Matthew Kenney

Small Business | Workplace Law

Coronavirus and Contracts: Must You Perform?

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The COVID-19 pandemic has negatively affected the global supply chain. Orders are going unfilled, which means contracts terms are not being met. Does it constitute a breach-of-contract when a supplier cannot fulfill its obligations?

The answer is: It depends.

Having a signed contract is one thing. Enforcing it is another. Under Florida law, there are instances where courts will excuse a party from contract performance. Two such instances: Where it is impossible to perform; and when it is impractical to perform.

However, courts will generally not excuse a party from performing when a disruptive event is anticipated at the time of contract formation. Stated differently, a court might require a party to perform if a risk — including a pandemic and resulting national emergency — was anticipated by the parties when they entered the contract.

The question before many business owners and their legal counsel: Is COVID-19 a risk that was reasonably anticipated by the parties?

Many written contracts will have a Force Majeure (meaning “Superior Force” ) clause, which excuses a party from performance if there is an unforeseen and uncontrollable event the parties could not have contemplated during the formation of their contract. There is no doubt COVID-19’s impact on one’s business is uncontrollable. The question in a breach-of-contract lawsuit, however, might be: Was it unforeseeable?

The phrase Force Majeure is generally used in contracts as synonymous with an “Act of God”. Contract performance prevented by hurricanes, floods and tornadoes would fall easily into this category. But what of COVID-19? Was this terrible event really unforeseeable?

Although COVID-19 feels like a sucker punch to our economy, futurists have warned of the risks of potential epidemics and pandemics (just like COVID-19) for years. Bill Gates gave a TED Talk on the subject in 2015, for example. Since 2000, the world has seen outbreaks of SARS, Swine Flu, Avian Flu, MERS etc. A reasonable person could argue parties should have addressed future epidemics and pandemics in their contract terms, given the notice we’ve been given by experts about our susceptibility to such events.

The point: Do not assume the effects of COVID-19 will absolve your company from contractual liability, even if performance is impossible or impracticable. A judge might ask: “If other companies and entrepreneurs specifically addressed the issues of national emergency, epidemic, or pandemic in their contracts….why didn’t you?”

Florida courts will likely evaluate your Force Majeure clause based on its clear, unambiguous language. It’s possible Florida courts will view non-performance related to COVID-19 as unforeseeable and uncontrollable events, freeing a party from performance. It is equally possible they will not. Therefore, the best approach going forward is to ensure your contract languages addresses epidemics and pandemics in clear, unambiguous terms.

Danger in Discounting

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Ask any marketing educator or consultant his/her pet peeve and you might find this is it: They dedicate careers to studying science of marketing and their advice to students/clients is ignored. This phenomenon is especially prevalent when it comes to the topic of price discounting.

Marketing practitioners — especially those in retail — often like discounting because they see a cause and effect. Drop the price of widgets from $200 to $100 and watch them fly. When sales volume is slow, discounting gets people into a store or showroom. This is just common sense, so who needs an egghead academic saying it will harm their brands and make marketing more difficult in the long-run? Many marketers don’t want to hear discounting is dangerous because they either don’t believe it or don’t want to believe it.

Well, the egghead academics are correct. Here is what inevitably happens. Companies generally cannot make a sustainable profit deducting 30-70% off a legitimate price. So what do they do? They raise the price and offer a deep discount on that inflated price. They are enticing some customers to buy while making it harder for the company to earn a profit. You don’t have a profit when you give it away via discounting. When companies start marking up only to mark-down it’s a sure sign of impending doom.

There is a place for discounting in the marketing mix, of course. Discounting is an effective way of liquidating excess inventory; introducing a new product; and capturing consumer attention. It can also be used strategically to squeeze competitor price-points and margins. Nobody who teaches the science of marketing will tell you there isn’t a place for discounting. What they’ll tell you is this: Don’t over use this tactic. Doing so may potentially destroy your brand and your company.

Discounting is the marketing equivalent of a 3pm cup-of-coffee. The caffeine boost gets you through the day, but doesn’t address the core issue of why you don’t have enough energy. Where we see too much discounting we often see a culture short on innovation and entrepreneurial thinking. We also see a need for more business education. The more marketers understand about marketing science the less dependent they become on discounting.

For example, study-after-study proves that price is not the biggest factor in the consumer purchase decision process. It’s not even near the top. Perceived value is the biggest factor. The mistake in practice is assuming a lower price increases perceived value. It often does not. If you see a sofa discounted from $899 to $599, for example, do you really think that sofa is worth $899? Is that jacket marked-down from $379 to $165 really worth $379?

