Up Again Luxembourg: 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?

Early action is key to avoiding potentially large exposure as an unsecured creditor on the insolvency of your customer.

The risk and effect of customer insolvency may be mitigated by implementing specific legal and operational planning and ongoing monitoring processes, tailored to the customer and the business in which the exposure may arise.

Depending its assessment of the risk, a supplier could consider the following actions.

Preliminary actions:

  • Review the contractual terms with the customer (in particular, regarding payment) to anticipate and identify any potential breach and any means of recourse against the customer.
  • Monitor the customer’s financial position and level of credit exposure, including by verifying:
    • the timely filing of customer accounts;
    • the eventual commencement of corporate restructuring proceedings by the customer;
    • the audit of stock segregation conditions at customer premises if the customer is holding goods supplied that are not yet paid for, and;
    • the availability of credit insurance.

Further actions:

  • Procure advance payments from the customer.
  • Enhance the protective provisions in your terms and conditions (for example, retention of title to goods supplied until all payments due from the customer are made, early insolvency triggers). Any amendment will, however, apply to a customer only to the extent it has been accepted by that customer.
  • Take security and guarantees to elevate and enhance creditor rights.

If your customer is in default of its obligations to you as a supplier, other steps include the following:

  • Take recovery action regarding stock or, subject to the specific terms of the contractual arrangement the customer, suspension of the delivery of goods by you as supplier.
  • Warn your customer that you may proceed with an early enforcement action/introduction of insolvency proceedings to apply immediate pressure for payment. However, a Bill of Law n° 7552 has been tabled that foresees the inadmissibility of bankruptcy petitions introduced by creditors (faillites sur assignation) during the state of crisis and the two-month period after it is lifted. It is specified that this inadmissibility should benefit only companies in financial difficulties as a result of the COVID-19 pandemic.

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?

Early action is key to avoiding potentially large exposure as an unsecured creditor on the insolvency of the supplier.

The risk and effect of key supplier insolvency may be mitigated by implementing specific legal and operational planning and ongoing monitoring processes, tailored to the supplier and the business in which the exposure may arise.

Depending its assessment of the risk, a customer could consider the following actions.

Preliminary actions:

  • Review the contractual terms with supplier (in particular, the delivery terms) to anticipate and identify any potential breach and any means of recourse against such supplier.
  • Monitor the supplier’s financial position and level of credit exposure, including by verifying:
    • the timely filing of supplier accounts; and
    • the eventual commencement of corporate restructuring proceedings by the supplier.
  • Understand to what extent a supplier is key to your supply/production activities, and engage early with the supplier to secure continuing supply (eventually by supporting the current supplier or by procuring continued supply from an alternative);
  • Monitor the potential impact on your ability to deliver on an onward supply contract.

Further actions:

  • Procure third-party guarantees from other suppliers for continued supply.
  • Look out for alternative suppliers should your current supplier cease trading, and diversify the supply of key goods and services.
  • Consider insurance or other indemnification agreements that may cover some losses.
  • In the event of supplier distress, consider acquiring assets or bringing part of the 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?

For ongoing cases, all suspensions of the procedural deadlines implemented by the Grand-Ducal Regulations of 25 March 2020 and 1 April 2020 will be lifted and the timetables issued by the courts during case-management conferences (audiences de mise en état) must be observed again.

For cases that are not pending, a writ of summons (assignation) can now be served on the other party and the statute of limitations applies again.

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

The parties should try to negotiate an amicable settlement and, if this is not possible, begin legal proceedings, after assessing whether the contract contains a jurisdiction or an arbitration/mediation clause..

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?

Consider seeking monetary compensation from the other party if the loss you’ve suffered has been caused by a breach or a default of the other party’s contractual obligations.

If the loss does not result from a breach or a default by the other party, you must check whether the relevant contract contains any specific provision, such as a hardship regime or a material adverse change (MAC) clause, that would allow you to renegotiate or terminate the contract.

You may then reach out to the other party for an amicable settlement. If no agreement is found, you may then put the other party on notice to execute their obligations under the contract.

In this respect, you should check whether the relevant agreement contains any specific procedure (such as the prior use of an expert or the referral to key persons) to settle the disagreement.

If no amicable settlement can be found, you may want to initiate legal proceedings. Before bringing a claim, you will need to assess whether the contract contains a jurisdiction or an arbitration clause.

If the breach or default results from a force majeure event, the defaulting party would not be liable for damages.

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?

Mass claims or class actions are not provided for by Luxembourg law.

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

For enforceability purposes, the parties should record in writing the changes put in place during the COVID-19 lockdown period.

Depending on the nature of such changes, this could be done by, for example, amending the original agreement entered into between the parties, or a party issuing a waiver for certain contractual provisions.

The terms of the original agreement may specify a formality or procedure to be followed for variation of the terms.

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 can decide, by mutual agreement, to reconsider the terms of their agreement, in particular for delays. In general, no form is imposed on renegotiation – but for enforceability purposes, it is preferable to draw up the new terms in writing.

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 the following steps to better anticipate the consequences of a pandemic and the rights of the relevant parties in this respect:

  • Establish contractually whether or not a pandemic such as COVID-19 shall qualify as an event of force majeure, relieving the debtor of any liability in the event of non-performance of its obligations.
  • Introduce a hardship regime (imprévision) or a material adverse change (MAC) clause under which the parties may either renegotiate or automatically terminate the relevant contractual arrangement under specific circumstances, and clarify whether a pandemic would fall within the scope of this clause.
  • Amend any penalty clause to determine whether they shall apply in the event of breaches due to a pandemic such as COVID-19.

The scope of such clauses should be carefully assessed depending on whether the parties are entering into the relevant agreement as supplier or customer. Also, the final form of the clauses will of course, depend on the negotiating strength of each party.