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How to lose out because you didn’t think of everything when you made up the contract


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October 1, 2019 by Robert Koci

Years ago, I had a service contract with a client that did not include a provision that recognized the cost to me of fulfilling the contract. This is what I mean:

The contract was to manufacture and supply a product once a month for a year. The product required a lot of upfront preparation. The income I derived from the contract was significant and the loss of that income would have made things difficult. As the contract was worded, if the client for one reason or another decided cancel any, they could simply cancel and I would be out a significant amount of money and have wasted a significant amount of resources in preparation for delivery.

The exposure was huge. I didn’t word the contract to protect myself from the possibility of cancellation. I just hadn’t thought about it. Unfortunately, for business reasons, a couple of the product deliveries were canceled and left my company severely short of revenue for the year.

When it came time to renew the contract, I decided I had better reduce my exposure to the risk of cancellation. The next contract we signed had a provision that required the client to pay a fee if they decided to cancel a delivery after a certain date. It looked good to me and I was sure I would not have to suffer the same stress and anxiety that the previous contract gave me.

Boy was I wrong. I discovered the provision for the payment on cancellation was useless because the cancellation was at his discretion. The client has a simple solution to avoid having to pay the fee. He just wouldn’t cancel. When the deadline was passed for him to either cancel and pay the cancellation fee or accept the product he would not accept the product OR cancel the order. When asked, “Okay, so you don’t want the product, are you cancelling order?” his answer was, “I don’t want the product yet. and, no, I am not cancelling the order.” The wording of the contract allowed him to do that.

If he wanted to, he could not take the product and not cancel the order virtually forever, and never have to pay the fee OR accept and pay for the product. My carefully crafted contract was not worth the paper it was printed on. Very frustrating.

Passing the “deadline for confirmation of delivery” without confirmation should have been deemed a cancellation and the fee automatically applied. But the contract put the onus for cancellation on HIM.  In writing, no less! OF COURSE he would never cancel and force himself to pay a fee for nothing.

I hate advice that ends with, “Always ask your lawyer (or engineer, or accountant).” It seem like such a cop-out. But I should have. Maybe this is better: “As proud as you are of your intelligence and as sure as you are of your abilities, always run the most important decisions you make on behalf of your company through trusted advisors, friends, professionals, or people who are smarter than you.”