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Lindsay Ellis Lindsay Ellis is a partner and heads the commercial law team at Wright Hassall. He advises on outsourcing, procurement and commercial contracts across a diverse number of sectors including technology, transport/ logistics, public, automotive, engineering (including aviation) and retail. Michael Hiscock Michael Hiscock is Head of Construction atWright Hassall, he is a specialist in construction and engineering procurement, advising on a wide variety of works contracts. www.wrighthassall.co.uk Focus www.thefis.org 25 When the new legislation does NOT apply It only affects suppliers, so let’s look at your relationship with your customers. • Nothing prevents you from terminating a contract in the period leading up to the insolvency proceedings, or terminating after the insolvency proceeding began, for any reason that’s not triggered by that proceeding. • You can also terminate your supply contract with the consent of the insolvency administrator or with the permission of the Court, which you will have approached if continuing to supply will cause your business hardship. • If a customer enters a formal insolvency procedure, you can wait for a new reason to end the contract, like non-payment for supplies you have made after the commencement of the insolvency. You may also be able to exercise other contractual rights, like contractual set-off and netting rights. • If your contract permits you to terminate for convenience, you may be able to do so, as long as you continue to supply as normal during the notice period. • If the existing contract is a single-purchase order, you may reject new orders from the customer, particularly when the contract has been structured as a framework agreement, with each new order constituting a separate contract. • You can also refuse to renew an existing contract once it has expired and can negotiate with the insolvency office-holder to agree an end to the contract. New supply contracts will have to change The contract you rely on to regulate your relationship with customers, will have to change in future to protect your own business. It will be important to seek legal advice about how you structure your contracts and what they contain, but a few considerations might include: • Reducing the contract term to ensure you are not locked into supplying your customer for a considerable period in any insolvency procedure – this will have to be balanced against the commercial objective of securing long-term customers. • Structuring the contract as a framework agreement, ensuring each supply is treated as a separate contract, which allows you to accept or decline orders as you see fit. • Tightening the payment structure to offer an early warning for you of when customers are experiencing financial problems, before insolvency is triggered. • Shorten the payment periods and increase the number of interim payment applications permitted under the contract. • Requiring regular financial information from your customers to assess continued solvency, including credit ratings and performance reports. • Use of project bank accounts that facilitate direct payment. • As an interim step falling short of termination, you might include a provision allowing you to suspend further supplies under the contract, for repeated or lengthy periods of non- payment by your customer. • Reapply fiduciary duties to retention sums to create a form of trust fund. • Allowing termination for convenience and including as short a notice period as makes commercial sense. However these are very rare in construction contracts due to the duration of a building project, the resource commitment and forward ordering of goods and labour down through the supply chain. It pays to work with customers that can pay There will be suppliers like you impacted by this legislation change and in future, carefully choosing which customers to work with could protect you from the consequences of having to continue supplying customers trading insolvently. It will also be advisable to undertake more detailed due diligence on a customer’s financial position before agreeing contracts, then monitor their payment performance closely to ensure you are aware of any difficulties well in advance of the customer becoming insolvent. It will be prudent for suppliers to train those managing contracts on the impact of the changes and how to spot the warning signs, including ensuring invoices are paid on time and possibly tightening debt collection procedures. It’s essential that you understand your contractual rights and you are ready to exercise them if need be to stop supply or terminate the contract promptly, should one of your customers show clear signs of financial distress. While we are on the subject of contracts, it makes sense to review your standard terms and conditions to ensure they offer protection against a customer’s insolvency, as far as possible. If you want real peace of mind, seek legal advice from someone expert in supply contracts, as a few small changes now, could save you a lot of trouble in the future. Explainer A termination for convenience clause in a construction contract allows one or both parties to terminate the agreement without a specific reason for doing so (such as a default or breach of the contract). Without a termination for convenience clause present, the party who terminates the contract can really only terminate the agreement based on default or breach (or some other term in the contract).