Non-compliance with contractual obligations in relation to COVID-19 by customers (sales)
In general, it is necessary to reckon with worsened payment discipline of customers, insolvencies and subsequent further claims by insolvency administrators (Insolvenzanfechtung in Germany), non-receipt of ordered or produced or even delivered goods, therefore it is advisable to increase the emphasis on payment and delivery conditions already at the time of contracting and subsequently to prompt and vigorous collection (or claiming from the insurance of receivables).
Accordingly, it may be recommended to consider the following measures, ideally by issuing an organisational standard, in sales:
- identify potentially risky customers (e.g. small and medium-sized enterprises, firms in unsatisfactory financial condition, with poor payment discipline) and take appropriate measures in relation to the terms of further deliveries e.g. reduce credit lines, shorten payment targets, require adequate security for commitments, change delivery terms, etc.
- use the services of companies providing reports on the financial condition of entities (e.g. CREDITREFORM) or similar options linked to insurance of receivables, take immediate action to reduce the balance if unsatisfactory condition is detected
- in contracting, strongly enforce extended retention of title, prohibition of unilateral set-off by the customer, possibly increase contractual penalties resulting from breaches of obligations on the part of the customer, hardship/price clauses, push for shortening of payment terms, possibly enforce payment in advance, require security for obligations, use letters of credit, etc., - in the case of credit agreements, the use of letters of credit, etc., should not be allowed.
- act decisively in the event of default by customers, i.e. proceed swiftly to court enforcement or to report an insurance claim under the accounts receivable insurance policy, only enter into instalment agreements if this will improve the company's own position (e.g. the agreement includes security for the obligations),
- in the event of default or force majeure, suspend further deliveries to such customers, and immediately submit notifications of force majeure claims by suppliers for legal review
- refuse requests from customers for extension of payment targets, not to confirm requests for deferment of payment obligations, not to waive claims arising from default, not to waive penalties (bearing in mind that a change of contract does not in principle require a written form), etc.
- in the event of 'overbooking' or inability to meet the requirements of all customers, give priority to customers with a legal right to delivery or with the most stringent legal consequences for non-delivery (e.g. fixed deadlines - 'time is of the essence') at the expense of customers without a legal right or with less stringent legal consequences for non-delivery
- consider the possibility of selling through a 'trading' subsidiary, which can protect the parent company against possible claims by customers, namely (1) claims arising from breaches of the company's own contractual obligations which are not excused by force majeure and (2) possible claims by insolvency administrators for repayment of payments received for the supply of goods (Insolvenzanfechtung in Germany)
- in the event of damage on the part of the own company, which can be attributed to misconduct on the part of the own company's bodies/managers, to think about the possibility of D&O insurance claims