In fair financial climes companies have the ability to settle bills on time or to see out contracts, so this is often the very first sign that previously healthy businesses are struggling financially.
As a business starts to see their cash flow begin to flow the wrong way, they will often seek to delay payments. This may be either in the hope that things will improve or to buy time until loans or additional investment can be received.
Very often this a good way of foretelling economic downturns as a break in the economic cycle eventually impacts all businesses, large or small. The reason being that when one debtor defaults or delays payment it normally impacts the ability of the supplier to pay their debts and so on.
The number of legal challenges regarding contracts therefore are often a good indication of how businesses in general are faring. Companies that are feeling the strain often resort to litigation both to protect income but also reduce their expenditure.
Cutting costs
So, what are we seeing at my firm? This year has seen a significant uptake in the number of businesses we are speaking to who are either seeking to enforce contracts or conversely looking to terminate agreements early.
Where they are seeking to terminate agreements, this is often for a range of reasons but mainly revolve around a desire to cut costs. Companies may look to terminate to drive a review of agreed pricing, to switch to cheaper suppliers or even to enable them to raise their prices due to the increased costs driven by inflation.
Inflation is having a significant impact on many companies’ contracts, as too few contain inflation clauses. This means that sellers are increasingly being tied into to supplying products or services at prices that are at best producing lower margins, and at worst resulting in a loss.
We are seeing an approaching perfect storm through a legal lens.Their staff costs are being driven up through a lack of available workers, while energy, material and delivery costs are being driven up due to inflation.
One business approached us to assist their potential clients' exit contracts early. They have managed to keep their supply costs down and are able to provide services at a lower cost, but potential clients are unable to benefit from this due to long and often onerous contracts.
Many of these contracts could be described as containing penalty clauses and are not only unfair but also of doubtful legality.
Increasingly, we are also being asked to interpret payment due periods and clauses within contracts. This is a surefire sign that companies are struggling and hence need to ensure every penny is accounted for.
In some cases, we are being told that obtaining new business is being placed on hold while the company ensures that they have sufficient liquidity in place to see them through what they anticipate to be a rough spell.
Perfect storm
One other impact of the current economic situation has been a rise of frustration of contract cases. This is where, due to forces quite often outside their control, a party is unable to fulfil a contract. We have seen examples of material shortages but also significantly labour shortages that have resulted in frustration cases.
These are often very complex to work through and where in more ordinary times matters would often be resolved through negotiation they are now escalating through litigation and ultimately the courts.
We are therefore seeing an approaching perfect storm through a legal lens. Inflation is impacting consumers' ability to spend and hence businesses’ profit margins, while also raising the cost of the same businesses’ supplies.
This is the same for a service-based company as it is for a manufacturer. Then add in a dose of labour market shortages, low liquidity, and high debt levels due to Covid, the next legal waypoint will be an increase in insolvencies and bankruptcies as businesses flounder.
No matter how much shoring up takes place this looks very much like a house of cards about to tumble. Some sectors of the legal industry may become very busy.
Tahina Akther is a barrister and co-founder of Wildcat Law
