Built Before the Storm: Legal Structure in Times of Economic Uncertainty
Author: Priscilla Schoendorf, Esq
The Schoendorf Law Journal | Volume I: Law in Transition | Essay 002 | August 24, 2026
Businesses are rarely built for the moment when everything begins to tighten at once. They are built in periods of optimism, when revenue is growing, customers are paying, financing remains available, and owners who share a common objective can resolve disagreements informally. In that environment, uncertainty in a contract or weakness in a governing structure can remain largely invisible because the business has enough financial and relational flexibility to absorb it. Economic pressure changes that.
When revenue contracts, financing becomes more difficult, or costs rise faster than anticipated, decisions that once seemed routine begin to carry greater consequence. Relationships that functioned informally for years may suddenly require the parties to distinguish between what they have historically done and what their agreements actually permit or require. Economic stress does not necessarily create weaknesses in a business’s legal structure. More often, it reveals weaknesses that were already there.
That distinction matters because economic uncertainty does more than increase the likelihood of litigation. It changes the significance of decisions the company is already making. Questions involving authority, contractual obligations, access to capital, ownership rights, and the allocation of risk become far more consequential when the business no longer has the financial capacity to tolerate ambiguity.
Preventative legal planning, therefore, is not an effort to predict every downturn, disruption, or disagreement. Its purpose is to create enough clarity before those pressures arrive so that difficult decisions can be made deliberately rather than reactively. When informal practices begin to fail under economic strain, a well-constructed legal framework can preserve options, reduce uncertainty, and often prevent an operational problem from becoming costly litigation.
Prosperity Can Conceal Operational Ambiguity
Business relationships can operate for years without requiring the parties to examine every right contained in their agreements.
Consider a commercial landlord who has historically declined to enforce an annual inflation-escalation clause because the relationship with the tenant is strong and the additional cost has been manageable. Over time, that accommodation may begin to feel like part of the parties’ ordinary course of dealing. But when borrowing costs rise, operating expenses increase, and margins narrow, the landlord may no longer be willing (or financially able) to absorb an increase that was once easy to overlook. The written agreement has not changed. What has changed is the economic significance of enforcing it.
That shift can place the parties in very different positions. The tenant may view enforcement as a departure from years of established practice, while the landlord may regard it as nothing more than reliance on the bargain originally made. A provision that once required little attention can therefore become central precisely because the parties allowed their working relationship to develop around something different from the agreement’s strict terms.
The lesson is less about eliminating every possible ambiguity than about recognizing where contractual rights and commercial practice may diverge over time. Pricing adjustments, escalation provisions, payment obligations, defaults, termination rights, and allocations of risk are particularly important because accommodations involving those terms may be easy to make when the economics of a relationship are favorable and much harder to continue when conditions deteriorate. Careful drafting gives the parties a common reference point when that happens. It allows them to distinguish between what the agreement requires and what one party may previously have chosen, as a matter of business judgment, not to enforce.
The same principle applies inside the company.
Governance Is Tested When Agreement Becomes Harder
Governance often receives the least attention when a business is healthy and its members share a common direction. Once interests diverge understandings that once seemed sufficient must be measured against the legal framework governing the company. Under New Jersey’s Revised Uniform Limited Liability Company Act, an operating agreement can govern significant aspects of the relationship among members, management rights and duties, and the activities of the company. When the operating agreement does not address a matter within that statutory framework, the Act may supply the governing rule instead. The freedom to structure the relationship is substantial, but it is not unlimited; the statute preserves boundaries around certain duties, information rights, dissolution provisions, and other protections.
The difficulty is that clarity about governance requires more than knowing what an operating agreement should contain. It also requires knowing what the members actually agreed would govern them. New Jersey does not require an operating agreement to exist as a single formal document bearing every member’s signature. The members’ agreement may instead be reflected in written terms, oral understandings, conduct, or some combination of those forms.
That flexibility serves the practical realities of closely held businesses, but it can become a source of considerable uncertainty when the members’ interests separate. At that point, the question may no longer be simply what a document says, but whether the members ever agreed that the disputed terms would govern their relationship at all.
Premier Physician Network, LLC v. Maro, 468 N.J. Super. 182 (App. Div. 2021), illustrates this problem. There, physicians formed a limited liability company after signing a Letter of Intention that memorialized the contemplated structure of a multi-specialty medical practice while expressly anticipating the later negotiation of a definitive operational agreement. The letter made only certain provisions binding and provided that the specific terms of the definitive agreement would remain subject to the mutual approval of the parties. A draft operating agreement was subsequently circulated, and the physicians operated through the new entity, but the defendants never executed the agreement and disputed whether they had otherwise assented to its terms. When they later withdrew, the company sought to enforce provisions requiring, among other things, shortfall payments and penalties associated with their departure. The Appellate Division rejected the trial court’s conclusion that membership in the LLC itself established assent. Under New Jersey’s Revised Uniform Limited Liability Company Act, a draft operating agreement becomes the LLC’s operating agreement only if all existing members agree to it; if they do not, it remains a draft. At the same time, the court made clear that assent need not take the form of a signature and may instead be shown in writing, orally, or through conduct. Because the record presented a genuine factual dispute over whether the defendants’ conduct manifested agreement to the circulated draft, the court reversed the grant of summary judgment and remanded the issue rather than holding, as a matter of law, that the defendants either were or were not bound.
