Up Again Belgium: 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?

The safest step to secure your rights as a supplier-creditor is to include a retention of title clause in your sales agreement or general terms and conditions of sale with the distressed customer.

In this way, ownership of the ordered goods transfers to the customer only when they have actually been paid for in full by the customer. If the customer becomes bankrupt, the unpaid seller with retention of title will have a super priority on the proceeds of the unpaid goods over other privileged creditors (such as a pledgee or unpaid landlord) (art. 58 Pledge Act).

Due to the statutory moratorium established by Royal Decree no. 15, the unpaid seller with retention of title will temporarily not be able to appropriate the unpaid property.

If no retention of title is stipulated, a creditor-supplier could urge its customer to notify other creditors who are also privileged over the goods (e.g. pledgee or unpaid landlord) of the fact that these goods have not yet been paid for.

If a pledgee holding a pledge over the supplied goods or the landlord of the premises in which the goods stored is aware that the goods have not yet been paid for, the unpaid seller (without retention of title) will also have preferential right on the proceeds of these goods and rank before the aforementioned privileged creditors (art. 58 Pledge Act and art. 23 Mortgage Act).

But even at an earlier stage (before the goods have been supplied), in the event of default by a contracting party, the other party can always invoke the non-execution exception in good faith (exceptio non adimpleti contractus), which entails that, in the event of non-performance of the customer's obligations (i.e. payment of the goods), the supplier can always suspend its own contractual obligations (i.e. delivery of the goods) as long as the other party remains in default.

The non-execution exception can only be invoked if, according to the agreement between parties, the customer is the contracting party to first perform its contractual obligations (i.e. payment).

For the sake of completeness, suppliers of services, in the absence of payment for the delivered services, can always in good faith exercise a right of retention on the object of the unpaid services (e.g. a customer's car in the case of an unpaid mechanic).

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?

If a supplier of goods threatens to go bankrupt, one could attempt to buy additional stock for the foreseeable future, but beware of perishable (e.g. food) and seasonal or season’s trends-sensitive products (e.g. clothing).

It is sensible to put targeted payment mechanisms in place to avoid making advance payments for goods that the distressed supplier will never be able to deliver due to imminent bankruptcy.

In the case of suppliers of services associated with intellectual property rights, it is sensible to contractually stipulate that the IP rights to the delivered services / products are assigned to you as a customer or that licenses to use certain IP rights do not cease to be granted following bankruptcy or the start of judicial reorganisation proceedings.

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?

Relaxing the restrictions will continue to create uncertainty, and this uncertainty is harmful to business. A significant number of businesses had to close, and will have to take measures to guarantee social distancing and a safe environment when they are allowed to reopen. Some questions need to be considered: Does restriction X apply to us? Are the measures we have adopted sufficient? What can we offer our clients and employees, and other key stakeholders?

On the other hand, lifting the restrictions does create perspective. It may be possible for various business to gradually assess the impact of the COVID-19 crisis and start looking at the future.

If you are confronted with a potential dispute, either because you have suffered loss or because a third party claims that you have caused it loss, try to be responsive, consistent, reasonable and constructive. This is not only useful to prevent litigation, but essential if the threat of litigation becomes a reality.

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

At all times, regardless of whether the restrictions are still in force, are being lifted or have been lifted, be responsive, consistent, reasonable and constructive to prevent litigation.

Your first concern should evidently be your own business, but you should also have regard to the position of your counterparty.

A significant amount of disagreements between businesses or between a business and its consumers can be resolved by sitting around the table and looking for a mutually satisfactory solution.

A business is more interested in the future and how parties will put their commercial relationship back on track, even means accepting certain losses or disadvantages, than in costly and lengthy litigation.

If, exceptionally, litigation is inevitable, courts and arbitrators will pay particular attention to how the parties reacted when the dispute arose.

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?

React swiftly: the longer you wait, the less credible your position may be perceived.

Gather and analyse all relevant information and contact your counterparty clearly setting our your position and the relief sought.

Be consistent, reasonable and constructive, and consult a lawyer if a deadlock seems likely or the situation is complex.

