Suppliers in Distress – Reducing the impact on critical services

In the wake of Carillion’s collapse, employers of services and works are taking an increasingly active role in monitoring the financial position of their key suppliers.

In recent months we have had a number of clients seek our advice on their contractual rights where their supplier appears to be in financial difficulty and, perhaps more importantly, the practical steps which they should be taking to reduce the impact of losing a key supplier.

Whilst every contract and circumstance must be considered individually, here are a three important questions which we ask our clients when a key supplier is in financial distress:

Do you want to terminate the Contract?

The contract may contain a provision which allows the employer to terminate the contract where the supplier is suffering an insolvency event or financial distress. However, termination may not be the best option. For example, the pool of companies able to provide the services or works may be limited or it may not be cost effective.

If termination is not the desired outcome, the contract may include alternatives. For example, the employer may have the right to “step-in” and provide the services or complete the works or it may grant the right to re-scope the supplier’s obligations by removing certain services.

What contingency plans are in place?

The contract may contain obligations on the supplier to provide (and update throughout the contract term) business continuity plans to deal with interruption with key dependencies and exit plans to deal with transition to either the employer or a replacement supplier. Employers should make sure that these plans are available, up to date and address their main concerns.

Do you have everything you need?

Whilst the supplier may be obliged to provide assistance during a transition, it has minimal incentive to do so following termination. Therefore, to ensure continuity of service, the employer should ensure it has obtained all the information and equipment it needs to continue providing the services or to complete the works before taking any action.

Employers should consider whether they will require any specific documentation or equipment to provide the services or complete the works, such as maintenance manuals. If there is, then the employer should identify where these are located and, if possible, obtain copies prior to termination.

Conclusion

If a supplier is suffering financial distress, establishing what information and assets will be required is vital to maintain progress of the works or continuity of service.

If your supplier is in financial distress then we would be happy to provide advice on your contractual options and the practical issues which you need to consider. The Government has also issued the helpful “Central Government Guidance on Corporate Financial Distress” (February 2019) to assist with the early identification of supplier failure and to ensure employers are better prepared to deal with its effects and to limit its impact on critical services.

Written by Greg Fearn

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