Q&As

What should be taken into account when drafting a contract for the supply of goods or services in light of statutory controls on rights in the event the customer is subject to an insolvency procedure including under the new Corporate Insolvency and Governance Act 2020?

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Published on LexisPSL on 29/06/2020

The following Commercial Q&A provides comprehensive and up to date legal information covering:

  • What should be taken into account when drafting a contract for the supply of goods or services in light of statutory controls on rights in the event the customer is subject to an insolvency procedure including under the new Corporate Insolvency and Governance Act 2020?
  • Restriction on termination clauses in supply contracts
  • Existing position in relation to ‘essential supplies’
  • Drafting considerations in supply contracts
  • Useful links

What should be taken into account when drafting a contract for the supply of goods or services in light of statutory controls on rights in the event the customer is subject to an insolvency procedure including under the new Corporate Insolvency and Governance Act 2020?

Restriction on termination clauses in supply contracts

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) introduces a permanent change to the use of termination clauses in supply contracts by introducing a new provision, section 233B, into the Insolvency Act 1986 (IA 1986). As a result of the measure, where a company has entered an insolvency or restructuring procedure or obtains a moratorium, the company’s suppliers of goods and services (with certain prescribed exceptions) will not be able to rely on contractual terms to terminate the contract, stop supplying, or vary the contract terms with the company (for example—increasing the price of supplies). The customer is required to pay for any supplies made once the insolvency process has commenced, but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.

The measure also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business.

There will also be a temporary exemption for small company suppliers during the current pandemic emergency until 30 September 2020.

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