Steps to consider if the other party in a contract is facing economic difficulty

Unless your contract was drafted recently, it is unlikely there will have been detailed consideration as to the effects of a changing economy such as a recession or high levels of inflation. However, you are not without options – now is time to review your existing contracts.

Variation provisions and negotiations

Depending on the working relationship with the counterparty, it is always advisable to sit down and discuss the position.

Most contracts will permit variation if agreed by both parties and in writing. Therefore, it might be necessary to vary some particularly onerous terms in the contract which are causing the counterparty particular difficulties. These may include obligations which the counterparty may struggle to fulfil but do not necessarily impact the core objective of the agreement. By varying them, it will allow the contract to continue and remain workable for both parties.

Payments

When facing economic difficulties, one of the key issues is likely to be around fulfilling payment obligations on time. It is therefore worth discussing whether amending the payment provisions may assist the parties fulfil their obligations, such as:

• Discounts for early payment- this may incentivize a paying party over other creditors;
• Instalment options – this can provide them some breathing space if having short term issues with cash flow; or
• Deferred payment terms.

If this route is considered, you will need to ensure the contract is varied correctly so you have a course of redress in the event the new payments obligations are not fulfilled.

Force Majeure

Now is the time to review the Force Majeure provisions in your contract. Since there is not a legal concept under English law, it is important to look at the precise wording used in your contract. Economic events such as a recession or rapid levels of inflation could afford you the right to terminate the contract early without having to rely on termination provisions. However, these will be restricted to the wording in the contract.

Termination

In the event you cannot rely on the force majeure clauses, it might be time to consider invoking your termination rights if the obligations on the counterparty are not being fulfilled or are no longer suitable for the parties.

In terminating the current agreement, if the parties had a good relationship, it is worth considering re-contracting under a new agreement which reflect the new financial environment in which the parties are working in.

In the event the other side ends up with solvency issues, it is advisable to speak to insolvency specialists, such as our Restructuring and Insolvency Team, who can best advise on resolve these issues.