Small business owners are used to signing contracts, whether it’s an employment offer, rental agreement or distribution deal. The disruptions caused by the global COVID-19 crisis, however, have prompted many business owners to rework--or at least revisit--some of their contractual agreements. From an in-person event that had to be cancelled because of a shelter-in-place order to an employee who was laid off in violation of a fixed-term employment agreement, disruptions can be costly if not handled properly or if contracts do not account for such contingencies.
The global pandemic has been a tough time for many small business owners. Despite these challenges, it is a good time to examine and realize the implications of current contractual obligations so that business owners are better prepared to deal with additional challenges, as well as create new contracts that smartly position them as business continues and grows.
The following information is intended to help you be well-informed and proactive when making, negotiating, and signing small business contracts.
You are not alone. Many businesses across the U.S. are facing the same dilemma, and as a result, business disruption is now commonplace.
Before anything, you may want to try reaching out to the other parties to the contract to discuss the situation and try to renegotiate the terms of your agreement or agree to cancel the contract altogether. Sometimes, just communicating with the other party is all it takes to find a fair and equitable solution.
You may also want to check your contract to see if it has a force majeure clause or a similar clause that addresses unforeseen circumstances. Force majeure clauses release parties from their contractual obligations when unforeseen events, sometimes known as “acts of God,” make compliance with the contract impossible. It may be a good idea to have one of these clauses in your contracts, but note that state laws differ when it comes to the requirements for them, and courts generally decide these types of disputes on a case-by-case basis.
Using COVID-19 as an example of an unforeseen event, the enforceability of a force majeure clause may depend on:
Specific reference to the event. The clause must state “pandemic,” “epidemic,” “viral outbreak,” references to “governmental orders and/or restrictions” or other language that specifically references a similar triggering event. Most force majeure clauses contain a comprehensive list of possible acts of God.
The date on which the contract was signed. The contract must be signed before the triggering event. If the contract was signed after March 11, which is when the World Health Organization declared COVID-19 a global pandemic, then it may be difficult to argue that it was “unforeseen.”
The actual ability to perform. Performance must truly be impossible. For example, if the performance of an in-person activity was clearly made impossible by COVID-19, then a force majeure clause could be enforceable; but if it’s just more expensive or less convenient, it would likely not be sufficient.
Whether or not it is a direct cause of the inability to perform. The triggering event must have been the cause of the inability to perform. For example, maybe you chose to back out of a contract because you had to focus on more immediate concerns; if the COVID-19 pandemic wasn’t the direct cause, then the clause may not be enforceable.
If you have a force majeure clause in your contract, you may send a Force Majeure Notice to the other party to begin discussions about modifications to (or cancellation of) the contract. As you can tailor the Notice to your specific situation, even if you don’t have the clause in your contract, you may consider sending the notice as a way of jumpstarting negotiations.
In any event, it might be helpful to ask a lawyer about your legal options before taking action.
Best practices for entering into agreements are essentially the same regardless of circumstances. In a post-pandemic world, small businesses may want to take the lessons learned from the COVID-19 shutdown and tighten up their business practices, including their contracts for goods and services. This includes avoiding verbal agreements and taking the time to read and understand everything in your contracts before signing them.
Here are a few things to consider before (and after) you sign a contract:
Make sure it’s a fair exchange. This may sound obvious, but a business contract should be fair and benefit all parties. If it doesn’t seem like a fair exchange, you can try to negotiate for a better deal, and be prepared to walk away if necessary.
Consider an arbitration clause. Settling disputes through arbitration can provide many benefits to businesses, including the private nature of the process, as well as the potential savings of both time and money as compared to litigation. You’ll need to specify your preferred method (and whether it’s binding) in your Arbitration Agreement.
Hope for the best, prepare for the worst. As many businesses have learned from the COVID-19 pandemic, contracts should provide protections in the event things don’t work out as planned. You may want to address, for example, additional fees for late or missed deliveries, the process for replacing substandard goods or services, notice requirements for price increases or shortages of goods, contingencies, reasons for termination, and force majeure provisions.
Retain original signed copies. Digital signatures make it much easier to save and access signed contracts. If it’s a “wet” signature, however, the original signed copy provides the best legal protections.
Get any changes in writing. If any changes are made to the terms of the contract after it’s signed, those changes should be in writing and signed by all parties to the agreement using a Contract Amendment.
If you have questions about contracts that you have either drafted or received for your signature, you may want to ask a lawyer before closing the deal.
A significant portion of business disputes involve employees, so you’ll want to take your time drafting an Employment Contract that takes into consideration business lessons learned from this pandemic. In particular, you might want to consider policies specific to remote work, if that is an option for your employees, such as security measures and non-disclosure agreements (NDAs). You might also consider a force majeure clause to account for unforeseen circumstances.
