Up Again Kenya: 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?

  • Focus on collections that have fallen due and reduction of aged bills and accounts receivable, by pushing for quick payment of invoices.
  • Try and be flexible with payments – be prepared to negotiate with your customers for relaxation of payment terms and consider accepting payments by instalment over a longer period.
  • Have an open dialogue with your customers about your concerns so that if issues arise, you will be made aware of them promptly.
  • Consider renegotiating particular payment terms and other terms of existing agreements. Be sure to clearly document any arrangements and that both parties are clear on the scope and application of the new arrangement. In particular, consider if you can:
    • eliminate or reduce availability of goods on credit and/or introduce a credit limit;
    • require that payment be made in advance (best), on dispatch, or on delivery;
    • reduce the payment period; or
    • revise minimum quantities or delivery periods.
  • Evaluate what security you may have and if none, see if the company is able to provide security or a parent guarantee (perhaps in exchange for something else, like a relaxation of payment terms).
  • Consider offering discounts and other payment incentives for early payment.
  • Reduce the quantity of goods supplied to high-risk customers and capitalise on the supply to low-risk customers.
  • If you are currently holding goods for the consumer, consider exercising a lien over the goods or delaying delivery until any outstanding payments are made.
  • Consider whether you have any liabilities to that customer that could be used to offset the amounts due to you.
  • Monitor consumers for any early signs of distress. Early knowledge of distress enables you to take pre-emptive steps to manage potential financial exposure. Bigger consumers may have information publicly available for your review. Keep an ear to the ground and listen to what other suppliers and creditors are saying and any drastic shifts in those relationships. At the most basic level – are the consumers still in contact? Are their phone lines open and is someone answering? Even small facts like this can give an indication of the health of a consumer.

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?

A number of the actions that can be taken to manage/mitigate customers (as set out above) can also be applied to mitigate and manage any risk in suppliers. In addition to those actions, the company may consider the following:

  • Earmark the main suppliers of the company and determine their ability to meet the supply needs of the company.
  • Hold discussions with the suppliers to gain visibility into their ability to maintain supply (and their general supply chain) and understand the extent of disruptions to their business, to enable the company to make informed decisions.
  • Identify the suppliers that are at the highest risk of being unable to supply to the company and possible consequences for these suppliers – for example, companies that rely on imported supplies may opt for locally available supplies or a different jurisdiction not hard-hit by the pandemic.
  • Consider and identify alternative suppliers, including whether there is a need to engage additional or secondary suppliers to supplement the supplies.
  • To the extent possible, extend payables to the suppliers to manage cashflows and conserve cash.
  • Understand the number and relative important of the supplier’s clients and where the company falls on that priority list.
  • Maintain an open flow of communication with the supplier at all times to stay updated of any considerable changes in their business.

Litigation & 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?

With a view of curbing the spread of COVID-19, the National Commission on Administration of Justice (NCAJ) had in March suspended physical court proceedings and the public’s access to court precincts. Subsequently, in April 2020, with a view to simultaneously enhancing the continuity of court proceedings and safeguarding the public’s access to justice, the judiciary, through the NCAJ, put in place a raft of procedures on electronic case management to facilitate online filing of court documents as well as conducting court proceedings remotely via various online platforms such as Zoom, Microsoft Teams and Skype.

Online filing allows parties to file both fresh cases and documents for ongoing cases. Cases that had been deferred during the suspension of physical court proceedings and before the issuance of directions on electronic case management have been allocated new dates when they are to be conducted remotely via the above online platforms. Courts are now taking up full hearings of matters either virtually, or in cases where few witnesses are involved, courts allow physical court attendance while ensuring physical distance is maintained at all times.

Initially, the judiciary had suspended execution of court orders by granting an automatic stay of execution of judgments, ruling or orders for a period of 14 days from the date of delivery where no directions have been issued. Recently and with a view to scaling up operations, courts have now resumed the issuance of decrees, thus opening up executions.

Accordingly, as at September 2020, all disputes are now being heard mainly through the virtual platforms made available by the various courts across the country.

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

With respect to the initiator of the proceedings (i.e. the plaintiff, claimant or applicant), we advise they diligently and vigorously pursue the expeditious continuation of the proceedings up to their logical conclusion, albeit within the framework currently in place, such as by adhering to the procedures on electronic case management. This will give them an advantage when it comes to allocation of early hearing dates once restrictions are lifted and physical court attendance is permitted.

With respect to the person against whom the proceedings have been initiated (i.e. the defendant or respondent), we advise they pursue amicable out-of-court settlements in instances where they may be disadvantaged from a litigation perspective. They should similarly ask the courts to direct that parties pursue alternative dispute resolution mechanisms. This will have the net effect of providing such a party with ample time to put their affairs in order and ameliorate the alleged breach, while also providing them with an opportunity to strengthen their position in the event that that an out-of-court settlement is not feasible and the court is constrained to direct that the matter proceeds to trial upon lifting of restrictions.

