When the cooperation and the contract come under pressure

Due to the COVID-19 pandemic, a number of Danish companies depend on bailout packages and postponement of tax and VAT payments. In line with the phasing out of the bailout packages, the need for liquidity will increase. Consequently, it is expected that an increasing number of companies will face financial challenges or even a crisis.

The first signs for the company having a cooperation partner with financial challenges may appear in several different ways. Typically, it depends on whether the cooperation partner wishes to continue the contractual relationship or simply wishes to get out of the relationship unharmed, for instance because the contract is less lucrative or even loss-making. The contract’s short-term financial value to the cooperation partner will be reviewed thoroughly if the company has challenges or is undergoing a turnaround process.

But how can the company proactively try to optimise its position vis-à-vis the cooperation partner in financial difficulties? Below, we will describe four issues to be aware of:

1. It starts with the contract

Your options are rarely better than the contract you have entered into. It is therefore often worth the trouble to ensure that the contract is adapted to the circumstances and the situation it is to regulate. Also ensure to dust off your standard contracts and general terms and conditions regularly.

Make sure that the definitions and mechanisms in the contract’s most important sections are clear and adapted to the services provided. All too often, the parties will discuss whether a service has been performed correctly when the situation between the parties intensifies.

Also note when the contract has been breached and the consequences thereof. Is there a right to remedial action or a direct right of termination, and in which situation? This issue of often ignored, but may have major financial importance in connection with a subsequent dispute concerning termination.

2. Documentation, Documentation, Documentation

Make sure that your documentation and paper trails are in place. Even though only minor current deviations from the contract are observed, which do not in themselves entitle you to terminate, you should make sure to have documentation of your requests to the cooperation partner in this respect in place. At the same time, you should have documentation of the deviation. You risk being met with claims for inactivity and implied acceptance, which will, at best, impair your negotiating position if termination of the agreement is to be negotiated.

If the contract’s terms and conditions are renegotiated, then make sure to draft new contracts and addenda that clearly state the precedence of the new terms and conditions and to communicate this clearly to the company executing and enforcing the new terms and conditions.

3. Know the value of your contract and cooperation partner - and analyse it

Analyse the value of your contract and cooperation partner - both financially, strategically and commercially and in the short and long term. Study the competition situation on the relevant market and analyse your cooperation partner's position and your possibilities of buying your service into the market. Consider your strategic and commercial risks and options thoroughly during the contract negotiations and be aware of the risks undertaken so that you can incorporate and take account of them.

In brief, know your cooperation partner for better or worse and realise where problems may arise.

4. When problems arise

Sometimes, a cooperation partner will face financial difficulties and go bankrupt. This is part of business conditions and must be accepted. It is also one of the situations where you may thank yourself for having drafted a good contract which has accepted a dispute as a calculated risk from the start.

Rights may be incorporated into the contract basis which will enable you to take out the delivered products from the bankrupt company, and you may also establish guarantees and security and payment and delivery terms minimising the potential loss.

A trustee in a bankruptcy estate may generally adopt and continue a current contractual relationship on the terms appearing from the contract. At the contracting party’s request, the trustee must notify without undue delay whether the trustee adopts the contract. We therefore recommend that you request the trustee’s position on the contract as soon as possible. And if there is no wish to continue the contract, we recommend to file a claim with the bankruptcy estate.

It is not unusual that the financially challenged cooperation partner will try to offer well-intentioned solutions to its cooperation partners in the period prior to the bankruptcy. It is important to keep in mind that if the company goes bankrupt, the trustee may find that there are grounds for avoidance of transactions if these have led to a deterioration or disequilibrium in the bankruptcy estate's body of creditors. To avoid this, the legal framework must be handled correctly.