Up Again Ireland: 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?

Steps to limit your risk in case a customer fails to pay include:

  • retaining title to goods supplied until all payments due from the customer are made;
  • periodic monitoring (for example, are the customer’s accounts filed on time, or have any actions been initiated in the Irish courts or winding-up proceedings commenced? Auditing stock segregation conditions at customer premises if holding goods supplied which are not yet paid for);
  • considering whether credit insurance is available;
  • monitoring and reviewing level of credit exposure; and
  • procuring payment on account.

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?

Steps to take to limit your risk in case a supplier fails to perform include:

  • identifying key suppliers;
  • considering whether there are any alternative suppliers and what the timeframe would be for them to replace one of your existing suppliers;
  • periodic monitoring of the supplier’s solvency;
  • considering potential knock-on impact of a supplier’s insolvency on your ability to deliver an onward supply contract and whether there are any steps which could be taken now to address any risks; and
  • considering whether, in the event of supplier distress, this would provide an opportunity to acquire assets/bring part of the production 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?

The limitation period for bringing a claim is generally six years from the date the action accrued, so claims for losses arising during COVID-19 can be brought for some time after the restrictions are lifted.

The Irish 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 (however, parties should be prepared for delays due to a backlog of cases during the lockdown).

If a force majeure clause has been triggered, then the impact will depend on the wording of the clause. For example, if the clause provides for the contract to be temporarily suspended for the duration of the pandemic then a party could try to argue that lifting the restrictions means that 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 clause provided for a full and final termination of the contract due to a force majeure event (or if a party has successfully invoked the doctrine of frustration during the lockdown) then the contract has been terminated and will not become binding even when restrictions are lifted.

From a practical perspective, if a party has triggered a force majeure clause and now intends to resume business, it will need to plot out the practical steps for re-engaging suppliers, manufacturers or others in its supply chain (particularly if there has been a knock-on effect and other force majeure clauses have been triggered during the lockdown).

Claimants must mitigate their losses under Irish law (i.e. they cannot recover loss that could have been avoided had they taken all reasonable steps). This can apply even after restrictions are lifted, so 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 will need to observe any contractual obligations for dealing with such disputes (e.g. notice requirements, time periods, requirements to explore mediation, and conciliation). Parties should also be mindful that the limitation period will have started to run from the date the cause of action accrued.

It is important for a party to take reasonable steps to mitigate its loss. On the claimant side, parties should check whether the lifting of restrictions allows 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 that would mitigate their losses arising from the lifting of restrictions.

Even in cases where liability is not disputed, parties may still need to bring legal proceedings if there is a dispute over the quantum of loss.

When developing a litigation strategy to manage disputes, parties should also be mindful of whether documents of the business may be later disclosed during any pre-trial discovery or whether such documents would be protected under Irish law protections of legal privilege.

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?

While there are limited pre-action protocol requirements under Irish law, 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 that this is not already required under the contract.

Parties should also take care that they do not inadvertently waive any rights by actions or any measures which 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?

There is no formal class action procedure in Ireland. Mass claims and multi-party litigation generally proceed by way of representative actions (where one claimant with the same interest as a group brings proceedings on its behalf) or a test or “pathfinder” case. Parties may also be faced with a series of individual claims all running independently.

There are a number of legal and strategic issues that parties will need to consider when dealing with multi-party litigation (e.g. ensuring a consistent strategy across cases, the risk of cross-contamination, and implications for settlement discussions).

Third-party funding is not generally available in Ireland. However, there are certain exceptions (e.g. funding by a party that has a legitimate interest in the proceedings, after-the-event insurance and certain types of contingency-fee arrangements).

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

Businesses should first examine the terms of their written contract, as it may set out a procedure for how changes are to be agreed/recorded. If the contract contains such a procedure, it should be followed.

Generally, most Irish-law contracts contain an express provision requiring that any changes to the contract be agreed by the parties and documented in writing. Even in the absence of such an express contractual requirement, it is considered best practice for any changes to a contact that are agreed should 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?

Open lines of communication and planning are key for customers and suppliers to mitigate the risks on both sides.

Most long-term relationships will have established governance procedures that are either formally set out in the contract or that have evolved as practice between the parties. These governance procedures will facilitate commercial discussions between the parties to arrive at solutions that work for both, with a view to maintaining the relationship going forward, planning for resumption of (or increase to) activities and minimising disruption to each party’s business.

Change management will also be important, particularly where interim solutions are agreed to facilitate short-term needs. Where the parties agree to deviate from established norms for the delivery of product or services, it is prudent to document these changes. Some contracts will include detailed procedures regarding change management that are useful for commercial teams when documenting these changes.

Key risks for both customers and suppliers 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.

From the customer perspective, it is important to focus on suppliers of key products and services in particular, and to look at alternative suppliers. Customers may want to review their supplier arrangements to determine concentration risks (e.g. where an exclusive supply arrangement has been made) and seek to diversify their supplier arrangements to allow for more flexibility/fall backs where a particular supplier is struggling to source products or resources in a timeframe that is suitable for the customer’s business.

From the supplier perspective, it will be important to review arrangements with customers, in particular 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). Suppliers will also be concerned where service levels have been agreed that will not be sustainable as the supplier and its sub-contractors ramp their businesses back up. Some contracts may accommodate changes to pricing and relief from service-level obligations in a relatively flexible manner, however most will likely require commercial agreement of the parties.

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 is a contractual concept and the interpretation of the clause will be dependent on its drafting. When drafting a force majeure clause, in addition to considering the types of events that could be force majeure events, it is worth considering the consequences of the occurrence of such an event. Where a pandemic such as COVID-19 occurs, termination is not always a practical solution for either party (although it is important to maintain this as a right in the contract).

For example, the force majeure clause should provide relief only to the extent that performance is impacted by the occurrence of the relevant event and the clause could provide specific commercial relief, such as the obligation to maintain fixed prices or meet specified timelines. Other practical considerations for a force majeure clause could include the obligation to promptly notify the unaffected party and the obligation to invoke business continuity procedures and take other reasonable steps to mitigate the impact of the force majeure event before a right of termination can be exercised.

In addition to including a force majeure clause, it could be useful to include a clause obligating the supplier to notify the customer of any events that could have a material impact on the supplier’s ability to perform its obligations. This could be coupled with a process whereby the supplier can specify the type of temporary relief the supplier will require and a process for agreeing the particulars of the relief. This would be broader than a force majeure event and would allow for commercial discussions to arrive at a suitable solution where possible. It would be prudent to include a right of termination (in whole or in part) where a commercial solution is not practical.

As a supplier, you may want to include a specific termination right if the customer fails to make payment. You may also want 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.

As a customer, you may want to include clauses that provide for additional rights such as a most-favoured customer clause that obligates the supplier to give favourable treatment to the customer (e.g. in terms of delivery priority, but note that most-favoured customer clauses can give rise to competition law concerns), 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 impacted by emergency legislation.