SME Champions

Legal is the last resort

Legal perspectives: Making SMEs pandemic-proof

Excerpts from the second webinar of the Gulf Capital SME Insights Live Series on combatting the legal challenges posed by the COVID-19 pandemic with industry thought leaders from Gulf Capital, Charles Russell Speechlys LLP, and Lex Consortia.

Small and medium-sized enterprises (SMEs) should be alert to unknown business risks from contract counterparties.

With many companies facing business relationship problems due to payment delays, disrupted supply chains, or myriad ongoing liabilities, the Covid-19 crisis has generated a surge of interest in contract law. Legal concepts such as force majeure are now the subject of much attention.

But the advice from lawyers speaking at the second Gulf Capital SME Insights Live webinar on 14 July is that small and medium-sized enterprises (SMEs) should try to avoid taking formal legal action against their contractual counterparties wherever possible.

“Rather than looking to see what your rights are contractually,” says Simon Gilbert, senior legal counsel at Gulf Capital, “parties should first focus on practical solutions and resolving things amicably.”

Not only does this avoid the cost of lengthy disputes, but amicable negotiations can help to maintain business relationships and foster mutually-beneficial solutions.

Insolvency snowball
For most SMEs, who typically lack financial reserves and operate within a highly interconnected business ecosystem, a key factor in avoiding business risks is identifying potential problems before they become a threat.

William Reichert, senior partner at Charles Russell Speechlys, describes the ‘insolvency snowball effect’, where the failure of a key supplier or client can have a devastating knock-on impact on the entire business network.

“It is difficult to see and also it can come on really quickly,” says Reichert. “Even if things look good, you need to be taking the time to examine the marketplace, examine your counterparties and do some investigation.”

Reichert advises SMEs to be vigilant to signs of distress in their network of suppliers and clients. Changes in business practice, late payments, alterations in structure, staffing or senior management can indicate problems.

It is also important to look at similar companies within a sector to see if there are any underlying issues that could impact a company.

Preparing to negotiate
Once a potential issue has been identified, the next step is to put measures in place to mitigate the risk including, where possible, renegotiating existing contractual relationships.
This involves identifying and fully understanding key contracts.

“A business needs to look at its contractual risks,” says Gilbert. ”What are the opportunities, but also what are the company’s strengths and weaknesses in a negotiation? For example, does a company have an alternative? Could the contract be terminated or suspended and is one of the companies currently in-breach of contract?”

In addition to understanding your own position, it is important to understand your counterparty and its priorities and limitations.

Gilbert says: “The more you look at the counterparty’s side, the more you will be able to start considering the potential compromises and how to reach common ground.”

During negotiations, Gilbert advises companies to begin by addressing the smallest and easiest issues first. This creates a positive mindset and provides momentum for the successful resolution of the larger issues.

He also states that it is important to maintain focus on the issues that are important to your business and to be realistic about what you can achieve.

Once revised contract terms have been agreed in principle, they need to be documented properly, and at this stage it is a good idea to consult a lawyer.

As the co-founder and managing partner of newly-established legal consultancy Lex Consortia, Beenish Haider has been able to put in-place contracts and practices to protect against the worst effects of the Covid crisis from the outset of her business, and to ensure business continuity in the longer term.

As well as seeking to develop an efficient business structure and implementing Covid-friendly technology and services, Haider advises SMEs to adopt a pragmatic approach to granting credit.

“We have seen a lot of SMEs pull back on credit,” says Haider. ”Because right now revenue is not the target, its receivables that are the target for sustenance.”

“You need to evaluate how much credit you are giving…and what are the guarantees that you are taking from your customers or from your suppliers”

This ties in with the need to identify genuine clients that have the ability to pay, and genuine services providers that are able to render the services that they have committed to provide.

Haider says that it is important for SMEs and startups to put documentation in place to secure business continuity. “Get your post-dated cheques, get the waivers, get the liabilities, and get the releases.”

But wherever possible, she says, business solutions to non-payment should be found.
“You have to go amicable at first in the current situation,” she says. “Legal is the last resort.”


The Gulf Capital SME Insights is a multi-channel programme of activity providing information, intelligence and support to the regional SME community.

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