“If I let my lawyer tell me what I could do for my business, I wouldn’t have a business.”
While this entrepreneurial spirit is admirable, it’s essential to balance it with a strong understanding of contract law. A well-drafted contract can protect your business interests, while a poorly written one can lead to costly legal battles and lost revenue.
The High-Stakes Game of Contracts
Crafting effective contracts requires a blend of legal knowledge and business acumen. Unfortunately, many small business owners overlook the importance of contracts or rely on generic templates that may not adequately protect their interests.
Let’s explore two real-world examples of how poorly constructed contracts can have severe consequences:
1. The Perpetual Marketing Nightmare
A tree trimming business entered into a seemingly innocuous marketing contract with an agency. However, the contract, riddled with complex legal jargon, contained an automatic renewal clause that tied the business to the agency for years to come. Despite minimal work being done, the business was obligated to pay hefty fees, a painful lesson in the power of well-crafted contracts.
2. The Never-Ending Web Design Project
A startup web development agency faced a similar predicament while working with a university. The contract failed to clearly define the scope of work, leading to endless revisions and delays. The agency found itself trapped in a cycle of revisions, unable to move on to other projects.
The Importance of Legal Counsel
To avoid such pitfalls, it’s crucial to consult with a business attorney who specializes in contract law. A skilled attorney can:
- Draft clear and concise contracts: Ensure that all terms and conditions are explicitly stated, leaving no room for ambiguity.
- Identify potential risks: Assess the contract for any hidden clauses or unfavorable terms that could harm your business.
- Negotiate favorable terms: Advocate for your best interests and secure favorable terms, such as payment schedules, deadlines, and termination provisions.
- Protect your intellectual property: Safeguard your valuable assets through appropriate intellectual property clauses.
- Resolve disputes: If a dispute arises, an attorney can help you navigate the legal process and protect your rights.
The Lesson of Substantial Performance
Even the best-laid plans can sometimes go awry. In the landmark case of Jacob & Youngs v. Kent, the court introduced the concept of substantial performance. This doctrine holds that if a party substantially performs its obligations under a contract, the other party cannot withhold payment entirely. However, the non-breaching party may be entitled to damages for any minor deviations.
By understanding the principles of contract law and seeking legal advice, you can safeguard your business and minimize the risk of costly legal disputes.
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