Contract law is continually evolving so courts can decipher the purpose and intent of these contracts. This is where the benefit detriment theory comes in. A substantial agreement must exist and the parties must have freely intended to be legally bound.
For instance, if a client offers your business partner a quid pro quo deal.
- Example: “If you redesign my site, I’ll refer my clientele to you.”
Some courts might consider this a valid contract. It’s enforceable as the client (the promisor) gets something of value from the promisee (business partner). However, if the the offer was a bit more audacious…
- Example: “If you redesign my site, I will give you 1 billion dollars.”
This “contract” is unlikely to hold up in court because it would be unreasonable to assume the client could come up with a billion dollars.
“Consideration” in Contract Law
Consideration is integral to contract law, not the amount of consideration, but actual intent.
For example, consider a family that suffers a tragedy in their home. Overcome with grief, they agree to sell the property to their neighbor for $25.
As unlikely a scenario as this may be, courts may view this as a valid contract. In this case, the promisee (the family) would be given the psychological relief of selling their house due to being rid of the mental burden of the tragedy. The fact that they did this for $25 has no bearing on the enforceability of the contract.
This is called the Benefit-Detriment Theory.
The most famous benefit theory case was in 1891, in the case of Hammer vs Sidway.
William E. Storey was a rich businessperson in New York. Storey promised his nephew $5,000 (roughly the equivalent to $130,000 today) if the nephew abstained from alcohol, tobacco, foul language, and gambling until the age of 21.
The nephew did so, and upon reaching the age of 21, wrote to his uncle who replied he would transfer the money to him, but that he would appreciate his nephew waiting to get his inheritance until later, and that he would add interest as he waited.
Unfortunately, the uncle died before transferring the money and the executor of the estate said there was no valid consideration as the so-called conditions of the agreement — since it did nothing but good for the nephew.
The New York State of Appeals Court disagreed, and ruled that the sacrifices the Nephew underwent in living up to his end of the deal were of sufficient value to having forgone the pleasures he could have experienced in drinking alcohol, smoking tobacco, using foul language or gambling.
Though closely related, the Benefit-Detriment Theory has been supplanted by the bargain theory. The bargain theory primarily views a contract as an exchange or a bargain, and as long as that is reasonably satisfied, it doesn’t much matter the value of the consideration.
For example, in the case of the family who sold their house for $25 to relieve themselves of psychological trauma. In selling their home, they achieved almost no monetary value. Yet, the psychological value, even if they sold the house for 1 cent, could be seen as a bargain for both.
Bargain theory takes into account subjective benefits, while benefit-detriment theory primarily takes into account objective benefits.
Benefit Detriment Theory in Modern Day
So how’s all this impact your day-to-day as a business owner? With startups, so often the contract or the Statement of Work (SOW) is based on a template found online or the entrepreneur’s former employers’ contracts — rarely, if ever, are contracts full-proof.
This is important for a few reasons:
- If you’re still registered as self-employed rather than organized as an S-Corp (or even LLC), then you are on the hook if you wind up with a client who is threatening to sue.
- If your client is using the nebulous contract and legal jargon to shovel more work out of you.
Now, first, if a client is threatening to sue because they feel there has been a breach of contract, you should seek legal counsel. That said, the following is an opinion based on our dealings with law practices. Most people are encouraged not to sue unless millions of dollars are involved. Rarely (if ever) do lawyers recommend going to court over a few thousand or even a hundred thousand dollars. Does it happen? Yes. Is it common? Absolutely not.
All that said, it’s worth mentioning because typically a client threatening to sue or a client reading the fine print of a contract to get more work out of you are both after the same thing: they want more than what was contracted for. In a “best-case-scenario” outcome, you and reason with the client and determine how best to proceed given what was written in the contract and what you’ve already done. However, even in the “worst-case-scenario,” don’t feel as though you’re at the mercy of a client simply because they throw a contract back in your face.
Consider Jacob & Youngs v Kent
For another example of this, read about the court case featuring Jacob and Youngs v Kent. The case illustrates how a contract clearly indicated the construction company would use a particular pipe and they did not. While the court agreed the contract was clear, they did not enforce Jacob and Youngs to replace the pipe as the piping they used wasn’t substantially different from the one requested and it’d be far more costly to tear apart the construction and replace the pipe with what was in the contract.
Again, if a client threatens to sue, consult legal counsel immediately for help. The purpose of these stories is to give you some peace of mind that there are solutions.