Business development · 16 July 2018

How to deal with unfair business contracts as the owner of a small company

unfair business contracts
You can’t just sue someone for your money back because you’re unhappy with the deal you signed up to

Business Advice legal expert, and Grid Law founder, David Walker reflects on a recent conversation with a client to help company owners deal with unfair business contracts that could threaten the future of a small firm.

The law is an ass” according to Charles Dickens in Oliver Twist, which is a far politer description than one of my clients gave it this week!

It was an all too familiar situation. My client needed advice about a disputed contract he had signed up to after being completely let down by the service provider.

He had paid a rather hefty up-front fee and there was an ongoing monthly retainer for the five-year term of the contract. On top of this, my client had committed to a minimum marketing spend which the service provider had said was absolutely necessary to get the results promised.

Three months in, my client was realising that the reality of the service was nothing like the expectations from the sales pitch.

His priority was getting out of the relationship before wasting any more money on it and he also wanted to sue the service provider to recover the money he had already spent.

As with all new disputes, before giving any advice, I needed to review the contract and find out what had happened.

My client was shocked to discover that in this case, the contract was weighted completely in the service provider’s favour. He thought that contracts had to be fair and negotiated in good faith.

However, that’s not always the case.

Business-to-business contracts

With consumer contracts there are statutory protections to help prevent consumers from being taken advantage of. But with business-to-business contracts (as this was) as long as you don’t break the law, there’s no obligation to act in good faith. When negotiating a business contact, you can act entirely in your own best interest and that’s what the service provider had done.

My client received an elaborate sales pitch and was lured in by a glossy brochure full of testimonials.

The sales pitch included estimates of the likely profits the average business could expect to achieve if they signed up to the service provider’s services.

I asked what was said. My client told me he was expecting to earn “up to £100,000 within the first two years”.

My client thought this was a misrepresentation, but the sales pitch was very carefully worded. If my client had earned only £10,000, just 10% of what he was expecting, the earnings estimate would have been accurate as this was “up to” £100,000.

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If the statement was true, even with such dismal results, it wasn’t a misrepresentation.

Also, the service provider had protected itself from misrepresentations by including an “entire agreement” clause in the contract. The entire agreement clause specifically excluded all discussions and the contents of the brochure from the terms of the contract.

As explained above, my client had invested a considerable amount of money into this relationship and he was obliged to continue paying a whole lot more for the remainder of the contract.

With so few results, my client felt like this was a complete waste of money and wanted to sue the service provider to get his investment back.

So, assuming we could get over the entire agreement clause hurdle, could we take legal action to recover this money? Probably not.

You can’t just sue someone for your money back because you’re unhappy with the deal you signed up to. You must have a legal basis for bringing the claim.

In this case, misrepresentation didn’t look like a strong option so was there a breach of contract?

Again, the contract was weighted entirely in the service provider’s favour. Their obligations were so vague that they only had to do the very minimum to comply with the contract. Proving a breach of contract was going to be difficult too, especially so early in the relationship.

But the situation was even worse for my client. Even if we had a good chance of proving a breach of contract, we were unlikely recover any money because the service provider had protected themselves again by including a limitation of liability clause within the contract.

In this case, the amount we could recover, even if we won, was limited to far less than my client had already spent. It simply wasn’t commercially viable to start legal action against the service provider.

This was the point when my client started describing the law as something akin to an ass!

So, what can we do?

From a legal perspective there’s a very real risk that if my client stops making the payments, he could be sued for the fees due for the remainder of the contract.

My client is understandably concerned about this but in reality, I think it’s unlikely to happen.

My client simply won’t be able to afford this and as much as the service provider wants to maximise his profits, he will be at a serious risk of bankrupting my client. The service provider will then have wasted his own money chasing a debt that cannot be paid.

It’s early days with this dispute but I’m confident we will be able to reach a negotiated settlement with my client paying very little (if anything) more.

So, is the law really an ass?

Well, it can certainly seem like that, but my client has to accept a certain amount of the blame for getting himself into this situation. He had the chance to read the contract and take advice on it before signing up, but didn’t. He trusted the service provider and that turned out to be a mistake.

With business to business contracts especially, you’re usually stuck with the contract you sign up to and it’s your responsibility to ensure you understand what you’re agreeing to. If you don’t like the terms of the contract and you can’t negotiate something more reasonable, you shouldn’t sign the contract.

Now, I know for most business owners it’s not going to be cost effective to use a lawyer to review every single contract you enter into, but if you don’t, you do need to at least understand the basics of contract law. So, in next week’s article, I’m going to give you a checklist of important points to look for when reviewing a contract yourself.

In the meantime, if you have any questions about contracts or contractual disputes, please feel free to email me at editors@businessadvice.co.uk and I’ll happily answer them for you.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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