Up Again New Zealand: Suppliers and Contractors

Restructuring

1. Navigating the supply chain in a distressed market:

  1. 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?

    Suppliers should ensure that their trade terms include appropriate retention of title provisions, that trade terms are signed and binding, and that a financing statement is registered on the PPSR before delivery of the relevant goods to perfect the supplier's security interest in those goods.

    Suppliers may seek additional credit support from some customers, such as parental guarantees.

  2. 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?

Purchasers could seek/require additional credit support from suppliers, including parental guarantees and third-party performance guarantees.

Purchasers should consider the timing for when title to goods passes and whether bailment agreements or offsite materials agreements (and related PPSR registrations) are desirable.

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? 

In many instances, the lifting of restrictions will mark the end of the circumstances that form the basis for COVID-19-related claims.  Therefore, the lifting of restrictions may enable the quantum of some claims to be calculated. 

Further, the lifting of restrictions will enable dispute resolution processes to proceed more rapidly, efficiently or traditionally.

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

You should take advantage of the lifting of restrictions to mitigate your losses.  In many cases, the law will limit recoveries to only the amount of loss that would have been incurred if you had taken all reasonable steps to mitigate.  Therefore, you should think carefully about how best to take advantage of each loosening of restrictions.

Also, you should generally put any party you have a claim against on notice of that claim at an early stage.  This may, for example, give some protection against money which would otherwise have been available to pay your claim being spent on other things.

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?

As noted in answer C3 above, generally you should put the other party on notice of the claim at an early stage.

You should comply with any contractual provisions that relate to the making of claims, including as to any deadlines.

But care is needed. You may have the legal option to cancel or affirm the contract. The option chosen may have a significant impact on your further rights to recover for loss and/or your right to be paid under the terms of the contract. Once an option is taken, it is generally not possible to change back to the other option.

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?

New Zealand has provision for multi-claimant class-action type proceedings.  Such claims would be brought in the court and could be funded by litigation-funding companies. Such funders pay for the legal costs of bringing the case in return for a right to share in any amount ultimately recovered. 

You would be served with the proceeding and have an opportunity to defend and/or settle it.

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

You should keep clear records of any matters you agreed with others to change the terms or basis of your business dealings or arrangements as a result of the COVID-19-measures. Wherever possible, you should have the record confirmed as accurate by the other party.

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?

You should think about the loss-mitigation and record-keeping matters referred to in the answers above. Think also about how best to manage the uncertainty of what will happen to your business and the broader economy. Look for flexibility and perhaps built-in specific review dates for any COVID-19-specific arrangements. 

You may also want/need to completely renegotiate existing contracts or look to terminate them to be replaced with new contracts appropriate for the new 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?

What additional protections or changes to existing provisions will be helpful for your business will depend on the nature of any relevant contract and your obligations and rights under it. 

You should certainly consider whether existing force majeure or other contingency/risk, suspension or cancellation provisions are fit for your purpose in the new circumstances, having regard to COVID-19. You may wish to specifically include appropriate reference to government measures in response to the pandemic.

Now is likely to also be a good time to consider whether your existing contractual arrangements and provisions adequately cover other unlikely but possible future risks.