Up Again Spain: 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?

Some solutions that may improve a supplier's resilience:

  • retain title to goods supplied until all payments due from the customer are made
  • periodic monitoring – for example, are customer’s accounts filed on time? Are any CCJs/winding up proceedings commenced? Conduct an audit of stock segregation conditions at customer premises if holding goods supplied that are not yet paid for
  • is credit insurance available?
  • monitor and review level of credit exposure
  • procure payment on account

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?

Some solutions which may improve a customer's resilience:

  • identify key suppliers
  • consider whether there are any alternative suppliers and what the timeframe would be for them to replace one of your existing suppliers
  • monitor potential knock-on impact on your ability to deliver an onward supply contract
  • in the event of supplier distress, would that provide an opportunity to acquire assets/bring part of the production 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?

Once the lifting of the restrictions is agreed and the operations are resumed (even partially), it will be a good time to quantify and assess the nature and amount of the loss suffered (or loss claimed), and to prove or dispute these, for example by economic expert opinions.

The impact derived from the mitigation of the circumstances that caused the breach of contract – for example under force majeure – should also be assessed.

All these circumstances will have to be assessed according to the type of dispute that may have arisen..

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

Given the temporary suspension of the Courts and Tribunals, it may be appropriate to assess other alternative dispute resolution mechanisms (such as negotiation, mediation or arbitration), or the possibility of requiring certain actions.

It will also be very important to assess the possible impact that a declaration into bankruptcy proceedings of one of the parties involved might have on any dispute.

If the other party to the claim is a public administration or an entity linked to it, disputes, claims or requests must be made within the applicable legal or contractual time limits.

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?

Once the restrictions are lifted, it will be a good time to

  • assess the losses suffered (e.g. compiling the relevant documentation, preparing an expert opinion);
  • identify the potential liable parties for such losses; and
  • determine the strategy for claiming them in light of the financial situation of the potential defendant (for example, if it is bankrupt).

In the case of contracts with public sector entities, if compensation has not yet been requested, it is necessary to check whether you can use (i) any of the compensation mechanisms expressly approved under article 34 of Royal Law-Decree 8/2020 as a result of COVID-19, or (ii) provided for in the applicable general contracting regulations.

Article 34 of Royal Law-Decree 8/2020, approves certain extraordinary compensation measures regarding certain public contracts:

  • public contracts entered into with entities belonging to the public sector as defined in article 3 of Law 9/2017 (e.g. Regional or Institutional Administration)
  • public contracts subject to Law 9/2017, Royal Legislative Decree 3/2011, Law 31/2007, Royal Law-Decree 3/2020 or Law 24/2011
  • public contracts of the following kind: (i) services and supply contracts for the performance of successive provisions or for the performance of provisions of a different nature (e.g. single provision); (ii) works contracts; and (iii) works concessions or services concessions
  • public contracts in force as of 18 March 2020, the date of entry into force of Royal Law-Decree 8/2020. These measures have already been amended a few times since their approval (i.e. on 2 April and 7 May 2020).

Provided certain specific requirements established in article 34 of Royal Law-Decree 8/2020 are met, the measures are as follows:

  • Services and supply contracts for the performance of successive provisions where execution would have become impossible (as a result of the situation created by COVID-19 or due to the measures approved by the central government, or the regional or the local administration): (i) the suspension of the contract; and (ii) the compensation, by the contracting entity, of certain items to the contractor (e.g. wages, expenses related to maintenance of machinery, insurances or guarantees).
  • Services and supply contracts for the performance of provisions of a different nature where execution would have become impossible (as a result of the situation created by COVID-19 or due to the measures approved by the central government, or the regional or the local administration): (i) the contract term is extended for, at least, a period equal to the time lost, unless the contractor requests a shorter one; and (ii) the compensation, by the contracting entity, of additional salary expenses the contractor would had effectively incurred as a consequence of the time lost, up to a maximum amount of 10% of the initial price of the contract.
  • Construction public contracts whose execution purpose would not have been lost or made impossible (as a result of the situation created by COVID-19 or due to the measures approved by the central government): (i) the suspension or extension of the duration term for the final delivery of the works; and (ii) the compensation, by the contracting entity, of certain items to the contractor (e.g. wages, expenses related to maintenance of machinery, insurances or guarantees).
  • Works concession public contracts where execution would have become impossible (as a result of the situation created by COVID-19 or due to the measures approved by the central government, or the regional or the local administration): restoration of the economic balance of the concession, either by (i) the extension of the original contract term to up to 15%; or (ii) amendment of any contract clauses of economic content of the contract.

For public contracts out of the scope of the special measures contained in article 34 of Royal Law-Decree 8/2020, check whether it is possible to request a specific measure (e.g. suspension or deferment of terms) or compensation or restoration of the economic balance of the contract due to, for example, force majeure, unpredictable risk, or factum principis, by applying the general contracting regulations.

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?

In Spain, claims can be brought either by individuals, or by groups of people (or consumer/user associations).

Such actions may be funded by third-party funders.

If you are aware that mass claims could be brought against your business, it is sensible to take certain step to facilitate the future management of  those claims, since procedural deadlines are often too short (e.g. for the preparation of expert opinions).

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

Carry out a detailed, case-by-case analysis of contracts affected by COVID-19, and of possible existing or future claims arising from such contracts, to assess whether or not the changes made in practice should be reflected in existing contracts (and the possible impact on future claims).

It would also be prudent to review model contracts or terms and conditions that will be used in the future.

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?

Given that the return to normality will not take place immediately, consider using any legal or contractual mechanisms to reduce the impact of COVID-19 on your contractual activities.

In the case of clients, it is advisable to make a prudent analysis of the progressive return to normality, because the actions of your customers or supplier could still be under the protection of legal or contractual mechanisms that eliminate or reduce potential liability on their part.

You must take all reasonable steps to mitigate any potential loss arising from contractual breaches.

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 addition to a detailed analysis of certain clauses (e.g. force majeure), other clauses should be adapted (e.g. those relating to delivery times, payment of the price, limitations on liability).

You should also conduct a detailed analysis of the distribution of risks and the economic and financial balance of the contract, particularly in contracts with successive terms or where deferred performance of certain obligations is provided for.

Customers should conduct an analysis of the risk distribution and financial equilibrium of the contract, especially in contracts with a successive term or where deferred performance of certain obligations is provided for.