed with the contractual partner). Other clauses that may need to be revisited will depend mainly on your particular circumstances. Such clauses may cover:

  • right of termination/cancellation;
  • delivery times; and
  • a variation clause in the contract.