Why you need written agreements, especially in times of financial crisis

Note: Statements made in this interview are only of a general nature and should by no means constitute or replace comprehensive individual legal advice, which is required in such critical and complex scenarios as insolvency proceedings. It is also important to emphasize that the legal framework for such proceedings is different at a national level within the EU and the European Economic Area. 

SGI: 2023 saw the collapse of several sporting goods retailers, including SportScheck and InternetStores. As our legal expert and with your background in the sporting goods industry, what is your long-term risk assessment for the industry? What developments will we see in 2024?  

JMS: With a certain focus on Germany, one has to regrettably say that the economic situation of quite a number of brick-and-mortar and hybrid retailers, as well as that of pure online players, is somewhat fragile. 

Looking at the two examples you quoted, it is certainly true that the collapse of the whole Benko “empire” is not exemplary of the current situation for all sports retailers. But, it does demonstrate that even stores or chains with a long tradition and a “shiny” name, such as SportScheck, are not spared from insolvency. 

From what I am reading, there is hope that the many breakdowns of businesses we experienced in 2015 during the financial crisis will not happen again in the near future. Nevertheless, consumers are holding back considerably right now and negative factors such as a still comparatively high inflation rate, multiple crises and wars are creating an overall consumption climate that is anything but positive, even in the days prior to Christmas and other holidays. As such, the possibility of more businesses going bankrupt cannot be excluded. 

SGI: If we talk about the specific experiences you have had as a legal advisor to sporting goods brands in the context of (preliminary) insolvency proceedings, what can you tell us about those? 

JMS: Throughout my years accompanying corporate clients in the course of their operational activities, I have always been a strong advocate of having clear and state-of-the-art written agreements in place with all marketing partners, be it at wholesale or retail level. 

SGI: Why are these written agreements so important, especially when it comes to insolvency proceedings? 

For me, they represent a valuable risk management tool. Not only in the event of disputes among contract partners but also in scenarios where the financial situation of a business partner may very rapidly deteriorate. The supplier may then be exposed to considerable financial risks, such as open payment claims. In cases such as these, open payment claims may no longer be fulfilled by the B2B purchaser of the respective products, or the seller can only hope to recover a minimal fraction thereof. 

Outstanding payment claims are – from a German insolvency law perspective at least – not privileged. 

SGI: How can a written agreement, which a supplier and a retailer entered into, be of concrete help in this situation? 

JMS: First, one has to differentiate here between individual written agreements and general sales terms and conditions (“GTCs”) at the B2B level. 

If individual agreements – negotiated and entered into by the contract parties – are in place and such agreements also cover scenarios of a financial crisis, these could then be of practical value (I will come to that in a second). 

However, GTCs also play an important role, provided, of course, the terms and conditions contained therein are legally valid, undisputed, and have a legally binding effect upon the other party. It would generally, for example, be insufficient to simply forward these GTCs to the buyer of a sports product together with the respective invoice pertaining to a certain order placed. 

Coming back to agreements that also cover scenarios of financial crisis: These contract terms may, for example, foresee that even prior to a financial collapse of a business partner, the seller is entitled to enter the premises of the buyer and to recover existing inventory by authorizing a freight forwarder to collect those items. Without a corresponding contractual entitlement, such activities run the risk of being viewed as a non-authorized trespassing of property and might even qualify as a criminal offense. 

Furthermore, I very recently handled a case where I represented a certain well-known sporting goods brand in the course of German insolvency proceedings. It proved to be very helpful when legally valid specific retention of title rights (Eigentumvorbehaltsrechte) formed a part of the individual agreements or the GTCs. The chances of a creditor recuperating at least a sizable part of its outstanding receivables deriving from such rights are considerably higher than in the event such rights do not exist. 

My conclusion is that it is very worthwhile to invest in the establishment of a solid contractual framework by implementing adequate securities, which in unstable economic times might well mitigate some financial risks at least.