In March, many state governors issued an executive order requiring small businesses in “non-essential” industries to discontinue operations for an indefinite future. Soon after, media personalities cried for a “new normal” to make it illegal for certain businesses to offer their goods and services going forward. These extreme circumstances driven by politicized views of “health and safety” where opposing expert medical views are authoritatively suppressed might be characterized contractually as an “impossible market driven event.”
This is important because: Should businesses be liable for the contractual obligations they entered into when it was legal and acceptable for them to provide their goods and services to paying customers when the contract was originated? Another question: Should businesses be required to pay the same amount in a commercial lease when they were able to operate at a higher capacity? Which ultimately leads to the question: Are commercial properties with businesses operating at lower capacity worth less than they were before the pandemic because they cannot generate the same amount of revenue? And of course: Is there going to be a property bubble that bursts as a result of the lower value of commercial properties?
In response, the executive agency responsible for the impossible market driven event provided small business owners with the option of applying to take on more debt. The U.S. Small Business Administration (“SBA”) which provides funding with interest to small businesses, expanded its product offerings to include several new lending options like the Economic Injury Disaster Loan Emergency Advance2 loan. This loan is an interest-bearing financial product for the brand new target market of small businesses categorized as non-essential.
Small businesses generally operate on a smaller profit margin than their publicly-traded counterparts and an additional loan payment obligation could be uneconomical. Does it count as economic relief for businesses to pay ongoing expenses plus the additional principal and interest payment on a new debt instrument to a financial institution?
What options do small businesses have then? According to a lawyer I recently spoke to there may be an option to negotiate existing contractual obligations using “impossibility of contract”. Impossibility of contract may be interpreted that, given an impossible market driven event the contract is now void and unenforceable. One should consult with a lawyer to determine eligibility, the cost of which will hopefully will be less than the downstream negative effects of halting and/or diminishing operations.
It is interesting that the counterparty for the contracts which should qualify for re-negotiation like loans, leases, etc., might be the same financial institutions selling state-sponsored financial products to the new market of non-essential businesses. Is that a conflict of interest? I wonder if any financial institutions, who recently accepted funds from tax-payers to fund state-sponsored economic relief loans, also deny requests to re-negotiate contracts. In that case victims should be able to challenge the apparent market manipulation, shouldn’t they?
Sources:
1U.S. Small Business Administration. (2020). “Coronavirus Relief Options.” Retrieved from https://www.sba.gov/funding-programs/loans/coronavirus-relief-options .
2U.S. Small Business Administration. (2020). “Economic Injury Disaster Loan Emergency Advance.” Retrieved from https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance .