The impact of COVID-19 is being felt by nearly all small businesses owners.

Many businesses are finding themselves in a situation where their supplier isn’t able to complete their obligations under their existing contract, which can be a huge problem as most businesses rely heavily on their suppliers.

This situation can be exacerbated if you’ve already paid for the goods or services, only to find out that the supplier is not in a position to honour the contract.

If you’re in this position, it can be a difficult situation to navigate for both you and your supplier.

You may be feeling helpless, however, it’s important to keep on top of your legal rights and think of alternative ways to keep your business afloat. 

In this article, we’ll outline some suggestions that can help you preserve your relationship with your suppliers. 

If you’re a supplier and can’t perform your obligations, you can read more about your options here

Figure Out Where You Stand

Before you take any action, it’s important to consider what you want the outcome to be. 

Here are some things you should be thinking about: 

  • Do you want to continue the relationship you have built with your supplier? 
  • Do you want your money back or would you prefer that your supplier perform their obligations under the agreement when they’re able to?
  • Would you be open to finding a different supplier to fulfill your business needs while your original supplier gets back on its feet?
  • What impact will these supply chain disruptions have on your customers?

These are just some of the questions you should consider when thinking about how you’re going to tackle the issues you have with a supplier in distress.

It’s best to find a solution which benefits the suppliers who are essential to your business operations, especially if you have built a long-term relationship you want to preserve.

Know Your Contract

Regardless of whether you actually end up exercising your rights under the contract, it’s important that you know what they are.

You might go into negotiations in good faith to reach an amicable solution with your supplier. Before you do this, it’s crucial to have an idea of your contractual rights so you know what your fall back position is.

Depending on your contract, there may be some remedies available for both you and your supplier. These remedies may allow your supplier to request an extension of time to meet their obligations. 

Through looking at your contract, you might also find that there’s an opportunity for you to gain credit if you’ve already paid for your supplier’s goods or services. 

Without reviewing your contract, it’s difficult to be sure of what options are available to you. It’s important to be aware of these rights so you can factor them into your negotiations. 

Negotiate With Your Supplier

Considering the impact COVID-19 has had on the economic climate, many businesses are struggling to maintain cash flow.

Before looking to enact the contractual solutions outlined in your commercial agreements, it might be worth talking to your supplier and exploring alternative arrangements. 

Through negotiations, you might be able to find common ground with your supplier. Plus, it’ll give your supplier the opportunity to fulfil their obligations under the contract after they have recovered from the impact of COVID-19. 

In the meantime, you might be able to find an alternative supplier to assist you while their services to you are on hold. 

What If We Can’t Negotiate A Solution?

Following discussions with your supplier, you might find that you can’t reach common ground and you won’t be able to maintain your commercial relationship.

In this situation, it’s best to review your Supply Agreement to see what rights you may have. 

Depending on the terms of your contract, there are some legal solutions you can enforce against your supplier if they are no longer able to perform their obligations under the contract.

Am I Entitled to A Refund?

If you have already paid for the goods or services provided by your supplier, you may be entitled to a refund from your supplier. 

Whether your supplier is obliged to provide you a refund depends on the terms of your contract.

In some situations, you might not be able to receive a refund — particularly if the consumer guarantees under the Australian Consumer Law (ACL) don’t apply to your situation. You can read more about this here.

You may also find yourself in a situation where your supplier had already commenced work for you but is no longer able to finish the job.

If you have paid your supplier, they may be entitled to some money under the doctrine of part performance

Part performance will allow your supplier to be paid for the services they have already provided to you. You will then be refunded the remaining amount for the services they can no longer complete. 

An Example

Cathy engaged a photographer to complete three photoshoots for her online fashion store. Her photographer completed one out of the three photoshoots before the impact of COVID-19 affected her photographer’s business.

The photographer can no longer complete the jobs and has canceled. What can Cathy do?

If Cathy has paid for photoshoots 2 and 3, she might be entitled to a refund under the contract. 

