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Supply chain issues? Look out for threatened breach

  • United Kingdom
  • Litigation and dispute management
  • Consumer
  • Diversified industrials

22-09-2020

As the global economy continues to deal with the fallout of the ongoing COVID-19 pandemic, many businesses are likely to have concerns about their supply chain and negotiations over the late payment of invoices are becoming more common as companies struggle with cash flow. The recent case of Medina Dairy Ltd v Nampak Plastics Europe Ltd[1] illustrates that companies threatening to withhold supply to get paid should be careful to do so within precise contractual terms, and companies that receive these threats should be aware of the terms of the contract, compared to what is being threatened. In the event that Court action becomes necessary, positioning is key.

What happened in Medina?

In Medina, the High Court upheld an injunction that had been granted ex parte the previous week, forcing a manufacturer of plastic bottles to continue to supply a dairy company (which supplied fresh milk to supermarkets) in accordance with contractual terms, despite the dairy company owing £800,000 in unpaid invoices relating to past supplies.

The manufacturer had not terminated the contract, although it might have been entitled to. The manufacturer was entitled, in accordance with the terms of the contract, to suspend its supply if, within 14 days after notifying the dairy company of an overdue invoice, payment was not made (or disputed). It also allowed termination by either party forthwith on written notice if debts owing were not paid.

At a meeting between the parties, the manufacturer had threatened to withhold supply but had not given notice to do so in accordance with the terms of the contract. With regard to “the immediate and continued supply of bottles”, the manufacturer sought to impose new terms on the dairy company, including requiring payment in advance and an increase in price. This, the dairy company claimed, amounted to a threatened breach of contract. On 27 January 2020, the Court granted the dairy company’s application for interim relief, ordering the manufacturer not to refuse to supply goods ordered by the dairy company in accordance with the terms of the supply agreement, including not to change the contractual terms for payment or the price.

Meanwhile, the manufacturer served notice of overdue payment on 4 February 2020. If payment was not made (or disputed) within 14 days of the notice, then the manufacturer could exercise its contractual rights and suspend its supply of bottles to the dairy company. It could not, under the contract, impose new terms. However, this threat remained.

On the return date of the injunction on 7 February 2020, applying the American Cyanamid test, the High Court upheld the injunction. Whilst it was recognised that the manufacturer was entitled to take steps in accordance with the terms of the contract (for example, termination), it was not allowed to go beyond this and seek to unilaterally impose new terms. Costs were awarded in the dairy company’s favour.

How to deal with supply chain issues in practice

There are several steps suppliers can take to mitigate their risk. When drafting (or renegotiating) a contract of supply, seek to include express terms that clearly dictate what happens when payments are late – such as the right to suspend supply, to terminate, to increase the price, to enforce a payment plan or to demand payment up front.

For existing contracts that are already in dispute or in which late payment is anticipated, professional advice should be sought as soon as possible. While problems can often be resolved commercially, as Medina shows, it is sensible to check your negotiation strategy doesn’t create more problems than it solves. For example, when negotiating, ensure that any new terms are offered as alternatives to the enforcement of contractual rights, such as termination – this could reduce the chance of a court viewing your actions as a potential threat.

If it is necessary to take Court action, it is key to position the case to the Court in an appropriate way, particularly if dealing with the dispute on an interim basis, in order to demonstrate that a reasonable stance has been/is being taken. The Court has demonstrated that whilst a party can exercise contractual rights, it will have less sympathy if a party is looking to overreach the contractual terms. On an interim application in the current climate, the Court may be more inclined to uphold the status quo pending full determination at trial. Therefore a parties’ approach in litigation may be key to the outcome on an interim basis.

Buyers that are struggling financially should also take note of this decision, especially those relying on the supply of key, difficult to source items. During negotiations, pay close attention to the supplier’s communications for any potential threatened breach of contract – interim relief could be an option to prevent the interruption of supply. When agreeing contracts, seek to resist the inclusion of onerous late payment terms.

In these challenging economic conditions, suppliers will naturally prioritise reducing their exposure as much as possible by chasing for invoices to be paid promptly. Buyers need to ensure a consistent supply of products. This makes the issues in dispute in Medina highly relevant.

Force majeure

During the current crisis, businesses seeking to suspend or even discharge their obligations under supply contracts may be able to rely on force majeure. This will depend on whether the contract has a force majeure clause, and if so, its precise terms.

Click here to view ES global force majeure guide 

 


[1]       [2020] 2 WLUK 70