Supplier’s financial position

Monday, October 17th, 2011

Supplier’s financial position

We are always advising clients to monitor a supplier’s financial position. Knowing the position at the time we obtain annual reports is no longer enough, given the incidence of financial failures. We advocate that it is a strategic role for procurement to undertake monitoring supplier’s finances. It is pertinent to read the judgment of Hackney Empire Limited v Aviva Insurance UK Limited (formerly trading as Norwich Union Insurance Limited) [2011] EWHC 2378 (TCC). It is a complex case regarding the provision of a Bond which secured the due performance of obligations under a contract. The detail is available on the BAILII website. It is relevant to note that HEL paid two installments of £500,000 and £250,000. The contractor went into administration after the payments were made. The judgment includes cross examination that includes the following passage:

Q. Well, you knew, didn’t you, at the time that you were making these payments that you were making it to a contractor who was financially in dire straits because they were not able to pay their debts as they arose?

A. That’s going a little further than I would, sir. I knew they had financial challenges. I wouldn’t have said that they were in dire straits, but certainly we knew they had issues.

Q. If they couldn’t pay their sub-contractors, they couldn’t pay their debts as they arose, could they?

A. Sir, it could be that they couldn’t fail but they were reluctant to pay. We didn’t know whether they were simply being dishonest, if you wish, rather than simply unable to pay. We didn’t know which was which.

Q. You took no steps to discover what their true financial position was did you?

A. The only steps we could take were looking at their accounts, which we did and we tracked but in terms of published accounts there is such a historic record that they are not very useful on a position that’s changing quite frequently.

Q. The published accounts which you looked at were in 2000?

A. Yes, exactly.

Q. You knew when you looked at those that there was a real risk of deterioration since then didn’t you?

A. No, sir.

The judgment continues and we strongly recommend it be accessed. There are salutory lessons within it.


Supplier’s financial position : Next Steps

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