A Case StudyPersonal Services Contract

Finally, let's review another typical small claims dispute. Toni, a true artist when it comes to graphics, is an ignoramus when it comes to dollars and cents. Recognizing this, she never prepares her own tax returns. For the past several years, she has turned all of her tax affairs over to Phillip, a local C.P.A. They discussed price the first year, but after that Toni just paid Phillip's bill when the job was done.

One spring, things went wrong. As usual, Toni's records weren't in great shape, and she was late in getting them to Phillip. By this time Phillip, who was overly busy, put Toni's tax return together quickly, without discussing it with her in detail. When Toni saw the return, she was shocked by the bottom line. She felt that she was being asked to pay way too much.

She called Phillip and reminded him of a number of deductions that she felt he had overlooked. There was some discussion of whether Phillip should have known about these items or not. Things began to get a little edgy when Phillip complained about Toni's sloppy records and her delay in making them available, and Toni countered by accusing Phillip of doing a hurried and substandard job. But after some more grumpy talk back and forth, Phillip agreed to make the necessary corrections. In a week this was done and the return was again sent to Toni.

While her tax liability was now less, Toni was still annoyed, feeling that not all of the oversights had been corrected. Toni called Phillip again and this time they quickly got into a shouting match. When Phillip finally and reluctantly agreed to look at the return a third time, Toni replied, "Hell no, I'm taking my business to an accountant who can add."

True to her word, Toni did hire another accountant, who made several modifications to her return, resulting in a slightly lower tax liability. The second accountant claimed that because he needed to check all of Phillip's work to satisfy himself that it was correct, he ended up doing almost as much work as if he had started from scratch. As a result, he billed Toni for $2,300, saying that this was only $500 less than if he had not had the benefit of Phillip's work.

Phillip billed Toni $3,000. Toni, still furious, refused to pay. Phillip then sent Toni a demand letter asking to be paid and stating that most of the problems were created by Toni's bad records. He added that he had already made a number of requested changes and had offered to make relatively minor final changes at no additional charge. Phillip also suggested in his letter that he was willing to try to mediate the claim using a local community mediation center that charged very low fees.

When Toni didn't answer the letter, Phillip filed suit. Here is how Phillip should prepare the case:

Phillip's Case

Step 1. Phillip has already written a clear demand letter (see Chapter 6 for a discussion of how to do this) and suggested mediation–a good idea, as both he and Toni work in the same small city and Phillip has an obvious interest in not turning Toni into a vocal enemy. Unfortunately, Toni didn't bite on Phillip's suggestion of mediation.

Step 2. Phillip knows that Toni's business makes money, so he is pretty sure he can collect if he wins, which of course should be a big consideration in deciding whether to file any small claims case. (See Chapter 3.)

Step 3. In court, Phillip's main job will be to prove that he did a job that was worth $3,000 and to refute Toni's likely contention that his work was so bad it amounted to a breach of their contract. Bringing copies of the tax returns he prepared for Toni as well as his own worksheets is probably the simplest way for Phillip to accomplish this. He should not present the returns to the judge page by page, but as a package. The purpose is to indicate that a lot of work has been done, without going into details.

Step 4. Phillip should then testify as to his hourly rate and how many hours he worked. He should emphasize that extra hours were required because Toni did not have her records well organized. To illustrate his point, Phillip should present to the judge any raw data Toni gave him that he still has (for example, a shoebox full of messy receipts). If he no longer has Toni's material, he might create something that looks like it, carefully pointing out to the judge that this is a simulation of Toni's data, not the real thing.

Step 5. By testifying that he was hired to do a job, that he did it, and that he wasn't paid, Phillip has presented facts necessary to establish a breach of contract case. However, he would be wise to go beyond this and anticipate at least some of Toni's defenses, which will almost surely involve the claim that Phillip broke the contract by doing poor quality work and doing it late. In addition, Phillip should anticipate Toni's backup claim that he charged too much and that the judge should award him less than $3,000. Phillip could attempt to take the sting out of Toni's likely presentation by saying something along these lines:

"Your Honor, when I finished my work, my client pointed out that several deductions had been overlooked. I believed then and believe now that this was because the data she provided me with was disorganized and inadequate, but I did rework the return and correct several items that were left out. When my client told me that she felt the revised draft needed additional changes, I again told her that I would work with her to make any necessary modifications. It was at this point that she refused to let me see the returns and hired another accountant. In my professional opinion at this stage, very little work remained to be done–certainly nothing that couldn't be accomplished in an hour or two.