If price had this biggest effect on your purchase decision wouldn’t your home and office be filled with the lowest-prices alternatives for everything? Why didn’t you buy the cheapest tires for your car? Why not buy the lowest priced linens for your bed, or the lowest-priced food for your children? Why did you have lunch at Panera and not brown-bag it? It’s because perceived value, not price alone, is what’s driving you.

Marketing is a science, which means actions have predictable results. Discounting is a dimension of marketing science, therefore there are predicable results. If your company is relying too heavily on discounting to generate sales you need to solve the underlying problems. Look at your value proposition, advertising and pricing. If consumers will not buy a product unless it’s discounted, your price is either too high or you haven’t convinced them otherwise. Marking-up prices only to mark them down is a bad strategy. Chickens come home to roost. Take a free tip from one of those eggheads who studies this stuff for a living: You cannot trick the market in the short-term and expect to thrive in the long-term.

(Copyright 2016. All Rights Reserved).

Five Ways to Remember More

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Did you ever see a textbook filled with highlighted passages? Of, have you ever re-read the same passage several times in an attempt to remember it? When it comes to learning….both these efforts have been proven ineffective. Many people believe highlighting and re-reading works because it seems obvious. Yet, the evidence doesn’t support it.

If these techniques do not work that means the information we want to retain will not be there when we need it. It matters not what we’re attempting to learn. Knowledge is like a savings account: We can only take-out what we put-in.

So, how do we make sure the information sticks in our long-term memory? Over a century of research on this topic suggests there are five proven methods. Due to space restrictions we’ll synthesize the findings below.

In Practice: 5 Types of Practice That Yield Results

One of the best ways to recall knowledge is called Distributed Practice. This is a process where practice is broken into a number of short sessions. Think of it this way: A daily five-minute sales meeting will likely be more effective than a 30-minute weekly meeting.

Retrieval Practice is also effective. This approach utilizes short quizzes or tests. The same premise applies: A number of small quizzes will be far more effective than one big test.

Interleaved Practice is where we blend topics. Thus, 5-minutes learning about a Product A and 5-minutes learning about Product B will work better than 10-minutes learning about Products A & B.

Elaborative Interrogation means that we should be asking ourselves as we learn: What is the purpose of this effort, and how will it be applied?

Self-explanation is a technique whereby we teach ourselves without any assistance. For example, let’s say a supply chain partner doesn’t provide any selling points to assist your efforts (which is common across industries). What do we do? We must figure it out. Business doesn’t always come with a playbook. Sometimes we learn effectively by relying upon our own common sense and talents. The key is to not rely solely on intuition if possible.

Reference:

  • Roediger, H. (2013). Applying Cognitive Psychology to Education. Psychological Science in the Public Interest. 14(1). p. 1-13.

A Marketing Lesson from the Toy Aisle

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Do you remember visiting the toy aisle as a little kid? Toys for boys were on one aisle, and toys for girls on another. Toys for boys normally had masculine imagery, while toys for girls emphasized femininity. This is the way toy companies and retailers wanted it: A clear gender-based line of demarcation.

The only problem: This is not how kids wanted it. To a kid, a toy is a toy. Toy retailers were — and arguably some still are — reinforcing outdated social norms in their marketing. Savvy toy retailers are doing away with this approach. So called “boys” toys are now intermingled with so-called “girls” toys. The focus is now on gender-neutral marketing.

In Practice: Go Where the Market Goes
One’s gender is sociological not biological. One’s sex is biological not sociological. While children begin understand gender as toddlers, sociologists tell us there usually isn’t full understanding until a child is about 7 years old.Look at little kids on a playground, for example. While there is some awareness of gender…kids couldn’t care less. Kids just want to play. The same principle applies to retail. There is no reason to segment toys for boys and girls. This is done purely for the benefit of retailers, not customers.

Of course, the broader lesson: Society is constantly evolving. Norms slowly change. Sometimes — as in the toy industry — the values of consumers are not aligned with retail practices. However, when retailers adapt their practices…the outcomes are well received. For example, companies like Amazon and Target have received positive public relations benefits (i.e. free advertising) by focusing on gender neutrality in their toy marketing.

The lesson for entrepreneurs in other industries: Go where the market goes. Think of it this way: If the market is constantly evolving; and your business stays the same; how long will it be before your company is totally disconnected from the market?

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