Best practices for employment contracts are the same pre- and post-COVID-19. Your first consideration may be how to classify the individual doing work for your business. If a worker is under the direction or control of the business, then they may be considered an independent contractor (such as consultants and freelancers) and not an employee. Each state has its own requirements for worker classification, which become even more complex when dealing with out-of-state remote workers. Interns, meanwhile, are neither independent contractors nor employees and have specific legal protections under federal law. Some states may have additional legal requirements for interns.
If the individual is properly classified as an employee, then you’ll want to consider the following contract provisions:
Wages - This will define the annual salary, hourly rate, and/or any commissions or other bonuses that make up the main compensation for their work. You’ll also want to include how often and when they will be paid, in accordance with state law.
Benefits - Benefits such as health insurance, life insurance, profit-sharing, paid time off, and commuter reimbursement are part of the overall compensation package and must be detailed in the contract as such.
Good faith clause - You’ll want to include language indicating that the employee will work to their best ability in exchange for compensation. It may seem obvious, but it serves as the basis for any corrective actions you may have to take, up to and including termination.
At-will employment and termination - All states, except Montana,* recognize the concept of “at-will” employment, meaning that, absent an employment contract to the contrary, an employee can be let go for any reason at all, unless it violates specific statutory or public policy protections. If you want employment to be “at will,” you’ll want to state this in the contract, as well as termination policies (such as relinquishing your security badge or company computer).
Confidentiality and non-disclosure clauses – Whether within the employment contract or in a separate Non-Disclosure Agreement (NDA), you should clearly define which types of information are considered confidential to help protect your company’s proprietary information.
Arbitration clause - Employment disputes that become lawsuits are a matter of public record and can tarnish your company’s public image, regardless of the actual nature of the case. Arbitration clauses help keep these matters private.
Keep in mind that this is not a complete list and provisions may vary by company and employee. As these contracts can be complicated and more complex if you’re dealing with out-of-state employees, you may want to ask an employment lawyer about your specific business and the individuals you plan to hire to avoid costly legal mistakes.
It’s worth repeating that the most effective contracts will prepare you for the worst, providing protection against potential losses you hope you won’t incur. This is especially true in these uncertain times. When you’re leasing commercial property, you’re on the hook for the rent. If unforeseen events occur that make it impossible for you to fully pay the rent and there are no provisions in your lease that provide some relief, then you will either need to negotiate with your landlord or face eviction, barring some intervention from local or state authorities.
Your best protection is to anticipate potential problems and address them in your Commercial Lease Agreement during negotiations with your prospective landlord. Lease provisions that address your potential financial exposure should you face unexpected business challenges are worth your negotiating time and effort. This is true both during this global pandemic and long after shops and restaurants are once again open for business. It pays to understand the basic elements of a commercial lease so that you can position your business for success in both expected and unexpected times.
Some of the most important elements of a Commercial Lease Agreement include:
First and last day of the lease agreement
Process/option for renewal when the lease ends
Process for breaking the lease, including acceptable reasons for doing so without penalty (e.g. financial hardship, unforeseen circumstance, force majeure, other emergencies)
Whether subletting is allowed
Amount of rent, when rent is due and when it’s considered late, how rent is to be paid, what the late fees are, and the amount of security deposit required prior to moving in
Tenant’s and/or landlord’s responsibilities for maintenance, utilities, and taxes (In a Triple Net Lease, for example, the tenant pays maintenance, insurance and real estate taxes, in addition to rent and utilities.)
Permitted use of the property
Whether (and where) parking and storage are available
Move-out procedures and what may be deducted from the security deposit (and how it will be returned)
If you are a small business owner with questions about your commercial lease, ask a lawyer about your specific situation.
These are trying times for organizations of all sizes, but the small and medium-sized businesses are typically the most vulnerable to such widespread and long-term disruptions. Being well-informed and pragmatic when you draft and sign contracts will go a long way toward protecting the immediate interests and future viability of your business. Visit the Rocket Lawyer Coronavirus Legal Center to ask a lawyer for legal advice or browse relevant topics.
* Montana only recognizes “at will” employment during a worker’s probationary period. Outside the probationary period, termination must be for good cause. See https://leg.mt.gov/bills/mca_toc/39_2_9.htm
About the author:
A cum laude graduate of Auburn University and the University of Georgia School of Law, Rocket Lawyer On Call® attorney, Michael Fucci, specializes in strategic business development and entertainment law/production, assisting individuals and businesses with their legal needs for more than nineteen years. He is an experienced legal and business consultant and enjoys working with small to medium-sized businesses and nonprofits to identify their DNA, helping them to capitalize on their unique mission and the specialized talents of their workforce and/or volunteers.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.