2020 has been a strange ride, hasn’t it? The pandemic exposed our divisions and we’ve experienced unprecedented fear, isolation, frustration, helplessness and stress. Regardless of how you lean politically, whether you think it’s a “hoax,” whether you disagree with the mask mandate or you want to blame any politician or group, or if you subscribe to any conspiracy theory, it’s here and our lives have changed dramatically – these realities transcend all our differences.
This article discusses how the pandemic has affected some of my small business clients. Nobody anticipated a global pandemic in their contractual dealings, so we’re all playing catch up with ill-fitting contracts. Since March I have counseled a diverse range of business owners about challenges caused by the pandemic and have learned much. In a moment I will share case studies of people whose contracts needed work, but there are two main themes:
Everything is Negotiable
Don’t worry if a contract says it is not cancelable or how well written and thought out it is. Every term is negotiable and if you disagree with a clause there is no harm in asking to modify or delete. Even if you are halfway through a contract term, changed circumstances might cause the parties to rethink their contract.
Don’t be afraid to negotiate or renegotiate. It is in the other party’s interest to modify the contract instead of seeing it breached and abandoned. Given our present limited access to the judicial system and the potential difficulty in finding someone to replace you in the contract, the other side has a strong incentive to be reasonable and work with you. This brings me to the second point.
Be Human in Your Business Dealings
Sometimes you might ignore or waive certain contract terms. Maybe you are legally justified standing on your contract, but should you? The other party in your contract is a person; even if it’s a corporation, corporations are owned and operated by people. Altruism aside, being ethical and compassionate in your business dealings is actually good business.
First, it’s the right thing to do. Second, it can be profitable in the long run because compassion is conducive to fostering relationships, loyalty and good will.
The following are quick case studies in some of the contractual issues I’ve encountered with clients since the pandemic hit.
The Private School
I was contacted by the owner of a private school early in the outbreak, before schools had converted to remote learning. We reviewed his contract in anticipation of parents asking about cancellation. The contract did not contain a force majeure clause and had no provisions about a pandemic (why would it?) and it did not allow mid-semester cancellation.
I concluded that he would be within his rights standing on the contract if someone wanted to cancel, but offered a word of caution. 24 Hour Fitness continued charging monthly dues even though its gyms were closed by the stay at home order. It was a public relations disaster, customers revolted and sued, and the company went bankrupt.
I advised the owner to consider the optics of refusing cancellation during a pandemic while the school is closed and parents are out of work. Parents talk with other parents and one aggrieved person could quickly inspire others.
School since shifted to remote learning, for better or worse, so the school remains open. I am now modernizing the contract to align with the times and to factor in remote learning.
The Wedding Service Vendor
I wrote a service agreement for a wedding service vendor years ago. Deposits are non-refundable because the vendor blocks out the date. Standard language in the industry.
The vendor now has brides requesting refunds because venues are closed and nobody is getting married right now. I advised that she would be within her rights to stand on the contract and retain the deposit, but asked, “Do you feel that is the right thing to do?” She said No. These are my kind of people.
As with the school and the gym, business owners must be mindful of the optics and be flexible and compassionate. Sometimes you must forego immediate revenue for a long-term return. We decided to retain a portion of the deposit as an administrative fee and to refund the rest. The bride was appreciative and the vendor’s reputation was enhanced.
If someone has been paid a deposit to provide a service, then circumstances outside everyone's control renders it impossible to provide the service, then return the customer's money. Keep some percentage to cover your admin or out of pocket costs, communicate that, then issue a refund. Don't keep someone's money for a service you cannot provide.
A retailer’s business was hit badly by the pandemic. While it still processes orders online, the pandemic caused a sharp reduction in demand for its products. The retailer couldn’t afford its lease and needed to renegotiate.
The landlord presented us with a draft rent deferment amendment. I reviewed and explained it to my client and identified areas of concern. Some clauses were fine, some were unreasonable. The lawyer’s role is to spot issues and ambiguities and identify language that should be revised or deleted. Ultimately the client makes the business decision whether to sign.
We pushed back to negotiate better terms, but landlords are reticent to have different terms for different tenants. They want uniformity among their leases, and as with parents at the school, tenants might share details of their terms, and that can complicate things.
On the other hand, no landlord wants empty inventory and the court system is slowed down and backlogged significantly. Trial dates are being set way out in the future, so litigants are having to work things out between themselves. A landlord is better off having a tenant paying reduced rent now, and recoup the lost rent later in the lease, than having a tenant simply break the lease and move out.
In this sense, tenants have leverage they lacked previously. Breach of contract and breach of guaranty claims are dischargeable in bankruptcy and vacancies are hard to fill. These conditions are fertile ground for renegotiating.
The Gym Owner
A gym owner was nearing completion on tenant improvements (TI) and making plans to open when the pandemic hit. The parties amended the lease to extend the rent commencement date and the amendment process was smooth.
The problem is nobody knows what the future holds here. When the state was beginning to ease restrictions in June, we discussed how some people are itching to get back into the gym (myself included), while others, especially the elderly or those with compromised immune systems, would go nowhere near a gym. It was impossible to project membership, revenue, or how long the facility would run in the red.