Although common business sense may be able resolve most problems, some situations require assistance from a lawyer from the outset – otherwise, the interests of the business may be irreversibly compromised.

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 Belgium, class actions are generally only open to consumers, and have thus far remained rather exceptional.

However, informal class actions, whereby different plaintiffs (not necessarily consumers) team up to jointly start proceedings against a business for alleged losses, or litigation at the initiative of an organisation whose purpose is to defend the interests of a certain group of persons, are also possible.

The risk of class actions or other mass claims may be higher in the current situation, in the sense that the uncertainty that goes with it will likely give rise to more disputes, though not necessarily class actions or other mass claims. As always, preventing litigation is key.

Third-party funding of litigation in Belgium is not prohibited, but there is no legal framework, and it is only seen very exceptionally in practice. One of the reasons is that the amount of the costs that can be recovered from the unsuccessful party are capped.

Intellectual Property and Technology

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

The COVID-19 crisis has impacted countless companies worldwide, affecting all parties in the supply chain and impeding full compliance with their contractual obligations.

Agreeing to a contract deviation or renegotiation may be the preferable option, rather than a prompt termination, to continue the performance of a contract in good faith.

You should take a number of elements into account when considering this option:

  • Before starting discussions about a contract deviation or renegotiation requested by your business partner, you may consider providing written notice to them reserving your rights in the event that no alternative solution to “normal” performance is found.
  • As a customer, it may be useful to request an impact assessment from your supplier, setting out details such as the impact of the proposed deviation on timelines, resources, costs, pricing, service levels and other contractual obligations, and a plan to mitigate negative consequences to the largest extent possible.
  • As a supplier, send your business partner timely notices to update them on the status of your obligations and ensure that any delays do not have an unforeseen negative impact.

When parties have agreed a contract deviation, the following principles need to be taken into account:

  • For reasons of proof, record the deviation in writing. This can be done through a contract amendment or an addendum, drawn up in writing and signed by all parties, with each party receiving a signed copy. Carefully documenting the agreed changes will help in the event of future disputes and interpretation issues.
  • To ensure enforceability, check the deviation is done in accordance with any contract change mechanism in the contract. For instance, a “no variation” clause may require specific formalities to be respected (e.g. by providing that any contract changes are valid only if they are set out in a specific form and signed by both parties, or that they go through a specific approval procedure).
  • All contract deviations must be recorded in sufficient detail to avoid disputes. This detail should cover, for example, scope, references to contract clauses which are deviated from, duration (start date and end date), and impact on other provisions.
  • From a contract-management perspective, keep track of all changes agreed on and evaluate and record their impact on other contracts or contractual obligations.

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?

Parties will need to review which of their contracts are affected by the COVID-19 outbreak. For both parties, good communication and planning is key.

As a supplier, it may prove challenging to bring the business back to normal, and all challenges and critical issues must be reviewed and listed – for example, backlogs which need to be caught up with, unavailability of raw materials, availability of staff and third party contractors, or price increases,.

To ensure good communication with customers, provide regular updates on the status of the performance of the existing contract and alert customers as soon as possible if there is a change in the planning.

This is not only required for the performance of the contract in good faith (one of the basic principles of Belgian contract law), but also to have written proof if the circumstances would lead to a dispute and to avoid a right to invoke force majeure being deemed waived if it is not invoked in a timely manner.

To maintain and enhance your customers’ confidence and loyalty, inform them on the market conditions you’re facing and the measures you are taking to ensure correct performance and to mitigate or eliminate the impact of disruptions.

As a customer, regularly monitor the correct performance of the contract and insist on strict compliance with governance, monitoring and reporting obligations. If a supplier has alerted that they will not be able to comply with all outstanding or planned orders as contractually foreseen, it may help both parties to communicate a priority list and essential deadlines.

From a contract-management perspective, monitor contract performance and to keep track of all changes to existing contracts (e.g. on the level of delivery terms, or payment terms) and assess their impact on other contractual obligations and on other contracts (likely in the same supply chain).

