Up Again South Africa: Suppliers and Contractors

Restructuring

1. Navigating the 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?

  • Keep open lines of communication with your customers.

Consider varying, in writing, the payment terms of the contract or enter into new payment terms to:

  • require payment in full or in part before delivery of the supplies;
  • require payment on delivery;
  • include an acceleration clause in the event of default on payment for any reason arising (this means the entire debt will fall due on default of one payment);
  • procure security for the delayed payment of the customer such as, for example, a guarantee, suretyship, general notarial bond or special notarial bond; and
  • consider taking out applicable insurance policies.

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

  • Keep open lines of communication with your suppliers.
  • Investigate alternative suppliers and diversify your risk, or have an alternate supplier that can be called on, without delay, in the event of the insolvency of your main supplier.
  • Consider varying, in writing, the payment terms of the contract or entering into new payment terms so you will only make payment on due and timeous delivery of the goods/services, or where ownership of the goods passes ex-warehouse and not on delivery.

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?

A dedicated COVID-19 judge has been appointed to deal with COVID-19 matters (particularly for contact tracing and privacy-related matters) but the various courts retain their usual jurisdiction. Disputes must be considered on a case-by-case basis with reference to the specific facts and the contracts in question.

Various measures have been put in place at courts and related facilities to curb the spread of COVID-19.

From a civil-law litigation perspective, South African courts have remained open for urgent court applications during the lockdown. Civil matters that were pending when the national state of disaster was declared may be proceeded with, on the direction of the court. It is debatable whether new civil matters are allowed to be instituted. In practice, however, this is being allowed at some of the courts. There has been a delay in pursuing most cases.

The execution of writs of execution and all attachment and removal of property have been suspended. Eviction orders pertaining to residential property may be granted, but are suspended until the last day of alert level 4 unless a court decides it is not just and equitable to stay the eviction order until such date.

From an arbitration perspective, most arbitral bodies are taking steps to pursue arbitration proceedings remotely.

The return to work will facilitate the hearing of matters, but may result in a backlog of cases in both the courts and arbitral bodies.

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

If you are the plaintiff/applicant/claimant, you should advance cases as much as possible, while working from home, continue to be proactive in pursuing the resolution of the disputes once there is a return to work.

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?

You should take legal advice as soon as possible (there is no need wait for  the restrictions to be lifted) so the claim can be assessed, formulated and pursued, and evidence in support of the claim collected.

The prescription/time-barring for a civil claim for loss resulting from breach of contract is three years. Given that some companies are facing financial difficulties, the sooner the claim is pursued and finalised, the better.

It is also advisable, depending on the circumstances, to consider:

  • what insurance policies you have in place; and
  • whether the losses are practically recoverable from the defaulting party.

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?

Any mass claims arising pertaining to COVID-19 are likely to be linked to exposure of persons to the virus at your business premises, or related to financial distress or insolvency.

Where a category or class of persons have substantially similar COVID-19-related claims against the same business or businesses in an industry, a class action may be instituted. In class actions, the class must first be certified by a competent court, by way of application proceedings. Thereafter, the main claim is instituted.

Third-party funding is permissible.

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

Maintain a detailed paper trail, whether in the form of correspondence, bulletins or other communications.

Where the changes affect contractual arrangements, the changes should be formalised in a contractual amendment/variation (whether as an interim arrangement or final amendment to the contract).

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?

In South Africa, the lockdown is being managed in a phased approach over five alert levels. Alert level 5 is referred to as a “hard lockdown” with severe restrictions; alert Level 1, has the least restrictions.

The government’s approach is to gradually open up economic activity, while reducing the alert levels, to ensure a measured process that safeguards public health.

Businesses should keep up to date with all new regulations and changes to the alert levels (which will not necessarily be the same in all geographic locations, and which may increase in some areas and decrease in others).

Businesses could also consider lobbying government from a sector perspective to provide input on the regulations and permitted conduct during the relevant alert levels.

In respect of customers and suppliers:

  • Reach out to your suppliers and customers with a view to understanding their needs, and managing the progressive start-up of the supply chain system to ensure the demands are met by supply, and increased over time.
  • Understand the obligations of your business in terms of existing contracts and ensure you meet those obligations. Where that is not possible, you will need to decide whether to reach out to the counterparty to renegotiate the position or tender partial performance, and consider other means of managing the performance under the agreement.

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 the specific facts, but. some contractual terms to consider include:

  • the timing of contractual performance required (including technical start-up requirements);
  • payment terms and the management of cashflow;
  • the provision of security for debt;
  • passing of risk and ownership, and related concerns pertaining to insolvency or business rescue of the contracting party;
  • contractual remedies in the event COVID-19 or related governmental action impedes performance (e.g. force majeure clauses that suspend performance for a specific time period without discharging the contract);
  • force majeure clauses should reference disease, pandemics and related governmental action;
  • renegotiation of the contract in the event of a material change in economic circumstances or if the contract becomes unaffordable to perform;
  • limiting contractual liability in the event COVID-19 or related governmental action impedes performance;
  • product liability concerns;
  • health and safety requirements; and

You should also consider whether to include a term requiring the other party to take out insurance.