It was also impossible to know how long the gym would be allowed to stay open. The gym agreed to start paying rent on a date certain, but what if the governor shuts it down again? A month later, that’s exactly what happened. What do you do when circumstances outside your control change your plans? You adapt. You renegotiate.
I could provide more examples from different industries, but the common theme is that nobody’s contract, whether a lease or service agreement, contemplated a global pandemic. If a contractual relationship isn’t working out for one or both parties to a contract, it’s in both sides’ best interest to work together (preferably through counsel) to find a compromise.
If you have a contract issue you'd like to discuss, grab a spot on my calendar for a free 15-minute consultation:
You know your business better than anyone else. You negotiated the particulars of an upcoming deal, and you know the numbers and the people. You developed a positive working relationship with the other party and are optimistic this venture will be mutually profitable. You don’t hire an attorney because you fear signaling distrust to the other party and scaring them off, plus you want to reduce overhead. You therefore summarize the deal points in a document you drafted yourself, both sides sign, and you get to work.
A few months later you are frustrated that the other party isn’t holding up their end of the bargain, is underperforming, not communicating, or not making promised payments. Perhaps the other party is saying these things about you. Goodwill between the parties is replaced with bad blood. Now you find yourself in a lawsuit, where this DIY contract is the most important piece of evidence, and it has gaping holes and ambiguities.
This totally avoidable scenario happens all the time. If you had only consulted with an attorney before signing, you would likely be in a stronger position in the lawsuit, or perhaps it could have been avoided altogether.
Worst Case Scenario
This is a case I recently defended. A manufacturer spent years building his brand and growing his business, and he wanted to expand into a new territory by contracting with a distributor. The parties negotiated deal points and memorialized them into a term sheet.
The term sheet provided performance benchmarks and a one-time distributor fee, and the owner had broad termination rights, but the agreement said little else. The owner terminated the distributorship a few months into the deal, but he had been paid a multi-year distributor fee up front. The term sheet said nothing about a prorated refund of the distributor fee in the event of early termination. The distributor wanted his money back, but the owner refused, claiming he canceled within his rights. This created a contractual ambiguity and one party lost money. Cue the lawsuit. Now the parties must testify about their interpretations of the contract terms, and the judge must weigh the evidence to sort through the mess. These cases aren’t cheap to defend.
Rather than getting an attorney review before the distributorship began, the owner did not hire me until after getting served with a summons and complaint. Instead of paying about $1,500 to have counsel review (and rewrite) the contract, he paid tens of thousands of dollars in defense fees and settlement payments. This killed his cash flow and growth trajectory, and the business was shuttered.
The distributor’s hands weren’t clean and the case was potentially defensible, but the term sheet did not contain an attorney fee clause. This means the owner could not recoup his defense fees even if he won the case.
Do I just Hate Term Sheets?
Please don’t read this article as me hating on non-lawyers writing agreement terms. By all means, memorialize the terms of your agreements in writing. You can call it a Term Sheet, Letter of Intent, or Memorandum of Understanding, but the enforceability of the document depends on the wording and circumstances.
In fact, when clients engage me to draft contracts, the first thing I ask is, “What are the deal points?” I can negotiate deal points myself, but business owners often have this part locked down before they come to me. I then merge the deal points into a formal agreement. Ideally, the draft would then go to the other party, where it would be reviewed by their counsel.
Consider the Optics
When you tender a contract draft to a sophisticated party, and it was not drafted by an attorney, it shows. Believe me, I can tell. If you submit a sloppy and unprofessional contract, with typos and ambiguous language, it reflects poorly on you. It makes you appear unsophisticated, inexperienced and cheap. In contrast, if you tell your negotiating counterpart that you will submit the contract draft once your attorney has completed his/her review, the other party will be more inclined to respect you and honor the contract terms. In fact, I recommend letting the other side know the contract was vetted by counsel. You will have better leverage and the other side will be less likely to play games.
What About Contract Templates?
Couldn’t you just find a contract template online, or copy the terms of a contract a colleague or competitor uses? It’s a reasonable place to start. In fact, I usually employ some form of template when I draft any contract. I almost never write a contract beginning with a blank word processor screen.
Having said that, even with a template you would still find yourself preparing your own contract, with all the resulting risk. The template you’re using may or may not be in your favor, and you might not even understand it. If the template is junk, any derivative contract will also be junk.
I once revised a contract for a wedding coordinator. The terms were all over the place and self-contradictory. The client got the template from a colleague, and she just put her name on it. She had been using a junk template for years, so I threw it out and started over.
If you are going to use a template from a colleague or competitor, at least ensure the contract was originally written by an attorney.
In closing, you are free to write your own contract, and you can (and should) use a template. However, you do not know what you do not know, and a desire to cut corners and costs could cost you much more in the long run. Hire a lawyer for your contract needs. Once you have a standard contract in place, drafted by counsel, you could then modify as needed for future use.