Under the doctrine of part performance, her photographer may be entitled to be paid for the one completed photoshoot. They may have to refund the remaining funds for photoshoots 2 and 3 back to Cathy. 

In any event, if you believe your contract entitles you to a refund, it’s best to contact your supplier first before taking any further steps.

My Supplier Is Trying to Get Out Of The Contract, Can They?

Your supplier might have already commenced work for you and, as a result of COVID-19, they cannot continue to provide their obligations to you.

Due to the impact of COVID-19, your supplier may be relieved from performing if there is a force majeure clause in your contract.

Force majeure clauses come into play when there is a circumstance which prevents either one or both parties from completing their obligations under the contract. 

The circumstance preventing performance must be one beyond the control of both parties

Pandemics like COVID-19 can be considered as an event that’s beyond the control of the both parties, but that depends on the exact wording of the clause in your contract. 

Sometimes, a force majeure clause requires a supplier to give you notice as soon as they are affected by the unforeseen event — so it’s important to consider whether your supplier has followed through with these requirements. 

Can My Supplier Terminate The Contract?

If you want to completely cut ties with your supplier, this can be an option if the contract has been ‘frustrated’.

Frustration is a concept under contract law which means an agreement can be terminated as a result of an event completely beyond the control of both you and your supplier. 

If your contract is frustrated, both you and your supplier will no longer have to complete your obligations under the contract. 

The Doctrine of Frustration is a very complex area of Australian contract law and can be difficult to exercise. It’s best to review your contract with an experienced lawyer who can advise you on how it may help or hinder your situation. 

An Example

Matt is a manufacturer and local distributor of wooden household furniture. His business is heavily reliant on a steady supply of materials from overseas. 

The impact of COVID-19 means Matt’s supplier can no longer continue to provide him with materials, as their factory has closed down due to government restrictions. 

What can Matt do?
In Matt’s supply agreement, there may be a provision which outlines that damages are payable if the supplier fails to meet their obligations. 
If the contract has been frustrated, and the supplier’s performance is rendered radically different as a result of the impact of COVID-19, then both Matt and his supplier will be discharged from their duties under the contract.

Note: Frustration is very difficult to rely on as only limited situations can be considered ‘frustrating events’. Factors like delay or hardship, by themselves, are unlikely to allow a party to terminate an agreement under the Doctrine of Frustration.

Think About Your Customers

If your supply chain has been affected because of COVID-19, your customers will also feel the impact. 

It’s important to communicate with your customers to determine if they’re open to negotiating the terms on which they purchase supplies from you.

You may be able to find an alternative supplier who can assist your businesses while your original supplier works through the impact of COVID-19. This way, your customers may not even feel the impact of your renegotiations.

Your customer contracts may have some protections in place that can help both you and your customers. Depending on the goods or services you provide, you may be required to compensate or provide refunds.

What To Take Away

COVID-19 is impacting the functioning of many businesses. 

Regardless of whether or not you have already felt the repercussions, it’s still a good idea to figure out what you’ll do if you run into any problems with your supplier.

Before considering ending your agreements, it’s best to have discussions with both your suppliers and customers to find alternative solutions to help you manage the problems you have encountered. These solutions can be drafted into an agreement which outlines the new obligations of the parties.

If you’re unable to figure out a creative solution, your current agreements are a reference point for the solutions that might be available. 

At Sprintlaw, we’re here to support you. 

We’re offering a number of discounted support packages for businesses who have been impacted by COVID-19. You can access free resources and read more about what we’re offering on our dedicated Coronavirus resource page.

If you have any other questions, please don’t hesitate to reach out to our friendly team on 1800 730 617 or at team@sprintlaw.com.au.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

5.0
(based on Google Reviews)

Have a question?
Get your FREE quote now.

We'll get back to you within 1 business day.

  • This field is for validation purposes and should be left unchanged.

Related Articles

Buying A Business In An Asset Sale

What Is A Mutual Non-Disclosure Agreement?

What Is An Option Deed?

What Is A Service Agreement?

Getting Your Clients To Pay On Time