A Case StudyProving a Contract Exists
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Now let's review a typical small business case with an eye toward identifying good strategies. Don Dimaggio is a successful architect and industrial designer who heads his own small company, which specializes in designing small manufacturing buildings. He prides himself on doing highly innovative and creative work. Recently Don did some preliminary design work for an outfit that wanted to build a small candle factory. When they didn't pay, he was out $8,500. In Don's view, the dispute developed like this:
"Ben McDonald, who makes custom candles, had a good year and wanted to expand. He called me and asked me to rough out a preliminary design. McDonald claims now that we never had a contract, but that's simply not true. What really happened is that McDonald authorized me to do some preliminary work before his company got their financing locked down. When interest rates went through the roof, the whole deal collapsed. I had already completed my work, but they refused to pay. My next step was to get Stephanie Carlin, a lawyer who has done some work for me, to write McDonald a letter demanding payment. When that didn't do any good, I took Stephanie's advice and filed a small claims court suit against McDonald. True, I had to scale my claim back to $7,500, the small claims maximum. But I obviously couldn't afford to pay Stephanie $200 an hour to file in formal court, so it seemed like the best approach."
Don's most immediate problem was that he had never used small claims court before. He wasn't sure how he needed to prepare, but knew, at the very least, he had to develop a coherent plan–if for no other reason than to overcome his anxiety. Here is how I coached him to do this:
RW: "Your first job is to establish why McDonald owes you money. Presumably it's because he violated an agreement that he would pay you for your work."
DD: "True, but unfortunately, nothing was written down."
RW: "Oral contracts to provide services are perfectly legal if they can be proven, and judges typically bend over backward to see that freelancers get paid. But don't be so sure you have nothing in writing. Tell me, how did McDonald contact you?"
DD: "Mutual friends recommended me to him. He phoned me and we talked a couple of times. There was some back and forth about how much I would charge for the whole job and how much for parts of it. After a little garden-variety confusion, we decided that I would start with the preliminary drawings and be paid $8,500. If the whole job came through and we felt good about one another, I would do the entire thing. On big jobs, I always insist on a written contract, but this one was tiny and I couldn't see wasting the time. McDonald just stopped by with someone else from his business, and we hashed out the whole thing in person."
RW: "Did you make notes?"
DD: "Sure. In fact, I made a few sketches, and they gave me specifications and sketches they had already made."
RW: "Do you still have those?"
DD: "Of course, in a file along with a couple of letters they sent later thanking me for my good ideas and making a few suggestions for changes. And of course, I have copies of the detailed drawings I made and sent them."
RW: "Well, that's it."
DD: "What do you mean, that's it?"
RW: "You've just told me that you can prove a contract exists. The combination of the sketches McDonald provided and the letters someone at his company wrote to you pretty convincingly prove they asked you to do the work. Of course, it helps your case that the law presumes that when a person is asked to do work in a situation where compensation is normally expected, he must be paid when the work is completed." (In legalese, this presumption is called quantum meruit. See Chapter 2.)
DD: "That's all there is to it? I just tell the judge what happened and I win?"
RW: "Not so fast. First, let me ask if you are sure you can present your case coherently. After you make your opening statement, you need to back it up with the key facts that show that McDonald hired you, that you did the work, and that he broke the contract by failing to pay you. (As discussed throughout this book, because so many people do a poor job making their oral presentation, make sure that you practice ahead of time.) Ask a savvy friend to serve as your pretend judge. Then present your case as if you were in court. Encourage your friend to interrupt and ask questions, since that's what a judge will likely do. Finally, be sure you have organized all your evidence, especially the plans and letters, so you are ready to present them to the judge at the appropriate time."
DD: "What about McDonald? Is he likely to show up?"
RW: "Many cases involving money being owed result in defaults, meaning the person being sued ignores the whole proceeding. (See Chapter 15.) But you know that McDonald claims he doesn't owe you the money, so it's my guess he will probably show up and claim no contract existed. Therefore, you should be prepared to counter the points he is likely to make."
DD: "You're right. Although it's a total crock, he will probably claim I agreed to do the work on speculation that he would get financing and that since the job fell through, he doesn't owe me anything."
RW: "And if your case is typical, McDonald will also probably try to claim your work was substandard. That way, even if you prove that a contract existed, the judge may award you less than you asked for."
DD: "But they wrote me that my design was of excellent quality."
RW: "Great, but don't wait until they raise the issue. Because you are pretty sure this point will come up, emphasize in your opening statement how pleased McDonald was with your work and present the letter to the judge. Now, what about McDonald's argument that there was no deal in the first place? Do you ever do preliminary work without expecting to be paid unless the deal goes through? And is that a common way to operate in your business?"
DD: "Me? Never! I don't have to. I suppose some designers do, or at least prepare fairly detailed bid proposals without pay, but I have so much work coming my way these days, I'm turning jobs down right and left, so when I do submit a bid, I make it clear to all potential clients that I charge for preliminary drawings. In this situation, as I said, we agreed on the price in advance."
RW: "What about witnesses to that conversation?"
DD: "Well, Jim, my partner, sat in on one of the early discussions. We hadn't agreed on the final price yet, but we weren't too far apart."
RW: "Was it clear to Jim that you intended to charge for your work and that McDonald knew you did?"
DD: "Yes, absolutely."
RW: "Great, bring Jim to court with you as a witness. Here is how I would proceed. Organize your statement as to what happened so it takes you no longer than five minutes to present it to the judge. Bring your sketches, and most importantly, the sketch that McDonald made, along with the letters they sent you, and show them to the judge. (See Chapter 15.) Then introduce your partner and have him state that he was present when money was discussed."
This little scenario is a simplified version of a real case. What happened? The small claims court judge awarded Don the entire amount he requested, and McDonald paid it.