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?

Section 4(1)(a) of the Limitation of Actions Act, provides for a six-year period from the date on which the cause of action arose within which actions founded on contract can be instituted. This is therefore sufficient time within which one can institute proceedings.

However, appreciating the fact that breaches have been caused by the harsh economic effects of the pandemic, it would be advisable – even as a plaintiff – to pursue negotiations or restructuring of the contracts in the first instance as opposed to filing suits. This could provide a faster and more effective commercial solution than proceeding to court in light of the anticipated backlog once courts resume.

Some of the other aspects to consider before filing suit include:

  • where the contract is secured by an insurance bond or bank guarantee whether such guarantee or bond can be called to offset some of the breaches;
  • whether the losses suffered are practically recoverable from the defaulting party; and
  • the mitigation measures a party can put in place to reduce the extent of exposure.

Should such negotiations or out-of-court mitigation measures fail, then it is advisable to institute legal proceedings at the earliest available opportunity, instead of waiting until the lifting of restrictions as there are presently exists a framework on electronic filing of cases and conducting of court proceedings remotely. This will enable you to gather the necessary evidence, liaise with potential witnesses and engage your legal representative more robustly in preparation of the case.

Also, guided by the increasing number of infections countrywide, it is advisable to pursue legal action while still having the necessary financial resources to institute legal proceedings. It is therefore advisable to pursue legal action at the earliest available opportunity.

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?

Potential COVID-19-related mass claims brought against a business are likely to be linked to actionable/negligent exposure to the virus when the claimants visited the business premises. They may also be related to the business’ financial distress, redundancies or insolvency.

However, guided by the Rule 6(3) of the Public Health (COVID-19 Restriction of Movement of Persons and Related Measures), Rules 2020, which creates an offence for business owners who fail to comply with requirements of, for example, regularly sanitising the business location, persons who have been exposed to the virus can still institute criminal and proceedings against the business owners for failing to comply with the Rules and subsequently exposing them to the virus.

It is possible for a category or class of persons who have substantially similar COVID-19 related disputes to institute civil proceedings against the same business or same businesses in an industry.

Third-party funding of claims is not common in Kenya. However, high-profile claims involving multinationals may be possible and foreseeable.

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

It is imperative to maintain a detailed and documented account of all correspondences exchanged, government directives and other communication disseminated among parties.

Where parties have orally agreed, or impliedly varied the contractual obligations, it is imperative that such variation be put in writing and an addendum to the main contract be executed and appropriately witnessed.

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?

The Kenyan government is gradually opening up economic activity within the country, albeit in a manner that precludes further spreading of the virus. For instance, hotels and restaurants have been permitted to resume operations but restrict their business hours to between 5am and 4pm and should observe the social distancing measures in place.

We advise that businesses keep themselves appraised of developments in government regulations with respect to the pandemic.

In respect of customers and suppliers:

  • As a supplier, it is important to understand the nature of your business and your obligations as stipulated in the respective contracts. Upon doing so, it is your duty to ensure that you meet those obligations. In instances whereby you are unable to meet those obligations, it is imperative that you communicate to the other party in writing and on a without prejudice basis, the challenges that you are facing and propose possible steps aimed at tendering partial performance of your obligations.
  • As a provider, ensure that you sufficiently engage suppliers and customers, and understand their unique needs with a view of ensuring their demands are met and progressively increased.

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?

Each contract should be considered with reference to its own unique terms. However, aside from force majeure, additional contractual terms that may provide further protection can include:

  • specification of the force majeure clauses to make particular reference to government-related action, pandemics and disease;
  • freedom of parties to pursue renegotiation of the contract in the event of a material change in economic circumstances of the country or if the contract becomes incapable of being performed;
  • provision for limitation of contractual liability in the event that pandemic, disease or government-related action impedes parties’ performance;
  • provision for the party with a specific financial obligation, in this case, the customer, to provide appropriate security for performance of its financial obligations;
  • provision on whether it is mandatory for parties to take out insurance policies and the extent of indemnity;
  • provision for flexible payment terms;
  • provision for remedies available to parties in the event of breach arising from disease, pandemic or government-related action. For instance, provision on suspension of parties’ obligations for a specified period of time, absent of treating the contract as repudiated;
  • provision for addressing liability arising from product defects;
  • provision for health and safety to take precedence over parties’ performance of their contractual obligations;
  • provision for passage of risk and assignment of benefits/rights under the contract in the event of insolvency of one of the contracting parties; and
  • freedom of parties to flexibly vary the timing of performance of certain contractual obligations.

This material was prepared by DLA Piper Africa, Kenya (IKM Advocates)