The significance of this case extends beyond the mechanics of forming an operating agreement. When a business relationship is functioning well, the difference between what everyone believes the arrangement to be and what can actually be established may have little practical consequence. The Premier Physician Network defendants left when the economic realities of the business was contrary to their initial belief of how it could ultimately perform disagreeing with what was ultimately promised and believed they were caused to expend large sums of money. When economic pressure brings operational differences to light, determining what is controlling can become costly.
Contracts Are Tested When Performance Becomes More Expensive
Governance is only one place where changing conditions can test assumptions made when circumstances were more favorable. Even where a company’s internal authority is clear, its obligations to others may have been fixed under economic conditions that no longer exist. Commercial agreements are often made in one economic environment and performed in another. The economics of performance can therefore change considerably before the legal obligation does.
That distinction has long existed in contract law. In Newark v. North Jersey District Water Supply Commission, 106 N.J. Super. 88 (Ch. Div. 1968), the City of Newark sought to escape water-supply agreements after the economics of the project deteriorated substantially from the estimates available when the contracts were made. The parties had negotiated with the express understanding that their projections were only estimates and that the ultimate cost could fluctuate with interest rates, the price of materials and labor, and the level of participation in the project. Newark nevertheless argued that subsequent increases had transformed the undertaking into an economically infeasible one: water initially estimated to cost no more than approximately $185 per million gallons was projected, under Newark’s calculations, to cost as much as $339, while the City also faced approximately $7 million in improvements to its distribution system. The court refused to equate that deterioration in the bargain with legal impossibility. The relevant question was not whether performance had become substantially more expensive than anticipated, but whether the changed circumstances were risks that were, or reasonably should have been, within the contemplation of the parties when they contracted. Because fluctuations in financing costs, construction expenses, capacity, and related project costs were inherent in the estimates upon which the parties had proceeded, the court concluded that the increased expense did not excuse performance. As the court emphasized, an estimate is not a guarantee, and contractual hardship ordinarily does not justify relief where it results from market changes or other contingencies the parties could reasonably have anticipated.
The economy of 1968 was, of course, different from the economy confronting businesses today, but the pattern of risk described in Newark is remarkably familiar. Businesses entering agreements in 2026 are again doing so against a backdrop in which financing costs, labor expenses, input prices, and inflation can move materially during the life of a contract. As of July 2026, consumer prices were 3.4 percent higher than a year earlier, while compensation costs had risen 3.4 percent over the preceding twelve months. Producer-price data likewise reflected continuing volatility: although overall final-demand prices were unchanged in July, prices for final-demand construction increased 2.2 percent in that month, and the overall producer-price index stood 4.7 percent above its year-earlier level. Financing remains part of that equation as well. The Federal Reserve has maintained the federal-funds target range at 3.5 to 3.75 percent while continuing to describe inflation as elevated and the economic outlook as subject to heightened uncertainty.
Today, contracting parties once again operate in an environment in which assumptions concerning price, labor, financing, and supply may prove materially wrong before performance is complete. That uncertainty does not ordinarily release a party from a bargain that later becomes less profitable, or even substantially more expensive, than anticipated. Contract law recognizes that truly extraordinary events may alter the analysis, and the agreement itself may allocate particular risks while doctrines such as impossibility, impracticability, or frustration of purpose may become relevant in appropriate circumstances. But those doctrines are narrow and fact-sensitive. Newark therefore directs attention to a more useful question for businesses operating in an uncertain economy: not simply whether economic conditions changed, but whether the risk of that change was assumed, allocated, or left unresolved when the parties made their agreement.
For a business deciding how much attention to devote to a contract before signing it, the lesson is not that every conceivable economic development must be anticipated. That would be neither practical nor economical. The more useful exercise is to identify the assumptions on which the transaction materially depends. If the economics of an agreement rely upon a particular cost of financing, a stable source of materials, predictable labor expenses, or a certain level of demand, the parties should understand what happens if those assumptions move materially in the wrong direction. The value of careful contracting lies less in predicting precisely what the economy will do than in deciding, before interests diverge, who bears the consequences when an important assumption proves wrong.
That preparation should remain proportionate to the transaction. Legal planning itself consumes capital, and businesses cannot reasonably devote unlimited resources to identifying and negotiating every remote contingency. Nor should the objective be the most elaborate agreement that counsel can construct. The better measure is economic significance: where uncertainty presents little consequence, additional drafting may add little value; where ambiguity could materially alter the economics of the relationship, clarity becomes an investment rather than an expense. In that sense, effective contracting is not an effort to eliminate uncertainty. It is an effort to decide which uncertainties matter enough to address before the market decides the issue for the parties.
