Insights
Negotiating with Your Vendors and Suppliers During the COVID-19 Downturn
By Melody Yuan
Review contracts and back up suppliers to help ride out the pandemic
When initial shutdowns were mandated worldwide due to COVID-19, many businesses waited and wondered when it would be safe enough to reopen. Today, the new normal has forced businesses to adapt and find new ways of operating under strict safety standards. Restaurants have opened once again with outdoor seating, sporting events are gearing back up in empty stadiums and some schools have even begun reopening campuses.
Under the duress of the pandemic, with months of little to no income and mounting bills, many businesses have buckled. “These are unprecedented times, and like a domino effect, we’re seeing business after business shut down, massive layoffs, and all of this causing an extensive decrease in demand for products and services across many sectors and industries,” says Laura Bechard, CEO and business growth advisor for ProVision Business Advisors.
To best protect your business during these uncertain times, understand the current situation of your vendors and suppliers, and review contracts to identify areas where you can save money and mitigate risk.
Manage supply chain risks by identifying the problem before they happen
Whether they are raw materials or circuit boards, the global supply chain has grown increasingly complex, and the pandemic has disrupted it like never before. Suppliers include independent contractors, subcontractors, and materials and inventory providers, and while businesses are currently focused on keeping their own doors open, many suppliers are also doing the same. Even if a supplier has been reliable in the past, given the current circumstances, a weak supply chain process can leave your business stranded.
“Your supply chain could have been disrupted for a number of reasons,” says Bechard. “Your suppliers may still be closed, or there could suddenly be import restrictions, or stricter customs inspections that delay your shipments.”
Whatever the reason, mitigating that risk involves having multiple back-up suppliers from different locations that you can contact. “As you start moving forward with your business, engage with your suppliers to see if they are going to still be around or see what the challenges are with your supply side as part of your strategy,” says Bechard.
Analyzing every part of the supply chain process from warehouses to transport routes will help business owners identify bottlenecks and anticipate unforeseen risks. “Literally map out your supply chain process and see where you’re seeing the kinks, then be sure to document where those problem areas are,” says Bechard. “Using a tracking app can help with the process, and you can receive digital alerts whenever things are delayed. You don’t want to be the last to know when your shipments are delayed.”
“Literally map out your supply chain process and see where you’re seeing the kinks, then be sure to document where those problem areas are. Using a tracking app can help with the process."
Cross-training workers and remote workers who are a part of the supply chain process to report on a regular basis can also help business owners get information in real time.
As part of your business continuity plan, you should have a framework with layers of defenses in the supply chain process that address everything from warehouse injuries to asset damage. Another thing to consider is different types of supply chain insurance that could provide financial coverage for business disruption.
The art of negotiation
When reviewing your contract, two things need to happen. First, you must be prepared to discuss the terms involved in a contract breach and a contract remedy. This includes having a thorough understanding of the force majeure clause in a contract that excuses one or both parties’ performance obligations under certain circumstances. Second, you must have a clear understanding of what it is that needs renegotiation, which includes preparing to respond to various reactions and counter offers.
“See if your suppliers are compliant with your contracts, because if they're not, then we can be understanding and empathetic, but it also gives you some negotiation leverage to talk about terms if they're not being compliant with a contract,” says Bechard.
Rather than going through the contract alone, Bechard believes that having an expert also go through the contract could save time and money. Driven by COVID-19, many businesses are looking into invoking the force majeure clause. Most force majeure events enumerated in contracts are swept under general categories such as:
- Severe acts of nature or weather events
- War, acts of terrorism and epidemics
- Acts of governmental authorities such as expropriation, condemnation and changes in laws and regulations
- Strikes and labor disputes
- Certain accidents
It’s important to note that a force majeure clause depends on the specific language of the contract and what types of circumstances they apply to. Having an attorney look over the language will be helpful for these instances.
“Think through what exactly it is that you might seek to renegotiate as you enter into a contract and the types of changes that you might try to avail yourself of, even if you have existing contracts in place,” says Stephanie Charles, a legal fellow at Start Small Think Big, an organization supporting underserved entrepreneurs.
“As you approach the process, obviously, you want to know your contract, but you also want to know which obligations are in play and understand where the risks in non-compliance align,” says Charles. “Anticipate what your counterparties’ responses might be and try to seek contractual change to better align with your circumstances.”
To do this, Charles suggests carefully reviewing the relevant contractual provisions, particularly as it leads to amendments or termination. She also suggests writing down those mitigation strategies you want to discuss with your counterparty in the event of a contractual breach and have the legal tools available when seeking changes in their contractual obligation. “Look closely at your dispute resolution clause,” she says. “It can point to specific ways in which you can enforce your rights as a business owner.”
A supplier, for example, could become a plaintiff if their customer fails to pay, and a customer could become a plaintiff if they have a warranty or indemnity claim, and either side might have confidentiality or exclusivity claims. “It gets messy. You have to know the facts of the transaction and all the parties involved to figure out what issues are likely to come out of a dispute,” says Charles. “It’s not impossible to execute a contractual negotiation on your own, but trust me when I say, it’ll be a lot easier if you do it with the right attorney.”
Provide support and empathy where you can
Negotiating and renegotiating during these difficult times may be an uncomfortable task for many business owners, especially if there has been a long-standing working relationship. “No one wants to call out and punish the other party,” says Charles, “but business is still business, and you have to protect yours.”
What you can do as a business owner is to show that you are willing to work within your means to help the other party. Rather than going into a discussion about termination, for example, making an amendment to the existing contract that could provide more time for you or the other party could be more beneficial in the long run. Other adjustments could include payments in smaller installments with a low interest rate to ensure that the other party won’t simply default or file for bankruptcy.
If both parties are unable to settle or negotiate a contract, it will most likely end up in litigation at court. “There are other legal principles and doctrines that a court might look to in determining whether a party can exit out of a contract, and the legal process can be incredibly frustrating and time consuming,” says Charles.
“Don’t let fear be your setback when it comes to contract negotiation,” says Bechard. “Continue to manage and communicate about performance with your suppliers and vendors so that everyone’s on the same page. This will ultimately help us all move forward.”