Tips for renegotiating contract and payment terms

The times and terms are a-changing – the impact of covid-19 on cashflow and renegotiating payment/delivery terms.

COVID-19’s devastating social and economic impact is squeezing cashflows and impacting business confidence across the globe. Government packages are being rolled-out to try and limit financial consequences but these will inevitably take time to get money into the system.

Businesses are understandably worried about how they will meet their liabilities and we are helping clients with the issues they are facing renegotiating payment and delivery terms as well as other obligations such as margin calls on currency contracts and potential loan to value. 

The vast majority of contracts can’t be varied unilaterally, and many contain restrictions on amending their terms. Whether you’re looking at a bespoke contract, lease or just the terms on the back of an invoice, renegotiations need to be conducted with care and sensitivity but that is only part of the job; fresh/varied terms must be properly documented to make sure they’re legally enforceable.  

Headline points to consider

If you’re paying

  • Don’t hide from the issue: go in with a realistic plan that explains why it’s achievable.
  • Don’t delay: get your plan in as far ahead of any deadline date as you can and allow for the impact home working, quarantine or sickness may have on the time it may take to negotiate.
  • Look for variation clauses and make sure they’re followed so a supplier can’t suddenly turn round and insist on payment under the original terms. Disputes over payments due under a clause in a licence to occupy ended up in the Supreme Court in 2018 (see Clare Mackay’s article) which said that they mean what they say and that ‘no oral modification’ clauses are enforceable.
  • Check notice and other clauses for any steps that may have to be taken and what “in writing” might mean under your agreement.
  • Are you negotiating with the correct party if an invoice has been assigned to a factor or invoice discounter?
  • Are you speaking with the right person? Does your contact have authority to negotiate?
  • Be prepared to speak with someone new if your usual contact is quarantined or off sick.
  • Do you need to give something extra in exchange for extra time to pay? Variations generally need extra consideration to be binding.

If you’re being paid

  • The same points are equally important to make sure the revised terms are enforceable if they’re breached.
  • Avoid vague, uncertain, open ended new terms. New dates/milestone events should be precisely defined – they can always be revisited if needs be, but lack of certainty may well mean new terms can’t be enforced.
  • Avoid agreements to agree. They’re not enforceable. For example, “the Seller and Buyer will work together in good faith to agree a new payment schedule”.
  • Are any particular formalities required, for example if you’re looking at a lease or a deed?
  • Are you in a position to vary? Do any variations need higher sign-off? Many variation clauses need a director to authorise any changes.
  • Look at related contracts: do you need to vary any of them or production/delivery schedules as a result of giving a supplier additional time to pay or deliver? It’s easy to get caught in an expensive hole where you look at one side only.

On either side

  • What are you trying to achieve? Do you need a variation or waiver?
  • How will you deal with practical things like signatures and witnessing if signatories are quarantined? Can you use wording that allows for scanned signatures?

With care and thought, effective and binding, variations can be put in place quickly through straight forward, short agreements or formal letters. Our commercial teams are available to help with all stages, from how to approach a renegotiation down to writing it up.

We are also able to provide advice on the operation of force majeure clauses and arguments over frustration which are starting to come into focus as parties review what they can and can’t do in fast changing circumstances and gear up for the domino effect of someone breaching or cancelling on them.

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