Some charities have been operating throughout the COVID-19 crisis, providing frontline support but many others have been moth-balled akin to businesses in the commercial sector. As charities start to return to an operational status, their management teams will be looking carefully at the state of their cash balances and wondering how to eke out the money that is available in order to get fully operational again. Receipts to charities are expected to be down by £4 billion during the crisis and those funds that are available will need to be carefully prioritised, working with suppliers to find compromises to normal payment arrangements.
What is happening here legally?
In legal terms, these compromises with suppliers amount to either a) a request for forbearance and waiver or b) an express contract variation.
Forbearance and waiver
Forbearance in relation to payments is where a party to a contract, say a purchaser, requests time (forbearance) from the counterparty to pay. If the counterparty (supplier) agrees to delay or takes no action about late payment and the party (purchaser) relies on this, the counterparty (supplier) is unable to pursue for damages relating to the delay. The counterparty (supplier) is said to have waived their rights.
The request for forbearance may not be formal or even expressed at all – there may be a pattern of conduct that is recognised by the supplier or just a desire to be seen to be reasonable or the supplier just hasn’t got around to pursuing their rights yet.
In more fundamental situations, where purchasers know that there is likely to be more than a few days delay in paying, or that their financial situation is in need of restructuring because there is a risk of significant financial distress, they may request a “time to pay” arrangement. Putting aside the shock that a supplier will suffer as a result of receiving such a request, the terms of such an arrangement may be far superior to the risk of complete non-payment and will go a long way to cementing a long term business relationship.
Time to pay arrangements should be formalised as a contract variation. The parties are agreeing to new payment terms (and perhaps new supply terms as well, if the purchaser will need additional goods to support their operations). There are details that need to be agreed, such as when payments will be made? Will interest be applied or waived? What happens if the arrangement is breached? Will the supplier get any security or guarantees?
Whilst variations to contracts can be informal such as verbal agreement or email discussion, where it is not obvious what the supplier is getting out of the time to pay arrangement, the variation will need to be drafted as a deed in order to make it binding.
Additional Boilerplate considerations
Nearly all long form contracts will include a “no-waiver” clause, limiting the effects of actions or omissions taken in relation to forbearance. If you are a purchaser looking to rely on forbearance, check whether this clause will over-rule the actions/inactions of your suppliers.
What does the contract say about variations? There may be a no “oral modifications” clause which could undermine the friendly conversation with the accounts payable staff of your supplier, when the MD finds out!
Finally what does the contract say about notice? There may be specific notification methodologies to follow.