COVID-19 is not only having an impact on the global economy, but also on the health and viability of small and mid-sized companies and start-ups. Companies on the brink or even well-established companies may not, realistically, see any revenues for one or more quarters. Deals that were in the pipeline may fall out as those prospective customers face similar struggles or unexpected business expenses. Investors may have other priorities or be looking to narrow their criteria. Human resources, both internally and externally, are limited.
Figuring out how to deal with these changes and uncertainties can be overwhelming. But grasping on to things we can control, in terms of both the law and the virus, can be a tremendous resource. This has happened before (and will happen again), and some of the most iconic companies and products have weathered (and even thrived!) in similarly despairing times. To help channel the anxious energy and uncertainty, here are some things you can do from a legal perspective:
Assess Existing Contracts: Given current pressures and constraints, you may be wondering how you are going to be able to comply with your contractual obligations. You may also want to take this time to do an internal audit of your finances and evaluate where you can comfortably (or even uncomfortably for a short time) make cuts to maximize cash and withstand slow quarters. To consider your options, the first and best place to look is the contract itself:
- “Termination” Clauses – A contract will usually, if not always, include a “Term” and/or “Termination” clause. Read through it to understand the length of the contract and how it can be terminated or cancelled. Sometimes, a contract can be terminated with x days written notice to the other party for any reason or “for cause.” If the contract allows you to terminate by written notice for any reason, you can simply write an email or letter terminating the contract and/or use your ability to terminate as leverage to negotiate a new or interim contract with better terms. If it allows you to terminate “for cause,” or for a particular reason, see if any of the reasons listed in the contract apply (e.g., upon a force majeure event).
- “Force Majeure” Clauses – If the contract contains a “Force Majeure” provision (sometimes labeled as such, other times muddled with another provision in the contract), it may excuse your performance under the contract. Look to see if it includes events such as “acts of government,” “disease,” or even generally, “event beyond a party’s control” that could be applicable here. Then, look to see what obligations it excuses (e.g., your performance, timeliness). While the application of a Force Majeure provision is not black-and-white, like with a termination provision, it may provide you with an opportunity to terminate and/or renegotiate the contract.
- Simply Renegotiate – Almost everyone is impacted by the COVID-19 pandemic in one form or another. The other party to your contract may be sympathetic and would rather renegotiate or enter into an interim agreement (where payment can be deferred or reduced until a certain economic milestone or date certain) than not receive any payment at all. It doesn’t hurt to ask. If that doesn’t work, you can argue that the purpose of the contract has been “frustrated” – a term recognized by law that excuses a party’s performance when the reason for entering into the contract has been frustrated by an unanticipated circumstance. You can also argue that performance under the contract is “impracticable” – another legal term that excuses a party’s performance where performance is so difficult and expensive that enforcement may be denied as impossible.
Prepare for Customers/Partners to Make the Same Request: Don’t be surprised if your customers and partners reach out and ask for concessions or to renegotiate or terminate a contract for the same reasons discussed above. Think about what you will be able to do to meet them in the middle rather than getting into a contractual dispute or sitting on a contract for which you won’t get paid.
Check your insurance coverage: If you carry commercial insurance, you may have coverage over loss of income due to “business interruption.” Insurance policies, of course, have tons of exceptions and caveats to sift through, but it is worth a shot – especially if you or any of your employees tested positive for COVID-19 or if you are subject to a legal shelter-in-place restriction. Review your policies, ask your insurance broker, or submit a claim. Either way, it would be prudent to start keeping track of business expenses (via receipts) and lost income as a result of COVID-19.
Look into local and state programs: There are a variety of federal, state, local, and even private programs specifically for businesses affected by COVID-19 including emergency funding, low-interest loans, tax deferral, and eviction moratoriums. Here are a few resources that seem to be regularly updated with relevant information:
- For California companies – https://business.ca.gov/coronavirus-2019/
- For San Francisco companies – https://oewd.org/assistance-guidance-businesses-and-workers-impacted-covid-19
- For Oakland companies – https://www.oaklandca.gov/resources/coronavirus-2019-covid-19-business-and-worker-resources
Take Stock of Your Business: With the inevitable downtime that COVID-19 will confer, there is no better time to take stock of your business assets and corporate documents to make sure everything is in order.
- IP Portfolio – Have you registered your name and logos as a trademark? Have you considered patent protection for your inventions? Think through your IP needs and take steps to protect your brand and assets while you have the time.
- Business Licenses and DBAs – Do you have a business license to operate in the county in which you operate? Are you doing business under a name that needs to be registered? You can run searches on many county websites to determine what you currently have in place.
- Corporate Filings – Have you filed all required statements of information and related documentation with respect to your corporate status? If you are a Delaware corporation, are you registered to business in your state?
- Confidentiality Agreements – Are any of your NDAs expired or close to expiring? Now is the time to index your confidentiality agreements and determine if new ones need to be issued.
When all is said and done, hang in there and remember that this too will pass. Take advantage of this opportunity to find efficiencies and button-up your business.
Rupa Nath Cook is an entrepreneur with over a decade of experience working with growing and established businesses of all kinds. With her fundamental business knowledge, experience working with a variety of businesses and team members, and extensive commercial law and litigation experience, Rupa brings a unique and well-rounded perspective to her clients. Contact Rupa here.
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