“If I let my lawyer tell me what I could do for my business, I wouldn’t have a business.”
Starting a business is one thing, working and proofreading contracts with clients is another. Creating disclaimers is integral if you’re selling a product; making sure promises are provable, and being explicit with returns/payment policies (remember, even a “no returns” policy is a returns policy). However, this gets more complex when you’re selling a service.
Contracts can make or break a business. It’s why consulting with a business coach is paramount for new business owners. The best contracts come from experience, not copy and pasted from templates. I’ve witnessed first-hand contracts that secured income indefinitely and contracts that unknowingly secured “services” indefinitely.
If that sounds vague, allow me to go into more detail.
Two Painful Contracts in Modern Day
Regarding the “secured income indefinitely” contract. There was a tree trimming business that had signed a contract with a marketing agency. Almost no work had been completed, and unfortunately, the 30 page contract was airtight, as no deliverables were promised. This was a 2 year marketing contract for tens of thousands of dollars and within the contract, the tree trimming business had a 14-day window to notify the agency that they’d like to cancel before the final month of work started, or it would automatically renew for another 2 years. At its core, this was a collection of sales people and lawyers.
For another, far less intentionally malicious contract. There was a startup web development agency working with a university on their site redesign. Within the contract, they’d promised a redesign that included mockups, wireframes and ongoing feedback on all pages of the site. What this looked like in practice was both parties spending 6 months going back and forth on the color scheme for the home page alone. They approached me when they received an email from the client saying they “hoped” the next 400 pages would go smoother. Sure enough, the contract stated a redesign for “each page” and not a template.
For that scenario, we created an amended contract with new terms and with all future contracts created “two revisions” within the scope of work. Beyond that, they would need to scope and charge more accordingly.
These scenarios can discourage small business owners, but their purpose is to demonstrate the importance of the contract. Having an advisor well-versed in legalese is paramount before sending or signing a contract. This is also why Jacob & Youngs v Kent (1921) continues to be discussed today. A court case where a breach of contract did not lead to any damages.
Jacob & Youngs v Kent: The Case
The plaintiff (Jacob & Youngs) contracted with defendant (Kent) to build a house. The defendant wished to have a specific brand of pipe installed and the contract reflected this wish. When the plaintiff had nearly finished the project, the defendant discovered a different brand of pipe had been used.
Now, the pipe used by the plaintiff was of equal quality to the brand of pipe desired by defendant. The plaintiff originally brought suit in order to receive the remainder owed by the defendant on the original contract price.
The defendant argued that the breach was material and requested that the existing pipe should be replaced with the desired brand. The plaintiff argued that using a different brand was a trivial error and that replacement would present an oppressive burden.
What’s the law say?
The doctrine of substantial performance prevents trivial offenses from totally wiping out an existing contract. When a breach of contract does not materially affect the goals of a contract, the offending party must pay for whatever difference in value occurs as a consequence of its breach. The offending party is not required to redo the promised part of the contract.
Court Rules in favor of Kent, but Jacob & Youngs
The court (New York Court of Appeals, highest court in the state of New York) found that using a pipe of a different brand but of the same type and quality was a trivial error. Ordering the plaintiff to completely replace the existing pipe with the desired brand would be oppressively expensive.
However, since the plaintiff breached the contract, the defendant was entitled to the difference in value between the product received and the product promised. In this case, the difference in value was literally zero because the two brands of pipe were of the same quality.
In the world of business, these kinds of trivial mistakes are quite common. Having an awareness of the concept of substantial performance can give you a sense of what to expect when these sorts of errors happen.
Image by Aymanejed