"Now, as to the amount charged–it took me ten hours to reconstruct what went on in the defendant's business from the mess of incomplete and incoherent records I was given. At $90 per hour, this means that $900 of my bill involved work that had to be done prior to actually preparing the return. Taking into consideration the difficult circumstances, I believe I charged fairly for the work I did and that I did my work well."

Toni's Case

Okay, so much for looking at what happened from the point of view of the indignant accountant. Now let's see how Toni, the upset graphic artist, might deal with the situation.

Step 1. For starters, Toni made a mistake by refusing to negotiate or mediate with Phillip. Especially since this is the sort of dispute over the quality of work where a judge is likely to enter a compromise judgment, it would have saved time and anxiety for both her and Phillip to at least try to arrive at a compromise outside of court. (See Chapter 6.)

Step 2. Once Toni has decided not to try to settle the case, she should write a letter of her own, rebutting Phillip's demand letter point by point. (See Chapter 6.) She should bring a copy of this letter to court and give it to the judge as part of her presentation. The judge doesn't have to accept Toni's letter (it's not really evidence of anything but the fact that she rejected Phillip's request for payment), but more often than not, the judge will look at both parties' letters.

Step 3. Next, Toni should testify that she refused to pay the bill because she felt that Phillip's work was so poor that she didn't trust Phillip to finish the job. To make this point effectively, Toni should testify as to the details of several of the tax issues Phillip overlooked. For example, if Toni provided Phillip with information concerning the purchase of several items of expensive equipment for which Phillip didn't claim depreciation, this would be important evidence of poor work. But Toni should be careful to make her points about tax law in a relatively brief and understandable way. She won't gain anything by a long and boring rehash of her entire return. One good approach might be for Toni to submit pertinent sections of IRS publications or a privately published tax guide outlining the rules that require equipment to be depreciated.

Step 4. Toni should next present more detailed evidence that supports her claim that Phillip did poor work. The tax return as correctly prepared by the new accountant would be of some help, but it would be even better to have the second accountant come to court to testify about the details of Phillip's substandard work. Unfortunately for Toni, professionals are commonly reluctant to testify against one another, so this may be difficult to arrange. But Toni should at the very least be able to get a letter from the new accountant outlining the things that he found it necessary to do to change the return as prepared by Phillip.

Step 5. Toni should also present to the court her canceled checks, establishing the amounts she paid Phillip for the last several years' returns–assuming, of course, that Phillip's previous bills were substantially less. For example, if Toni had been billed $1,700 and $1,900 in the two previous years, it would raise some questions as to whether Phillip's bill of $3,000 for the current year was reasonable.

Both Toni and Phillip should be prepared to answer the judge's questions. Especially in a case like this one involving a technical subject, the judge is almost sure to interrupt both Toni's and Phillip's presentations and ask for details. So in addition to preparing and practicing presenting their cases before a critical friend, both Phillip and Toni should be prepared to answer likely questions and then smoothly return to presenting their cases.

Because this little story is based on a real case, I can tell you what happened. The judge gave Phillip a judgment for $1,800. The judge didn't explain his reasoning but apparently felt that there was some right on each side. He split the difference with a little edge to Phillip; probably because Toni hired Phillip in the first place and had worked with him for several years, she was on somewhat shaky ground claiming he was incompetent. This sort of compromise decision, where each side is given something, is common in small claims court and again illustrates the wisdom of the parties' negotiating or mediating their own compromise. Even if Toni and Phillip had arrived at a solution where one or the other gave up a little more than the judge ordered, there would have been a savings in time and aggravation that probably would have more than made up the difference.

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