The Case of Covid 19 and the Cash Strapped Small Business Owner – What is Your Supplier’s Contract Saying?

2 min

This article was written by Dolores Bassila, a Trainee Solicitor.

As a small business owner, are you fully aware of the contractual obligations you have in place with your various suppliers? For example, suppose you were to experience a sudden change of circumstances affecting your business cash flow and beyond your control. Would your contractual obligations towards your suppliers remain the same?

These were the questions I suspect many small business owners asked themselves in the wake of the unprecedented health crisis.

In reality, it might just have been too late for many businesses that had to close shop permanently. In contrast, others barely escaped bankruptcy, often thanks to the intervention of governments who had to step in to allow their businesses to stay afloat. 

The government’s intervention included various financial packages that enable businesses to operate, albeit at a low optimum level. Although these financial packages offered temporary relief, the various government-imposed restrictions during this health crisis have still caused long-lasting damage from which many businesses will never recover.

The worst affected businesses have been the brick and mortar ones. Many have and will continue to face various contractual obligations towards their suppliers, like landlords or goods or services providers. Though the government might have imposed temporary relief measures that could prevent these suppliers from recovering any amount due to them by a business owner, these relief measures will eventually end.

Unfortunately, a cash-strapped business with poor cash flow might just not be able to withstand such suppliers’ payment obligations when they come knocking. This will, however, depend on the contractual terms and conditions governing the contractual relationship between the business owner and his/her suppliers.

The reality is that many small business owners do not have the resources and operational capacity to negotiate contracts with their suppliers. As a result, such small business owners would mostly transact on their supplier’s terms and conditions without knowing the full legal implications of such commitment.

As a result, it will be very unlikely that such business owners would have the foresight to put in place contractual mechanisms that would enable them to terminate their contractual relationship with their suppliers in the instance that they were no longer able to fulfill their contractual obligations as has been the case during this pandemic.

The lesson learned is that as a small business owner, ensure that you have the right to exit a contract in the future. Such right will generally be triggered when a supervening act beyond your control and in respect of which you were unable to mitigate against occur. This right will often be considered a case of Force Majeure and would be captured in your contract as such.

A good Force Majeure clause will set out a period of suspension. Such suspension period should ideally reflect the risks inherent to the relevant business by allowing its owner to exit or terminate a contract upon the expiry of such period of suspension.  

A Force Majeure clause would go a long way in protecting small business owners. It will provide them with the ability to step away from commercial and contractual obligations that would have otherwise become impractical to fulfil.

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