A client, who recently used an agreement that he found on the internet, called us for help. The agreement was used to hire a subcontractor for a $100,000 task to be performed over several months, yet payable at a daily rate of $1,500 per consultant. The agreement had a beginning and an end date.
The subcontractor’s work was far below standard and was not worth the daily rate. Our client wanted to terminate the subcontractor prior to the end date. Unfortunately, the contract was silent as to any termination. Without a termination provision, the law generally requires “good cause” to terminate. Additionally, the contract contained no description of the services to be provided, so the client could not explain what the subcontractor’s deficiencies were. When the client suggested termination, the subcontractor demanded a $25,000 termination fee.
We were able to prove some of the deficiencies, enough to force a settlement, based on generally accepted performance standards. Unfortunately, the client had to pay our attorneys’ fees and a substantial sum to settle so he could move forward.
How could this have been avoided?
Using someone else’s forms and work product is dangerous because contracts are prepared for specific purposes and one size does not fit all. Provide for termination without cause and describe the services that are required by you to achieve the result for which you are paying. Contracts must be prepared based on the possibility of negative events, rather than the community of interests. Allowing attorneys to review and prepare the contracts that will have a big impact on your business will save you money in the long run.
Another client wrote his own contract with a computer network consultant, who was required to maintain the network, respond to problems, and maintain web sites as well as purchase and upgrade the hardware and software. The contract stated that the client would pay the consultant an hourly rate and guaranteed to use the consultant’s services for up to 20 hours per month for six months. The contract also stated that it could be canceled by either party following 30 days prior written notice. The contract did not, however, state when repairs were to be made or how long the network could be down during a month, nor did it deal with the termination of the payment obligation and consequential damages.
By the end of the first month, the consultant had only shown up three times, had spent less than two hours working, and the network was down ten full days. The client was convinced that the consultant had caused substantial damage to the client’s computer network and destroyed one of the servers, causing a loss of business opportunities.
The client sent the consultant a letter notifying him that their agreement would terminate in 30 days. In response, he received a letter from the consultant’s lawyer blaming the damages on the client’s technical staff and demanding payment for the entire six months because he lost profits! Not providing for a termination of the compensation upon termination of the contract allowed the consultant to claim he was entitled to the full six months’ payment.
How could this have been avoided?
In addition to the suggestions made above in the first case:
- Clearly state the terms of the deal: How long is reasonable for the network to be down during a month, how many hours must be worked at a minimum, and outline performance standards (i.e. response time, quality of parts for replacement, etc.).
- Build in a statement of representations and warranties of the vendor.
- Have contracts with vendors and service providers reviewed by attorneys with expertise and knowledge of how to anticipate such problems and properly protect you from damages.