Both customers and suppliers may want to reconsider their existing contracts. Key risks resulting from the COVID-19 situation will include longer lead times (whether in terms of product or resource availability) and increases to prices in response to demand at all levels of the supply chain.

As a customer, it may be useful to identify key products and services and to look at alternative suppliers. Existing contracts may have become too expensive (as a result of price increases) or too burdensome (if a supplier is struggling to source products or resources in a timeframe suitable for the customer’s business).

As a supplier, review arrangements with customers, particularly where the supplier has agreed to fix prices for a period of time or where increases to prices are limited (either in timing or in amount).

Previously agreed contractual arrangements may have become too burdensome for a supplier, for example if service levels have been agreed that are not sustainable as a result of changed circumstances, staff availability, or increased demand.

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?

Force majeure clauses

Although force majeure is a well-defined concept under Belgian contract law which does not need to be contractually anchored in order to be applied, we usually advise including a force majeure clause in every contract. This can be useful not only to modulate the conditions under which force majeure can be invoked, but also the formalities that need to be respected.

Many of those clauses contain a list of circumstances that will qualify as force majeure, and circumstances that will not. The circumstances listed will, to a large extent, depend on the nature of the goods or services supplied under the contract.

At present, we observe that many contracts do not list pandemics, such as COVID-19, as examples of force majeure events.

Because it is expected that pandemics of this nature will occur more frequently in the future, we advise specifically agreeing whether a pandemic can be considered a force majeure event, and if so, agreeing on specific obligations that will need to be respected by both parties.

It is also useful to agree on the consequences of the occurrence of such an event, and to foresee solutions other than mere termination.

Hardship clauses

At present, the concept of hardship is still not accepted under Belgian law. This means that if the performance of a contractual obligation has become much harder or much more expensive as a result of an unforeseen circumstance, but not impossible, the parties are still bound to it.

Although this risk is mitigated to a certain extent by the obligation to perform agreements in good faith and the prohibition of abuse of law, it may be useful for suppliers to contractually agree on a hardship mechanism.

Service levels and price corrections

From the supplier perspective, it may be useful to include more flexibility for the supplier with respect to performance obligations such as service-level commitments and pricing commitments – for example, by allowing relief from these commitments where there is a material change in the supplier’s circumstances (not just a force majeure event), where there are changes in law, or where the supplier’s business is affected by emergency legislation.

Business continuity and disaster recovery

Given the unprecedented nature of the COVID-19 crisis in Belgium, it is likely many business continuity and disaster recovery plans did not take into account the specific circumstances resulting from a worldwide pandemic. It may be useful to agree on specific measures that need to be followed in the event of an unexpected disruption in the market.

Termination rights

For both the customer and the supplier, it may be useful to include specific termination rights in the event of market disruptions resulting from extreme and unforeseeable circumstances like the COVID-19 crisis.

However, pursuant to the Royal Decree nr. 15 of 24 April 2020, it is prohibited until 17 June 2020 to terminate any agreements concluded before 24 April 2020 for reasons of non-payment of any amount payable under the agreement.

This prohibition does not apply to contracts concluded after 24 April 2020.

Exit arrangements

Taking into account the unprecedented nature of the current COVID-19 crisis and its impact on businesses worldwide, it will be useful to include specific exit arrangements in the event of contract termination due to the effects of a pandemic.

Governance, reporting and audit rights

From the customer perspective, closely monitoring the performance of the contract will be of even greater importance when the delivery by the supplier is subject to stress. If a customer agrees to contract changes as a result of the COVID-19 outbreak, this may in turn be made subject to stricter governance and reporting obligations and increased audit rights.

Other clauses

As a customer, it may be useful to include clauses providing additional rights such as a most-favoured customer clause obliging the supplier to give favourable treatment to the customer, step-in rights that allow the customer to assume performance or replace the supplier on a temporary basis, and business-continuity obligations that align with the customer’s own business-continuity plans.

A customer may also want to include a right to relief from any minimum-purchase commitments or a right to cancel orders where there is a material change in the customer’s circumstances (not just a force majeure event), where there are changes in law, or where the customer’s business is affected by emergency legislation.