Up Again Australia: 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?

In this environment, it is highly likely customers will be unable to pay their debts when they become due. Seek to mitigate those risks early:

  • Contact your debtors and ask them to pay you, even if it is before the due date.
  • Negotiate periodic payments.
  • Invoice on delivery of product, without delay.
  • Review your sales contracts to determine whether customers can cancel orders. If necessary, update those contracts to limit cancellations.

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?

In the short-term it may be prudent to mitigate the effects of an insolvent supplier.

These steps may include:

  • finding an alternative source of supply;
  • extending lead times for customer deliveries;
  • halting or limiting new customer orders; and
  • thinking about bringing some of the supply capabilities in-house.

Litigation & 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?

The Australian courts and court offices have been operating on a restricted schedule during the pandemic (with certain matters being dealt with by remote hearing). Once these restrictions are lifted, cases can proceed more efficiently (but parties should be prepared for delays due to a backlog of cases during the lockdown).

If a dispute has arisen as to the applicability or operation of contractual provisions such as force majeure clauses and material adverse change clauses as a result of the restrictions placed on business, whether that dispute will be affected by relaxation of restrictions will depend on the particular wording of the relevant contractual provision.

For example, in the case of a force majeure clause, if the clause provides for the contract to be temporarily suspended for the duration of the force majeure event, a party could try to argue that lifting the restrictions means this suspension period is over and the contractual obligations are once again enforceable – and that a failure to fulfil those obligations could put the counterparty in breach of contract.

On the other hand, if the force majeure clause provided for a full and final termination of the contract due to a force majeure event, then the contract may have been validly terminated and be at end regardless of the restrictions being lifted.

From a practical perspective, parties should reassess their contracts to understand how the lifting of restrictions may affect the parties’ contractual rights and obligations.

Similarly, parties should consider the practical steps for re-engaging with suppliers, manufacturers and other business partners where the restrictions have affected these relationships.

Claimants must mitigate their losses (i.e. they cannot recover loss that could have been avoided had they taken all reasonable steps).

The lifting of restrictions may provide claimants with the opportunity to mitigate any loss they have been suffering. Parties should keep any measures to mitigate their losses under review in light of the changing circumstances.

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

Disputes arising from COVID-19 restrictions should be managed in the usual way. Parties must observe any contractual obligations for dealing with such disputes (e.g. notice requirements, time periods, requirements to explore mediation, conciliation). Parties should also be mindful that the limitation period will have started to run from the date the cause of action arose.

A party must take reasonable steps to mitigate its loss. On the claimant side, parties should check whether the lifting of restrictions enables loss to be mitigated. Likewise, defendants should monitor the changing circumstances closely for opportunities to offload some of the risk by presenting claimants with reasonable options to mitigate their losses arising from the lifting of restrictions.

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?

If you have suffered loss under a contract as a result of COVID-19, you should seek legal advice on your rights under the contract.

In addition to observing the terms of any pre-action protocol requirements (which vary depending on the requirements of the particular Australian courts and tribunals), it is common practice for parties to advise the opposing side of a potential action before serving proceedings.

Positive engagement with the other side can be worthwhile and parties may wish to discuss alternative dispute resolution options (e.g. negotiation or mediation) to the extent this is not already required under the contract.

Parties should not inadvertently waive any rights by actions or measures they adopt once restrictions are lifted. If in doubt, it can be worth notifying the other side clearly that you reserve all your rights and that any measures you take are without prejudice to those rights.

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?

Generally speaking, businesses should be aware of potential class-action claims brought in Australia. For example, the travel industry has already been the subject of media coverage on potential class actions against airlines, travel agents and tour companies.

Australia operates a class-action regime in both the Federal Court and in the State Supreme Courts.

Class actions are commonly funded by third-party litigation funders in Australia.

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

First, examine the terms of your written contract, as it may set out a procedure for how changes must be agreed/recorded. If so, you must follow it.

Generally, most Australian contracts contain an express provision requiring any changes to the contract be agreed by the parties and documented in writing.

Even without an express contractual requirement to do so, it is best practice for any agreed changes to a contact to be documented in writing and signed by the parties.

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?

Endeavour to negotiate with the counterparty for a mutually agreeable commercial alternative arrangement while business comes back to normal.

Do not attempt to resume 100% operations straightaway; implement a phased approach. This may include reducing the volume of goods/services.

Be mindful of ongoing travel bans that may prevent people from moving around the world with ease or delay imports/exports.

Review all of your existing contracts to understand how clauses such as force majeure, extension of time, material adverse change, and change in law may affect supply chains from both a customer and supplier perspective.

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?

Ensure that any force majeure clause expressly includes reference to pandemics, global health emergencies, or epidemics. Consider a specific pandemic, global health emergency, or epidemics clause (potentially an escalating clause, depending on the classification) to address the parties’ responsibilities and obligations during a pandemic. This will give more control than relying on a force majeure clause.

If your definition of force majeure includes a change of law, consider how “law” is defined, given many of the social-distancing restrictions were made by way of government and Public Health Directives, and were not strictly “laws”.

Consider whether force majeure events include government regulatory action more broadly to account for measures governments may implement for public hygiene and safety.

Consider a clause linked to the impacts of exercise of governmental powers or a hardship provision.

Consider whether you want to include the right to terminate for an exceptional event that continues for a certain period of time, or termination for convenience. The applicable period of time will vary based on the specific contract.

Consider carefully whether you agree to the exclusive appointment of suppliers.

Consider use of a “variation” provision to allow the parties to vary terms of the contract.

Consider your obligation to mitigate against the adverse impact of a pandemic, or similar health emergency. Do they need to be lessened or increased accordingly?

Consider your notification obligations as relevant to force majeure. The timeframe for alerting the other party to the force majeure event may be critical, particularly where restrictions evolve so rapidly.

Consider how force majeure will interact with other relief provisions, such as extension of time, material adverse change and change in law.

Consider how the COVID-19 pandemic will impact on the “reasonable foreseeability” assessment. If there is another pandemic in the future, parties’ responses will likely be benchmarked on how its effects could have been prevented, avoided or overcome, given this is something that has previously occurred.

Consider how workplace health and safety obligations could be affected where public health and safety measures have been implemented, and whether social-distancing requirements could prevent businesses from sending employees to work. For example, can a contractor be excused from performing their obligations under the contract because sending employees to work would be in breach of a law or government directive?