How Will COVID-19 Impact Startups?

The COVID-19 pandemic has impacted everyone and it has left in its wake a public health crisis, an economic crisis, and a tremendous amount of social unrest. As most of the world struggles to emerge from shelter in place orders, startups are going to feel the sting of the pandemic more than most. One of the ways that the pandemic might impact startups involves breach of contract cases. There are a few points that everyone who works for or runs a startup should note.

Cash Flow Risk

First, startups do not have the cash reserves of other companies. As a result, they might not have the ability to absorb the blow that comes with a pandemic. With shelter in place orders going into effect, startups might have their only source of revenue dry up. This means that they might not have the money to fulfill the orders that are placed with suppliers. If a startup is unable to pay for their orders, this could result in a breach of contract case. This could place startups in a difficult legal position as they struggle to figure out how they are going to respond to a difficult situation.

Legal Risk

On the other hand, it is possible that a startup might find itself on the other side of a breach of contract case. In this respect, startups are dependent on not only inventory to supply their customers but also hardware to keep their operations going. If startups are getting their inventory and hardware from overseas, these suppliers might be subject to shelter in place or shutdown orders in their own countries. Therefore, they might end up filing a breach of contract case against their suppliers.

Regardless of the direction a breach of contract case takes with respect to startups, there is another clause that might come into effect. This is called a force majeure clause. In this clause, it is possible that the party filing a breach of contract case might not be able to seek renumeration if the cause of the breach of contract stems from an unforeseen circumstance. This could be changes in government regulations (such as a shutdown) or even a pandemic. It will be interesting to see how court systems handle the various breach of contract cases that arise in the coming months.

Vulnerability

These are just a few of the biggest ways that a breach of contract case might impact a startup. Startups are particularly vulnerable because they do not have the cash reserves of other companies, so it is important for everyone who is involved in a startup to read their contracts carefully so they know what their options are in the event they are caught in a crisis such as a pandemic.