The Impact of COVID-19 on Payments and Order Cancellations for Suppliers and Distributors

At the present time, many suppliers and distributors are looking at the impact of COVID-19 on their businesses and thinking—hard.

Thoughts are likely to be at three levels.

1. Goods supplied for which payment has not been received

First, in terms of goods supplied, it may be that payment has not yet been made. If the distributor becomes insolvent, it will be crucial that either in the distributorship agreement or the supplier's terms and conditions of sale (and preferably both) that the supplier has retained title to the goods supplied. If this is not the case, the supplier will be an unsecured creditor in the distributor's insolvency.

Where, for example, the distributor has gone into administration/liquidation and title has not been retained by the supplier, it can be expected that the administrators/liquidators will seek to sell the goods. But they will not account to the supplier for the monies owed by the distributor. Instead, after paying their own costs and the secured/preferred creditors, any surplus will be divided up between the unsecured creditors (including the supplier) as a cohort.

Even where the supplier has included a retention of title clause, the issue will be whether: The words used, and the sequencing in which the distributor's order is accepted, will ensure that the retention of title clause is effective. The term "the battle of the forms" is well known. But unfortunately, experience tells us that, unnecessarily, on too many occasions, it is a battle lost!

2. Attempts to cancel orders already made

Second, in terms of orders made, it would be unsurprising if, in some industries, a distributor did not give thought to trying to cancel the order.

Whether a supplier can refuse an attempt by the distributor to cancel a placed order, again depends on the distributorship agreement and the terms and conditions of sale in place between the parties and for each order.

But even where the supplier does refuse to accept a cancellation, what if the supplier is concerned that it will not be paid by the distributor? The difficulty lies in the supplier being bound to deliver the goods ordered. If the supplier fails to do so, then, depending on the terms of the distributorship agreement, it may be possible for the distributor to claim that such failure amounts to a serious (or repudiatory) breach of that agreement. This, in turn, may allow the distributor to: Achieve "cancellation" by the back door and, depending on the terms of the distributorship agreement, claim damages for the wrongful ending of the agreement.

3. Does the distributorship agreement provide for force majeure? If so, does this cover COVID-19?

Third, there is the distributorship agreement itself.

Such an agreement should (but will not always) provide for force majeure. If it does, the language of the force majeure provision will determine whether the current COVID-19 situation constitutes an event of force majeure. Unfortunately, as many force majeure provisions are included in distributorship agreements with minimal thought, it is far from certain that COVID-19 will be such an event. Finally, even if it does, what does the force majeure clause set out as the consequences of there being such an event?

So far as distributors are concerned, the above points can be read largely in reverse.

As a consequence, for both suppliers and distributors, it can be a question of "be careful what you wish for."

Stephen Sidkin, Esq., is a founder/partner of Fox Williams. He is head of the Commerce & Technology department, specializing in channel management agreements concerning the supply chain, IP licensing and franchise law. He is focused on creating value for clients by helping them achieve their business objectives.