Up Again Portugal: 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? 

Legal remedies available include:

  • payment on delivery;
  • reduced payment deadlines; or
  • request for provision of (additional) guarantees, such as bank guarantees, notes, comfort letters or any form of debt acknowledgement. 

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?

On supply side, payment on delivery (or post-delivery) and avoidance of any pre-payments should be sought.

On client side, commitments that may be hindered by a supply-side default should be avoided, by ensuring contracts limit or exclude liability due to underperformance of any third parties (such as suppliers).

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?

Circumstances like COVID-19 are relevant under Portuguese Contract Law as they may allow:

  • the possibility to terminate the contract or modify the parties’ obligations; or
  • the termination of the contract without liability for breach.

If some restrictions are lifted and business operations resumed in whole or in part, the reasons that prevented parties from performing their obligations may cease to exist and performance may need to be resumed to avoid contractual liability.

Statutes of limitations and expiry deadlines regarding all types of proceedings are suspended and this suspension prevails over any regimes establishing compulsory maximum statutes of limitations or expiry deadlines. If this restriction is lifted, these time limits will apply again.

Courts will return to their normal operation when a decree-law is published declaring the termination of the exceptional circumstances related to COVID-19.

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

If due to COVID-19 the contractual obligation that may give rise to the legal dispute has not become completely impossible to perform, but only temporarily impossible (and so thus performance is just delayed), Portuguese law provides that the debtor shall not answer for the consequences of the delay while the exceptional situation lasts. But after the restriction is lifted the debtor, has to perform immediately or it will be liable for non-performance.

In such a scenario, the debtor should offer its performance to the creditor. If the creditor maintains its interest in the performance of the obligation by the debtor, it should put the debtor on notice to perform. In any case, it is important to notify the other party of the preferred solution, as it always requires solid evidence. So, it is advisable to keep adequate supporting documentation.

After COVID-19 restrictions on judicial and court proceedings are lifted, new disputes can be brought to court and ongoing disputes shall proceed as before.

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? 

When restrictions are lifted, if the contract can still be performed but may require some adjustment, rebalancing or renegotiation, the debtor should be put on notice to perform and/or try to settle or renegotiate the contract to mitigate losses.

If not possible or not yet done, notify the debtor of the termination of the contract and consequences (the amount of the claim). 

In any case, unless your claim is subject to a specific statute of limitation or expiry period not COVID-19-related, you’ll have plenty of time to bring legal action against the other party, as regular limitation periods shall apply; for contractual liability, the Civil Code provides for a 20-year period.

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 against a business shall be processed under individually or jointly ordinary proceedings provided in the Civil Procedure Code, but not as a class action, as requirements are not met.

In Portugal it is not yet common to have third-party funders funding claims – though for international arbitration there are already some cases.

In any case, there still isn’t any law regulating third-party funders, but their use is not prohibited.

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

Recording any changes to contracts should be a priority. The first option should be though an addendum or amendment to written contracts, but if this is too time consuming or burdensome, other options, such as Side Letters or Letters of Understanding, should be considered.

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?

Regarding their customers, businesses should adopt a communication strategy as early as possible, providing updates on likely timing for delivery. In the case of deliveries that depend on specific timings (after which the client definitively loses interest in the supply), Portuguese law allows for the termination of the contract, so any such performances should be prioritised.

Regarding their suppliers, businesses should seek specific commitments and relevant penalties in case of breach, to at least ensure serious efforts – and, if possible, priority treatment – from those suppliers. These commitments, ideally in writing, should mention the specific context of the supply, to make it clear these were taken in the specific context of COVID-19 and to avoid discussions between the parties on what could be considered as “hardship” situations, and therefore dismissing claims for underperformance.

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?

In both customer and supplier/provider relations, COVID-19 should be acknowledged as a reality affecting any new agreements. Considering that force majeure cannot be claimed for agreements that are signed pending the COVID-19 situation, any new agreements should specifically acknowledge the current situation, and contain clauses expressly designed to address the hindrances arising from it.