Advice to Trading Companies on Avoiding The ‘COVID-19 Payment Squeeze’

A trading company is not a manufacturer.  It typically buys from a manufacturer for resale to the trading company’s customer.  Let’s assume the trading company is reselling merchandise to a retailer in the US or the UK.  Because of the coronavirus, the retailer has closed all of its stores and perhaps its distribution centers too. 

The last thing that the retailer wants at this point is more merchandise.   So, it informs the trading company that all orders in the pipeline are cancelled.  Leaving aside any claims that the trading company may have against the retailer for wrongful cancellation or non-payment, what is the trading company’s position vis-à-vis the manufacturers from whom it is buying the goods?

Well, that depends in large part on the purchase orders and other contractual documents that the trading company has issued to the manufacturers   All that fine print on the back of the purchase order that few take the time to read. 

And, there may be sales confirmations and the like issued by the manufacturers to the trading company that need to be taken into the mix.

Typically, the purchase order boilerplate has said that seller (here, the manufacturers) is aware that buyer (here, the trading company) is reselling the goods and therefore time is of the essence.  But stopped there.  This provision’s focus has historically been on delivery, not payment.

Over the past few years, trading companies have become increasingly concerned about taking on buyer risk, given the explosion of bankruptcies filed by US retailers and similar actions taken by retailers in the UK, Canada and elsewhere.    

So, this concern of a trading company  —  being on the hook to the manufacturer even though the retailer (or whoever the customer is) won’t pay or will pay very little  — surfaced pre-virus. 

But the virus makes it mandatory, I would say, that trading companies revise their boilerplate to inform the manufacturers that if I (the trading company) don’t get paid, you (the manufacturer) don’t get paid.  This provision could be featured on the back of the purchase orders issued by trading company or, better yet, inserted in a master purchase agreement that all the manufacturers sign, since who signs purchase orders these days.  Or best of all, the sole object of a standalone side letter from the trading company to the manufacturer.

To be fair, the provision should be scaled, not all or nothing.  For example, if the trading company gets x percent payment from the retailer, the trading company pays the manufacturers x percent of what it owes them.

I appreciate that many manufacturers may be indignant about such a  provision, may refuse to sign any purchase orders or other documents containing it and/or may issue counteracting boilerplate of their own.  Notwithstanding, in the current climate where so many retailers were already teetering financially even before the virus hit, trading companies need to be legally armed with as much PPE (personal protective equipment) as they can find.