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HCR Law Events

27 September 2022

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

Unless your contract was drafted recently, it is unlikely that it was drafted to deal with current issues such as the effects of a changing economy, the energy crisis or high levels of inflation. However, if you find that your counterparty is in a precarious financial position, you are not without options – now is the time to review your existing contracts.

Variation of provisions and negotiations

Depending on your working relationship with the other party, it may be best to sit down and discuss the position amicably before enforcing your legal rights or remedies.

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 other party particular difficulties, such as obligations which they 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 incentivise paying sums owed to you over other creditors
  • Instalment options – this can provide some breathing space to ease short term issues with cash flow
  • 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.

Contracts often provide that interest is payable on overdue sums. Although it can be awkward to invoke this, it could provide leverage to encourage prompt payment or renegotiation of the payment terms.

Force majeure

Force majeure provisions may allow you to terminate if the other party is not performing its obligations. If you are a supplier, they may also allow you to suspend supply while the other party is not paying. Since there is no universal legal application of what a ‘force majeure’ event is, 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.

Termination

If you cannot rely on the force majeure clauses, it might be time to consider invoking your termination rights if the obligations on the other party are not being fulfilled or are no longer suitable for the parties. Contracts will often contain an express right to terminate for non-payment.

If the parties had a good relationship, it is worth considering re-contracting under a new agreement which reflects the new financial environment in which the parties are working.

If it appears likely that the other party is or soon will be insolvent, speak to our Restructuring and Insolvency Team who can best advise on how to deal with these issues.

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About the Author
Hannah Clements, Solicitor

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