Inflexible Contractual Terms

Chances are, you’ve signed a contract before. Or, you may have made one verbally. Simple offer and acceptance are the basic requirements for contract in Law. In this article, we’re going to look at the spirit of the contract rather than the harsh elements of enforcement, breach and the like. In other words, we will consider the friendliness or morality of the contract from a business perspective.

Consider this: Diane and Pete sign a contract in which Diane is to provide eggs to Pete for his baking business. Everything goes well over two years, when suddenly, Diane’s mother who lives in Jamaica, gets very ill. Diane lives in Barbados and is her mother’s only child. She must go to take care of her mother and make arrangements. She informs Pete that she will be leaving at the end of the month but that she can find another supplier so that Pete doesn’t have to worry about the lack of eggs.

Pete is very upset. He pulls out the contract, signed two years ago. It mentions three months’ notice of termination. He basically tells Diane that she will have to meet the penalty clause which states compensation for three months’ supply (which in the very least would mean that she pays the new supplier). While Diane understands the terms of the contract, she cannot understand Pete’s rigidity.

The above is a simple example which illustrates how ridiculous enforcement can sometimes be. Of course, no one is supporting loss by one party while the other party simply goes their jolly way. But in the case above, it can clearly be seen that there would have been no material loss to Pete or his business. Therefore, when a client or supplier comes to you a la Diane, what do you do?

In the past, I have allowed clients to walk away from or change terms of an Agreement based on extenuating circumstances. I always remember allowing one client to terminate a six month contract in month four, since his business was on the brink and ours at the time was a very healthy business. He was always grateful. More than seven years later, he brought a $700,000 contract to the company for which I worked. He paid fifty percent upfront and the other fifty at the halfway point. Do you think he would have returned if I had held him to ransom by the rigidity of the penalty clause within his earlier contract?

Consider this the next time you may be faced with such situations: how much am I losing? Is there a way in which both parties can walk away happy? If I’m not losing anything, why am I holding this person to the fire? What about future business? How much influence does this person have? Would it do me well to terminate the contract in terms of my business reputation?

While not all agreements can be easily terminated based on value, critical points and more, when it’s a simple one, why not keep it that way?