New Look delays supplier payments and Debenhams on the rocks....

Background: New Look has written to its suppliers to tell them that it is delaying payments to them "indefinitely" and that they can come and collect their stock if they want. Even ASDA (despite the increase in sales and business rates relief) is rumoured to have written to its clothing suppliers to tell them that as a "gesture of goodwill" it will only be paying 30% of an invoice value at the moment. The continuing fallout of the pandemic crisis and the "knock-on" impact of one business decision is well and truly magnified by the announcement from the retail giant.

Collecting stock is hardly an advantage when there is no party to supply to and so the move by New Look is going to devastate a supply chain that is already under significant strain. Equally, if New Look and others survive this crisis then I doubt its suppliers will be rushing out to assist them going forward. It is unclear on what basis New Look is doing this but it is not unusual for large organisations to include the right to terminate contractual arrangements for convenience at any time - leaving the other contracting party with little recourse than to collect stock, minimise losses and keep their fingers crossed they can survive. Even if the contract does not allow for such action, the reality is that many businesses cannot afford (whether for financial or commercial reasons) to take on these larger organisations.

In perhaps the least surprising news of 2020, Debenhams has now appointed administrators and Arcadia are looking to close 100+ stores. Debenhams looks like it will enter into a pre-pack, essentially allowing it to resume trading once the virus has been curtailed but leave the majority of its debt behind. Whilst, this is undoubtedly the right and long time overdue move by the retailer, it is another example of a business that will leave its supply chain devastated.

View: the moves by both New Look and Debenhams et al are going to leave an already fragile (and often small business) supply chain devastated. Whilst we are undoubtedly in unusual times, once the dust has settled the Government need to look at the use of pre-packs and the way in which big business treats its supply chain. It is high time that big business was required to report its average supplier payment days including details on how many times it failed to meet contractual time frames and that contractual restrictions are put in place limiting what a large organisation can do when contracting with much small suppliers.

So what can businesses do to limit the damage caused by customers refusing to pay? Contractually, businesses need to review their contracts and ensure that they have in place clear retention of title clauses over their stock and late payment provisions including default interest and rights to suspend etc. They should also consider less draconian measures including incentivisation for prompt payment. However, contractual provisions also need to be considered alongside commercial reality including ensuring that you have in place strict practical as well as legal controls on your own supply chain (for example, back to back terms and clear lead in time requirements).