What happens when small businesses can’t enforce contracts?

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Contracts are essential to all business operations. When you do business—whether as a seller or buyer—you need to know the other party will abide by the agreement. A contract enables both parties to hold each other accountable. That accountability depends on one simple fact—if needed, courts will enforce the contract. Without this assurance, doing business is precarious.

What happens when one or the other party breaches the contract? Civil and common laws exist to provide remedy to the injured party. When conversation and arbitration fail, the job of the court is to determine the facts as to the existence of the contract, the validity of the contract, and whether the contract should be enforced. This process has been in place in the U.S. for more than two centuries.

Courts Adjourn in Face of Pandemic

The Coronavirus pandemic, and the government’s response to it, have disrupted the time-honored judicial process. Though the laws have not changed, the courts’ abilities to hear the complaints and enforce the laws have been drastically curtailed.  

Courts that hear breach-of-contract cases particularly have been hard hit by gubernatorial orders to shut down in-person operations. While some courts can hear criminal and “emergency” cases online or over the phone, small businesses have been told their breach-of-contract cases will not be heard until courts reopen for in-person sessions.

The uncertain future of the court system leaves many aggrieved companies in an untenable situation. When every dollar counts, many fragile small businesses, already starving in the wake of pandemic shutdowns, will not survive the ponderous reopening of the courts.

Small Businesses Suffer in Wild West Environment

Without the court system to enforce contracts, small businesses face a “Wild West” environment, where contracts are hardly worth the paper on which they are written.

At BooksTime, a small-business accounting and bookkeeping firm, we see the impact of the overloaded court system on our clients. We handle collections follow-ups for our clients, giving us a direct view of the fallout. We and QuickBooks have seen customers refusing to pay service providers simply because they know little can be done while the courts are not hearing their cases.

We experienced a case like this ourselves. Prior to the onset of the COVID-19 pandemic, a company owed us money and refused to pay, creating a clear breach of contract. After a failed attempt to resolve the issue directly, we took our case to small claims court. A district court in Massachusetts agreed that the debt was valid and ordered the company to pay BooksTime the amount owed. Then, shortly after the case was decided, the pandemic struck.

Fortunately for the company that owed the debt, they remained financially healthy despite the pandemic. Nevertheless, even after being ordered by the court to make the payment, the company still refused. They saw an opportunity to get away with not paying. They knew it would be difficult for bookkeeping firm BooksTime to do anything about their noncompliance while civil proceedings were suspended indefinitely.

That could easily have been the end of the story. Indeed, that is how such stories end for many small businesses with breach-of-contract claims during the pandemic. Bookkeeping firm BooksTime persisted, however. We eventually found a way to get the court to enforce their order after making a special request to relevant authorities. Unfortunately, navigating this system is something that most small businesses owners would find incredibly hard—and they are unlikely, therefore, to get a similar result.

This is true despite the fact that court personnel (at least in our experience) have been incredibly responsive and eager to help. Furthermore, the courts have been working hard to overhaul their processes and systems to enable remote hearings for more cases. Despite these valiant efforts, however, it is clear that the entire judicial system is under a tremendous amount of pressure and has built up a major backlog as they await the signal to reopen in-person proceedings.

Grim Storybook Ending for Many

Our story has a happy ending. For most small businesses left adrift in the backwash of judicial shutdowns, however, the ending is grimmer. Businesses lacking the resources to advocate for themselves may perish simply because they cannot enforce their contracts. The average small business owner cannot afford to miss a big payment from a customer or let a supplier renege on the terms of a sale. The peril to the small-business backbone of the U.S. economy is real, and it is stark.

Small claims courts around the country must move faster to reopen civil proceedings by conference call or video-conference, as has been done for criminal cases. In a time when small businesses are already struggling with unprecedented challenges, the government must not fail one of its most important functions—enforcing contracts.

 

 

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