Up Again UAE: 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 implementation of specific operational planning and ongoing monitoring processes may mitigate the risk and effect of customer insolvency, increase optionality from an early stage and thereby minimise resulting business costs. Steps to mitigate risk or exposure to customer insolvency include:

  • retaining title to goods supplied until all payments due from the customer are made (key legal provisions properly incorporated in supply contracts can be valuable);
  • reviewing the customer's financial position and payment terms;
  • monitoring and reviewing level of credit exposure across customers; and
  • periodic, ongoing monitoring:
    • are customer accounts filed on time?
    • any insolvency proceedings commenced?
    • audit of stock segregation conditions at customer premises if holding goods supplied that are not yet paid?
    • is credit insurance available?

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?

Specific operational planning and ongoing monitoring processes may mitigate the risk and effect of supplier insolvency, increase optionality from an early stage and minimise resulting business costs.

Steps to mitigate risk or exposure to supplier insolvency include:

  • monitoring potential knock-on impact on your ability to deliver an onward supply contract; and
  • considering the following:
    • is the supplier key to your supply/production operations?
    • if the supplier ceased trading, what alternatives would be available and in what time frame?
    • would supplier distress provide an opportunity to acquire assets or bring part of production required for your business in-house?

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 inevitably depends on the terms of the contract under which the legal dispute has arisen, but the lifting of restrictions may mark the end of circumstances that form the basis of COVID-19-related claims.

In addition to force majeure, there are a number of other concepts under UAE law parties may seek to rely on in the context of COVID-19-related claims, such as impossibility of performance of the contract or the occurrence of an exceptional circumstances event.

Parties must therefore assess the direct impact of any force majeure/exceptional circumstances event or change of law on their operations to quantify such loss in a claim.

Parties should also prepare for possible secondary claims for relief under the principles discussed above in the event that restrictions are re-imposed due to a second wave of COVID-19.

Throughout the UAE, courts have continued to operate with limited capacity virtually. Cases being heard online include labour, civil, commercial and personal status matters, and arbitrations are also continuing remotely. Practically, the lifting of restrictions will enable dispute resolution to proceed more efficiently and traditionally.

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

Communication with the other parties to the dispute is key. Engage with your suppliers/customers in a collaborative and reasonable manner, as this is likely to assist in resolving or avoiding any further potential disputes.

Depending on the terms of the contract, it may be necessary to review or update the force majeure notice (should one be required under the contract) if, for example, the event which was affecting performance has ceased on the lifting of restrictions, and it is now the measures that are necessary to exit lockdown that are affecting performance.

Think carefully about how best to take advantage of the loosening restrictions to evidence that you have sought to mitigate losses, as required under UAE law. Consider whether there are any ongoing compliance requirements, such as providing updates to the other party. Keep a record of them, along with evidence gathered in support (such as evidence that alternative means of performance were kept under review).

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?

Review the dispute resolution clauses in your contract and ensure you have either complied with these or can now do so. Consider whether any action needs to be taken immediately to ensure you do not affirm the contract if your preference is to terminate.

Comply with any notice requirements specified in the contract (or there is a risk your claims will be time barred), and even if the contract is silent, we suggest you notify the other party promptly of your claim. If you have not complied with the notice requirements, write to the other party and explain why it was not possible to comply.

Consider carefully the merits of any potential claim and whether the other party will be able to honour any settlement or pay damages awarded by a court or tribunal before starting any dispute, to avoid wasted time and costs.

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?

UAE law does not currently legislate for class or collective actions and does not have a mechanism by which such claims can be brought in the UAE Courts. Each claim would need to be filed separately.

Though third-party funding is not prohibited by law in the UAE, it is in its infancy and remains fairly uncommon.

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

Any agreements to vary the contract to take into account the changes in lockdown and return to business should be documented in writing. You must also comply with any requirements in the contract about how amendments to the contract can be validly made.

You should keep an easily auditable trail of all correspondence between the parties as evidence of what was agreed (and why certain decisions were taken), should a dispute later arise.

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?

We recommend conducting a full contract audit to assess the existence and scope of force majeure, termination, jurisdiction and governing law clauses to assess your legal position in respect of each contract.

We recommend you keep accurate records of the difficulties being experienced and their impact. Consider whether there is a duty to mitigate the adverse consequences in your contracts, and the extent of that duty. Keeping accurate records will assist in evidencing that you have complied with this duty.

Consider how best to allocate existing supplies and determine your priority suppliers by considering, for example, the value of the contracts, exclusive purchase/supply clauses, or minimum volume/spend commitments.

Document any amendments to the contracts or agreed settlements/payment plans with creditors or debtors in writing.

You may also want/need to renegotiate existing contracts, terminate and replace them to ensure they are sufficiently flexible and remain appropriate for any changing circumstances.

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?

Consider whether existing contractual provisions, for example, relating to force majeure, suspension or cancellation, are fit for purpose, having regard to COVID-19. If not, consider whether additional specific provisions dealing with COVID-19 and COVID-19-related restrictions (which are likely to be reintroduced, for example, if a second wave occurs) may be required, for example, with reference to government measures in the responses to the pandemic.

The risk of restrictions being re-imposed is well known and should therefore be planned for, so a claim for force majeure is unlikely to succeed a second time around, as the parties are more likely to be able to reasonably protect themselves from the impact of a second wave on their performance under the contract.

Ensure your contracts contain an effective mechanism to permit variations to the contract in light of the changing landscape. Consider including an emergency procedure allowing for a fast-tracked process to implement changes.

Flexibility in contracts will be key during this period. We recommend that provisions such as those relating to minimum order/purchase requirements and purchase order delivery are made as flexible as possible.

Review and update business continuity plans to reflect the lessons learnt from going into lockdown.

Any additional protections or changes to existing provisions will depend on the nature of the relevant contract and your obligations and rights under it.