Law in Transition: Building for an Economy Being Rewritten
Businesses are facing an economy that is changing rapidly due to technological advancement. The artificial intelligence boom is already directing extraordinary amounts of capital toward technology and infrastructure. In its July 2026 Monetary Policy Report, the Federal Reserve reported that business fixed investment increased at an 11 percent annual rate during the first quarter of the year, with much of that strength connected to the infrastructure required to support AI services. Investment outside AI-related categories was comparatively weak. At the same time, financing conditions remained generally accommodative for larger businesses while conditions for small businesses remained somewhat restrictive. Those conditions create an unusual economic environment.
There is enormous pressure to take part in a technological transition whose long-term value may be substantial, but the ability to participate is not distributed evenly. A large organization may be able to invest heavily in infrastructure, software, experimentation, and workforce transformation while absorbing investments that fail to produce immediate returns. Smaller businesses operating with tighter credit and less available capital have less room to be wrong. That does not mean smaller businesses should resist artificial intelligence. It means adoption itself is a business decision that requires careful consideration and planning.
Technology that reduces unnecessary work, expands productive capacity, or allows employees to direct more attention toward higher-value functions may make a business materially stronger. But an investment made primarily because competitors appear to be moving in the same direction can consume capital that the company may later need for other matters. A business must therefore consider what the is the most efficient and cost-effective way to implement new technology. The economic question goes beyond whether artificial intelligence can perform a particular task. It is what the business becomes after adopting it.
That question reaches the workforce as well. Employees are sometimes discussed in technological transitions almost exclusively in terms of tasks that may be automated. For the business itself, however, the relationship is more complicated. Employees also carry institutional knowledge, customer relationships, operational experience, judgment, and continuity. A company that enters difficult economic conditions with little financial flexibility may eventually have fewer choices about how it manages its workforce, regardless of how management would have preferred to respond. This is where business resilience has consequences beyond the owners.
A company that preserves sufficient financial and organizational flexibility is better positioned to make deliberate decisions about technology, investment, and staffing rather than having those decisions dictated by immediate financial necessity. That does not mean every position can or should be preserved regardless of economic reality. It means that thoughtful planning can preserve more options, and those options matter because they affect not only the business, but also the people whose livelihoods depend upon its continued viability.
The businesses most likely to navigate the AI transition successfully will therefore not necessarily be those that adopt new technology the fastest. They will be those that understand where technology creates genuine economic value, where human judgment and capability remain essential, and where sufficient flexibility has been preserved to respond to developments that cannot yet be predicted.
The consequences of the AI transition do not stop with businesses. They are beginning to reach the institutions and professions that govern them as well. The law occupies an unusual position in this transformation because it must develop rules for a technology to which it is simultaneously adapting. In that environment, building before the storm means preparing not for a single, predictable disruption, but for a range of possible changes while preserving enough flexibility to respond deliberately as they emerge.
Conclusion: Built for the Transition
In conclusion, the businesses most likely to navigate the future successfully will not be those that predict every economic shift or adopt artificial intelligence simply because the market rewards speed. They will be the businesses that preserve enough flexibility to make deliberate choices: where technology creates genuine value, where human judgment remains indispensable, and where continuity matters more than short-term efficiency. The enterprises that plan with equal attention to innovation and resilience for their employees, customers, owners, and communities that depend upon them will be better positioned to endure the uncertainty ahead. That is where preventative counsel can have its greatest value.
Before financial pressure narrows the available choices, counsel can help a business examine whether its governance, contracts, capital structure, and decision-making processes are designed for the company it is becoming rather than the company it once was. In a sense, preventative counsel must help marry the discipline of the horse and cart with the possibilities of the Model T—preserving what remains valuable in established structures while making room for a fundamentally different way of moving forward. The objective is neither to preserve the old simply because it is familiar nor to embrace the new simply because it is faster. It is to understand what should endure, what should evolve, and how the two can coexist during the transition.
No agreement can eliminate uncertainty, and no lawyer can anticipate every consequence of an economy still being reshaped by technology. But a business can enter that transition with greater clarity about how consequential decisions will be made, which risks it is prepared to bear, and where preserving human capability is as important as pursuing technological efficiency.
Building before the storm is therefore not about resisting change or insulating a business from risk. It is about creating enough strength and flexibility to meet change without surrendering judgment to urgency. The objective is not merely to survive disruption, but to preserve the ability to choose what the business should become when disruption arrives.
Questions Worth Considering
1. When economic conditions change, does the company's current legal structure clearly identify who has authority to make its most consequential decisions?
2. Which important business relationships depend upon economic assumptions that may no longer be reliable, and what does the governing agreement provide if those assumptions change?
3. If technological or financial pressure forced the business to make difficult decisions tomorrow, would its current structure preserve meaningful choices for the company and the people who depend upon it?
Publication Notice
This publication is provided for educational and informational purposes and does not constitute legal advice or create an attorney-client relationship. The law may vary by jurisdiction and depends upon the facts and circumstances of each matter.