As businesses continue to trade within difficult economic times, we have in this blog post provided a checklist on how best to extract value from your existing commercial contracts, to improve cash flow and to avoid being adversely affected by your customer's financial difficulties:
Review existing contracts
In an economic downturn businesses should review their commercial agreements to consider strategies which may facilitate renegotiating the contract terms, such as price or to exit from an unprofitable agreement. The review should include supply and purchase terms with key customers and suppliers.
Review of existing contracts can highlight savings that can be achieved by:
- Making use of existing clauses for example exclusivity /minimum purchase obligations
- Renegotiating individual terms
- Termination
- Negotiating an exit
If an existing customer is not paying then take steps to strengthen your trading position to exert commercial pressure. You can consider:
- Suspending services or delivery
- Renegotiation of terms
- Have a contingency plan for resale of undelivered finished goods for a customer in financial difficulty
Review credit limits/payment terms
Review credit limits with existing customers and undertake credit searches against new customers to ensure credit levels are appropriate to the risk of insolvency. Check invoicing and payment terms and put in place credit control procedures to enforce them. Check your rights to terminate or suspend if the customer becomes insolvent or fails to pay.
Is your retention of title provision effective?
Many contracts contain a provision that prevents title to goods passing to the buyer until paid for. Enforcing these clauses can be difficult in practice however an effectively drafted retention of title clause will prevent title passing in respect of goods that have not been paid for and those goods will not therefore form part of the insolvent business assets and so are not available to creditors. If title has not passed then the insolvent business must return the goods to the supplier. Businesses that trade without effective written terms and conditions properly incorporated into the contract have no right to claim retention of title. Remember that title to goods passes on delivery and not payment in the absence of express provisions to the contrary.
Building and using a commercial position
If a company in financial difficulties pays you but not other creditors there is a risk that the payment to you will constitute a preference and potentially it can be set aside upon insolvency. To protect against that risk create a paper trail to show that payments to you are in response to genuine commercial pressure (such as a threat of cessation of supply and/or litigation) and was not made with the intention of preferring one creditor over another. A well structured approach to recovery should enable you to provide evidence to defeat a preference claim by the liquidator.
Denison Till can assist you in providing practical and cost effective commercial advice on the review of your commercial contracts. If you would like further advice or information please contact Jonathan Cripwell, Dispute Resolution and Litigation Partner