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Coronavirus - Considerations for IT contracts - UK

  • United Kingdom
  • Commercial and IT
  • Coronavirus - Contractual issues

19-03-2020

Introduction

One of the many implications of the Coronavirus outbreak is a renewed focus on contract terms that allow suppliers early warning of customer financial difficulty. However, for suppliers of IT, English insolvency legislation prevents those suppliers exercising certain contractual terms in their IT contracts where the customer is subject to certain UK insolvency proceedings.  The purpose of this legislation is to support the rescue of viable insolvent businesses by protecting what are seen as essential supplies, with similar controls in place for gas, water, electricity and telecommunications services from statutory undertakings.

The IT supplies covered and treated as essential supplies are point of sale terminals, computer hardware or software, information, advice and technical assistance in connection with the use of information technology, data storage and processing and website hosting.

The upshot of this is, irrespective of what a contract contains, this legislation will prevent the exercise of certain contractual rights by a supplier, so as to ensure the continuation of the supply if the customer under the contract enters into administration or becomes subject to an approved voluntary arrangement.  Effectively, the supplier is prevented from withdrawing supply, altering price or payment mechanisms or varying any term to reflect any increased risk to it arising from its customer’s worsening financial situation – in essence locking a supplier into pre-insolvency terms and not allowing the supplier to insist on payment of charges incurred pre-insolvency as a condition to continuation.

How do these statutory restrictions operate?

The way that this legislation protects essential supplies is to provide that certain contractual terms cease to have effect as soon as the customer enters into administration or becomes subject to a voluntary arrangement. This can result in the supplier being prevented from:

  • terminating the supply or the contract (even if the contract provision allows for automatic termination or termination on administration); and
  • altering the terms of the contract or requiring higher payments or different payment terms, even if the contract gives it the right to do any of these things.

These restrictions could mean that a supplier cannot rely on, say, a pre-administration payment default to exert leverage once the customer enters into administration.

There is further bad news for IT suppliers: contracts that cover a large range of services may be affected if any one element of them is an essential supply and complicated issues can arise where a supplier is providing third party software.  And if group members of the customer have contractual rights to use the supply, the insolvency of a group member can mean continuation of the supply, even if another group member has significantly breached the contract: the wider the pool of entities that can benefit from the IT supply, the more risk to the supplier.

There are some limited protections for IT suppliers locked into contracts by this legislation. They can:

  • ask the administrator/supervisor to consent to termination of the contract;
  • apply to the court for permission to terminate the contract on grounds of hardship;
  • terminate the contract for unpaid charges over 28 days incurred post administration/voluntary arrangement; or
  • terminate by giving notice to the administrator/supervisor informing him that the supply will be terminated unless he personally guarantees the payment of post-insolvency charges for the supply and that guarantee is not given within 14 days of receipt of that notice. This may either bring the administrator/supervisor to the negotiating table or hasten a decision that the supply be discontinued, although 14 days is potentially quite late in the day in the context of an administration.

These statutory restrictions, coupled with a situation of deteriorating financial conditions, emphasise the importance of advance warning of counterparty financial difficulties, be that through information or notification obligations or credit control, and reviewing the need to put in place other payment protection mechanisms such as security or guarantees.

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