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 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? Check the online insolvency register.
- audit of stock segregation conditions at customer premises if holding goods supplied that are not yet paid for?
- is credit insurance available?
COVID-19 measure for supplier credit
The Dutch government will provide reinsurance of supplier credit for SMEs that have obtained or require supplier credit. The total available amount of reinsurance is EUR12 billion. The reinsurance covers the whole of 2020, significantly decreasing the payment risk for credit insurers.
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 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?
Legal claims that have arisen as a result of COVID-19 or its effects will, in principle, not be affected, as they are based on situations that occurred in the past. The basis of such claims is not affected by the lifting of regulations going forward.
In some cases, after restrictions are lifted, alternative solutions to the dispute may become possible that are more attractive to the parties (e.g. specific performance instead of a claim for damages, which the defendant may ultimately not be able to pay). In some cases, reaching a settlement may be more attractive than legal action.
3. How should you manage those disputes once COVID-19 restrictions are lifted?
See the answer above. Possible alternatives to pursing the action should be identified and assessed against the litigation risk.
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?
The statute of limitations under Dutch law is generally five years; a claim should, in any case, be brought within this period. Particular procedures may be prescribed by, and claims restrictions may follow from, sector-specific regulations or the contractual relation between the parties, so this should be assessed as soon as possible to ensure that no possibilities are negated by the passage of time.
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?
Third-party funding is not commonplace in the Netherlands, but cannot be discounted. The same applies for mass claims.
6. What should I do about recording contractually or otherwise any of the changes put in place during the COVID-19 lockdown period?
A proactive negotiation with a long-term perspective may be a win-win solution for the parties. Given the temporary nature of the crisis, most partners will be seeking to ensure relationships continue when the crisis passes. Many parties are willing to accept a loss in the short term, if this allows a profitable relationship to continue.
This should work both ways. Consider which partners are crucial and which are not, and which relationships are worth investing in. To avoid interpretation issues moving forward, record any changes made as a result of COVID-19 implications.
It is especially important to record the duration of any special COVID-19-related changes agreed between 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?
Customers and suppliers should assess their obligations and rights under existing contracts:
- Identify specific affected terms, such as representations and warranties, most favoured/preferred customer provisions, exclusivity, payment rights, minimum production amounts, schedule and delivery, force majeure clauses, termination rights, and insurance or indemnity clauses.
- Identify any terms requiring notice, and whether they have been triggered (e.g. a notice of default).
- Assess whether either party’s performance may be excused, or if a party can take measures to ensure performance (e.g. by obtaining goods or services from a third party).
- Assess the risk and consequences arising from a potential breach or default.
- Identify the law governing the contract and the parties’ relationship, because this can materially affect how a company addresses any issues.
The parties should continue to monitor the actions required to protect their own interests. For example, sending a written notice of default in time and granting the counterparty a reasonable period of time to remedy its breach (though in a force majeure situation specific performance will not be possible).
However, before invoking any available remedies, the future relationship with the counterparty should be considered.
Customers should also look at alternative sourcing arrangements to allow for more agility in the ordering process. Suppliers could perhaps seek more lenient commercial arrangements to help strengthen their business operations and to ensure continuity (e.g. prepayments or shorter payment terms).
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?
Given that the outbreak of COVID-19 must now be considered a fact of public knowledge, the contracting parties should agree on a risk allocation that considers and addresses the impact of COVID-19 on the relationship between the parties.
Failure to do so will make it more difficult for a defaulting party to invoke, for example, force majeure under Dutch law, as the consequences of COVID-19 would have been – to a large extent – foreseeable when the parties entered into the agreement.
This may be different in case of, for example, far-reaching legal restrictions and regulatory measures that are currently not yet introduced, which may not have been foreseeable at the time of conclusion of the agreement.
One important option with new agreements is to specifically include COVID-19 as a force majeure event, and to link this provision to a right to terminate or cancel the agreement.
Customers could also include shorter terms or notice periods or flexible pricing arrangements to cater for demand changes, or refrain from minimum commitment obligations or exclusivity. Suppliers in turn could include more favourable commercial terms to ensure a healthy cashflow.