Ordinary course of business: Overview, definition, and example
What is ordinary course of business?
Ordinary course of business refers to the normal, routine operations of a business, including activities that are consistent with its usual practices. This concept helps define whether a transaction, decision, or action aligns with how the business typically operates.
For example, a retail store purchasing inventory from suppliers is considered part of its ordinary course of business. However, if the store suddenly sells off all its assets at a discount, that would be outside the ordinary course and may indicate financial distress.
Why is ordinary course of business important?
This term is often used in contracts, financing agreements, and legal disputes to determine whether a business is operating as expected. It helps:
- Ensure contractual consistency: Parties in an agreement know what to expect in terms of operations.
- Prevent unexpected liabilities: Transactions outside the ordinary course may raise concerns for investors, lenders, or business partners.
- Provide legal protection: In bankruptcy or mergers, courts analyze whether transactions were within the ordinary course to prevent fraudulent or unfair actions.
Maintaining clear documentation and policies helps businesses demonstrate that their activities align with standard industry practices.
Understanding ordinary course of business through an example
Imagine a manufacturing company that regularly buys raw materials from a supplier. This is part of its ordinary course of business because it’s essential to operations. However, if the company suddenly sells off factory equipment—something it doesn’t normally do—it may signal financial trouble or an unusual event.
In another case, a restaurant signs a contract with a food distributor to purchase fresh produce weekly. If the restaurant suddenly agrees to buy a large quantity of non-food-related items, that would likely be outside its ordinary course of business and could raise concerns among investors or creditors.
Example of an ordinary course of business clause
Here’s how an ordinary course of business clause might appear in a contract:
“Each party agrees to conduct its operations in the ordinary course of business and shall not engage in any transaction outside of its normal business activities without prior written consent from the other party.”
Conclusion
The ordinary course of business ensures that companies operate in a predictable and legally sound manner. It protects businesses from unexpected liabilities, helps maintain investor and lender confidence, and plays a crucial role in contract enforcement and financial stability. Companies should clearly define what constitutes their ordinary course of business to avoid legal and financial risks.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.