In most businesses, large and small, the day to day in the accounts department, is working out how much money is coming in, and what money needs to be paid out.
In strict contract terms, this should be a straightforward exercise, sellers have payment terms setting out when they should be paid and they, in turn, have negotiated payment terms with their suppliers. Customers wouldn’t dream of paying late and suppliers know that not adhering to their payment terms is a breach of a contractual obligation that may go “to the heart” of the contract, where time to pay is of the essence.
But, in reality, it is not a smooth and technical exercise. For financial controllers and their teams, it is a daily juggling act with random sized objects being lobbed into the air-borne gymnastics and more than a smattering of nagging, shouting, cajoling and sometimes begging customers and suppliers to “work with us.”
This has only got worse with the pressures and complexities on businesses during the COVID-19 outbreak. Some companies know they have little to no money coming in, and are not paying their suppliers at all. Other companies are going to prioritise payments for suppliers critical to keeping their businesses afloat or servicing the limited customers they do have.
What is happening here legally?
In legal terms, the requests to “work with us” or agreeing payment schedules 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 insolvency, 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 little or no payment in formal insolvency proceedings 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 (and perhaps new supply as well, if the purchaser will need additional goods to support trading) terms. 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.