COVID-19: Contract obligations, vendor payment, and renegotiation

Veterinary practices aren’t immune to the financial impacts of the COVID-19 pandemic. Despite the unprecedented challenges currently confronting every business, owners must maintain sufficient cash flow to see their businesses through the global crisis.

One potential strategy to bolster cash flow is to reduce short-term expenses by working with vendors and landlords to renegotiate contracts until normal business operations resume. This can buy a veterinary practice time to get through the emergency.

Here, you’ll find guidance on how to approach vendor payments, understand your contractual obligations during an emergency, and potentially seek to renegotiate contract terms. 

Business implications

The COVID-19 pandemic has resulted in fewer examinations and reduced client traffic at veterinary practices across the country, as well as postponement of many elective procedures. The result, from a financial perspective, has been depressed revenue and cash flow. 

This can make it difficult for a veterinary practice to meet financial obligations to suppliers, lenders, and other third parties. Examples include companies that provide practices with veterinary supplies and medications, marketing and advertising services, software and PIMS providers, landlords, and financial institutions with which practices may have business loans. 

In these cases, practice owners will want to consider asking suppliers to extend payment dates and waive any applicable late-payment charges, which can sometimes accumulate on a monthly basis. Practices that are concerned about meeting financial obligations and timely payments are especially at risk and should approach suppliers quickly, rather than wait and make payments late or go into collections. 

Reaching out to vendors and suppliers

Contract flexibility scale

 
Not all contracts are the same, and different contracts might warrant different approaches. Before deciding how to approach vendors, take some time to cull through your expenses so you can focus first on your largest expenses and contracts. For example, it makes more sense to focus on renegotiating a $50,000 contract than a $500 one.

As you review each contract, take some time to also understand how much room or flexibility your vendor may have. Distribution companies, as an example, sit in the middle between the practice and manufacturers. Their profits are historically very slim, and while your bill with them may be large, there may be little they can do to reduce your payments. It may still be worth a conversation, but you need to understand how much room they might have to be helpful.

Other scenarios to consider:

  • Do you have contracts with both small businesses and large companies? Corporate entities may have more flexibility to accommodate than smaller businesses.
  • Do you pay rent to a landlord or a bank? Banks tend to have a bigger portfolio and more ability to adjust to cash flow disruptions. An individual landlord, on the other hand, might depend on rent checks to pay their mortgage or other bills.

Step 1: Contract review

Before contacting a supplier and asking to renegotiate payment terms or requesting additional leeway, review your contract to understand the clinic’s rights and obligations. When are payments due? What triggers a payment obligation? What happens if a payment is late? Does the contract allow cancellation or termination without liability? The language of the contract should address each of these questions.

  • Determine if the pandemic qualifies as a force majeure event for delaying or deferring payments, or terminating the contract entirely.
  • Verify if the contract contains language giving you the right to cancel or terminate, and under what conditions or requirements.
  • Some contracts contain dispute or resolution clauses. Be familiar with these if your contract contains such language.
  • Ask an attorney familiar with commercial contracts to review the contracts for you and provide a recommendation on the best course of action.

Step 2: Contact the vendor/supplier

Once you’ve reviewed and understand your contract, you’re almost ready to contact the vendor/supplier.

Consider what your primary goals are for the negotiation – for example, a payment extension, reduced interest rate, or zero-interest rate on late payments.

If your contract does not contain language or offer you any legal rights to extend or delay payment, some additional prep work might be in order. In these cases, you’ll want to consider asking the supplier what accommodation they’re willing to make. Prepare for this conversation by considering your goals and leverage.

Goals

Consider what your primary goals are for the negotiation – for example, a payment extension, reduced interest rate, or zero-interest rate on late payments. Interest rates have lowered since before the pandemic, and there’s opportunity to reduce your interest rate expense.

Leverage

What, if any, business leverage do you have? Consult with your practice accountant, tax advisor, and/or attorney to assess the best course of action. Here are some questions to consider:

  • Are you a key customer? Suppliers are motivated to attract and retain key accounts, and may be more willing to make accommodations outside of a contract to retain business in the long run. 
  • Can you easily find another supplier that would be more accommodating? If the supplier knows you could easily switch or transition to another supplier, they may be more accommodating to keep you as a customer. Knowing who your supplier’s competitors are can be an advantage. 
  • How much time is left on your contract, and are you willing to offer an extension of the contract if the supplier can work with you on accommodations during the pandemic?

Negotiating tips

When you approach your contract partner, be prepared to have a candid conversation about your situation. Consider asking for an extension on invoices and payments due, and a waiver of late fees or interest penalties. Be flexible, and consider creative solutions that the supplier may offer in return. The vendor likely is being impacted by the economy in the same ways you are. Look for an opportunity that can benefit both parties.

What is “force majeure”?

Some contracts have a force majeure clause (French for “superior force”), though it may be called “impossibility” or “acts of God.” The intent of these provisions is to excuse performance of one or both parties under circumstances that weren’t reasonably foreseeable or avoidable, such as natural disasters or terrorist attacks. Once a force majeure event occurs and prevents performance under the contract, typically each party can walk away from further contractual obligations without liability.

It’s important to understand that not all force majeure clauses are written the same way. 

Economic hardship alone, however, doesn’t typically qualify as a force majeure event. The big question right now is whether the COVID-19 pandemic constitutes a force majeure event that would allow a party to terminate or delay further contractual obligations without liability. The answer isn’t always clear, and it depends on the language of the contract at issue.

It’s important to understand that not all force majeure clauses are written the same way. Each contract will need to be reviewed separately to determine potential options. Most force majeure clauses include a list of covered events, such as fire, earthquake, floods and similar acts of God, disease, labor strikes, terrorist attacks, war, riots, or government order or mandate. Some clauses also have language suggesting that the list is not all-inclusive (“including but not limited to” or “such as”), which is helpful if the specific event or circumstance preventing performance is not listed.

For COVID-19, a stronger argument can be made if the force majeure clause expressly lists disease, epidemic, public health crisis, or something similar – because it is indisputable that the world is suffering a pandemic. Even if a contract doesn’t specifically list disease as a force majeure event, liability may still be avoided if the force majeure list is not finite and allows for other causes that are beyond the parties control.

Check for “force majeure” exclusions

Unfortunately, that isn’t the end of the inquiry. Certain types of contracts, such as commercial leases for buildings or offices, often expressly exclude the obligation to pay money or rent from the force majeure clause. Thus, even if disease is a triggering event under the force majeure clause, the obligation to continue paying may not be excused. There might still be other contract defenses to performance, such as “frustration of purpose” and “impracticability,” but these defenses are typically narrowly construed and are not available in all jurisdictions.

Timing considerations for “force majeure”

Timing is another important factor to consider. Most contracts require that a party seeking protection under force majeure provide written notice to the other party within a limited timeframe after the start of the force majeure event. If notice isn’t given in a timely manner, the failure to provide such notice may be viewed as a waiver of the right to claim protection.

Note: This page is intended for informational purposes only and not intended as legal or financial advice. Contract analysis is often fact-intensive, turning on the language of the contract and the circumstances on the ground. AVMA recommends that veterinarians consult with an attorney familiar with commercial contracts to determine the best course of action.