Why Contracts Are Essential During a Recession

Every economy is cyclical, and recessions are relatively common. A recession caused by a global pandemic, however, is a reality few were prepared for. Whether a typical recession, or a worldwide economic shutdown, situations like these emphasize the importance of contracts for business owners across the country. Dallas law firm Ritter Spencer Cheng PLLC helps businesses utilize contracts that safeguard your business interests and prepare your company for challenging financial situations. Discover why contracts are essential during a recession and how these documents can help protect your business.

Contracts Can Protect Your Business or Limit Your Rights

The best contracts protect both parties’ rights in a business deal so that each party benefits from the relationship. Contracts that are one-sided or favor one party more than the other are problematic for the business seeking to satisfy the party in the better position. Whether you are acting as the creditor or the debtor, written contracts are useful to determine the terms of the parties’ relationship and will govern any dispute. Courts read the terms of the parties’ contract in a business dispute and look at the meaning of the words to arrive at a resolution. Companies struggling to cover payments to creditors may be left with few options due to strict terms. Those companies may be forced to rely on their creditors’ flexibility, even if they are not contractually obligated. The unprecedented financial challenges caused by the coronavirus pandemic have shown businesses what terms their contract may be missing and whether their contracts are unfair to any party.

In addition to promoting positive working relationships between creditors and debtors, contracts play a role in protecting businesses and their employees. Employment contracts can protect the business’s trade secrets and intellectual property, as well as ensure employees are paid a wage and provided protection and security, which helps promote their loyalty to the business. These contracts also have workplace rules which promote teamwork and discourage conflicts of interest. 

Force Majeure Clauses and Coronavirus

Many businesses have a better legal position than others after the coronavirus pandemic due to a boilerplate clause found in many contracts. Known as force majeure clauses, these elements within contracts are designed to reduce business liability when an unforeseen circumstance outside of the party’s control impacts a company’s ability to fulfill its end of the contract. Force majeure acts include events like natural disasters, terrorist attacks, famines, and even epidemics. The terms of the force majeure clause of the contract are extremely important to consider. Generally, it is best to include as many “acts of God” and uncontrollable situations as possible in a force majeure clause. For instance, due to the coronavirus, many companies had problems paying their rent due to government lockdowns. The pandemic and/or lockdown does not prevent the actual payment of rent; however, if these situations are encompassed by the force majeure clause, then your company would be protected. Even if your business did not include a force majeure clause in your previous contracts, you never know when the next world-altering event will occur. Help protect your business with a force majeure clause in future contracts. 

Negotiate Contracts to Benefit Your Business

Now is the time to renegotiate contracts to most benefit your business. Whether your business has been forced to pause operations or can continue serving customers, most companies are working with reduced cash flow. Take this time to reevaluate the essential and non-essential operations your business dedicates money to and determine where you can cut costs. Renegotiating contracts with your creditors and debtors improve your company’s financial standing if the country enters a recession as a result of the coronavirus pandemic. It may also be beneficial to revise your contracts to include a force majeure clause, in case more unplanned and uncontrollable events affect your business during this time. Well-written contracts that are optimized to preserve your business interests prove invaluable in tough economic environments. Companies that invest the time to develop thorough contracts set their businesses up for success and are more likely to avoid unnecessary and costly litigation.

Ritter Spencer Cheng PLLC, a Dallas law firm, is here for businesses facing unprecedented challenges brought on by the coronavirus pandemic. Whether your company wants to reevaluate contracts with your business partners or needs to discuss a restructuring and reorganization plan, our team of highly skilled attorneys can recommend a strategy for your business. Learn more about our practice areas and contact our team of commercial business attorneys at Ritter Spencer Cheng PLLC today.