Contract Termination

In the latter part of May, I was contracted to develop a large scale website for a company located here in the US. The contract stated that I had until September 1 to complete the website at the amount specified, and that payment would be received upon the customer's acceptance of the work. The customer paid 35% of the cost up front so that any expenses I incurred would be covered.

Towards the early part of July, the customer requested an additional feature to be desgined and developed, which resulted in an undocumented October 1 deadline and the price being elevated by 25%. The customer agreed to this amount and new deadline, but it was not recorded as an ammendment to the contract.

On August 23, the customer came to me and expressed concern for the impending deadline, and said they would "let me go". They said that I was now in debt to them for the initial 35% payment, as well as the costs of their web hosting during the time I spent developing the site.

Now, the contract made absolutely no mention of termination fees, partial payments, or implied costs, so I don't really think that I'm obligated to pay anything more than maybe the 35%. But, there's something screwy about that even (to my favor): The contract stated that payment would be issued upon the customer's acceptance of the work. The customer provided the payment at their own discretion prior to any work being done, thus, out of contract.

Also, if they are going to collect implied costs, I had 2 developers working for me (the reason the deadline was becoming a concern), I hosted a discussion forum for the project (which they want copies of everything from), and bills for phone calls directly related to the project. Also, the additional feature they requested was partially used by them, which they have not returned to me.

So, I am in need of opinions and advice.

The total cost is really too little to be handled in a court of law, unless the implied costs and supposed "damages" due to lost marketing are taken into consideration. But when it comes to those "damages", the customer terminated the contract prior to the initial deadline, let alone the ammended deadlines, thus removing responsibility from me. Correct?

Since they still have posession of a portion of my system, they are required to supply me with payment. Correct?

Since they issued the 35% cost upfront (outside of the contract), it should not have to be refunded. Correct?

Don't worry, I am in the process of discussing this with a lawyer, but I want to get real world opinions as well. This is the first time I have ever had to consider legal action on a project, so I'm quite nervous and uneducated.

Thanks in advance.

Early termination on their part is not your fault. They should not ask you to refund money and you still have till September 1 to complete your side of the agreement. Essentially, they have breached the contract.
Feature creep.
Serious error on both your parts. Always get it in writing.
Where in the contract does it say this? It doesn't, does it?
Another serious error.
You will. From your lawyer. The time to contact your lawyer was when this contract was written not after you get in trouble with a badly written contract. Then you can use the same contract for most future work.
Always, always get everything into the contract. And if something comes up later, write it as an amendment. Always! In many cases, if it's not in the contract then it doesn't exist.

This is just all screwed up. They pay you to start a project then want their money back when they pull the plug on you. Since none of this was in the contract, I don't see what recourse they have but they will hear real world advice from their lawyer, too.

One piece of advice about lawyers. Years ago I had one who was a real likeable guy. His rate, then, was $125/hour. My business had a problem and it took many months and hours to solve.

I read in the newspaper about another lawyer who was known as a real cuthroat. Other lawyers didn't like him because he was known to sue other lawyers! He charged $300/hour. He took over my case and solved it in one afternoon with two phone calls. Should I repeat that ten times?!!!!

I learned a LOT from this mess, including feature creep, the importance of documentation, etc. Since nobody (that's not aimed at this forum) had any advice to offer before I started, this was the only way I was going to find out. There was no "how not to get screwed by your customer" manual anywhere, so I took the shot in the dark: I missed.

I know about good lawyers and all that, but there again, I've not had any experience before this, so I have no other way to find out who to use. There are many lawyers in my area, but several of whom my family has had encounters with in the past, so I have reason not to trust them. Just like the business of web development, though: You get what you pay for.

Thanks for the advice. While it is going to be useful to me, I'd be interested in other opinons as well.

First, you need to put a lot of thought into all contracts. You need to have an iron-clad Professional Service Agreement, and deal with the schedule and scope in your Statement of Work. You should have a clause in your SOW like:

Your PSA should have dealt with refunds, cancellations, fees, etc. Anything that changes the project scope or legal agreement should be put into an addendum and signed off. I luckily have networked and get contract advice from highly paid lawyers, ones that cost more than I'd feel paying. Having such resources is incredibly valuable.

In this case, if there was no agreement to fees then you should be fine. The general rule is that if the customer doesn't like your work, don't take their money. So I'd give them back the 35%, simply to maintain a professional relationship. I would not accept responcibility for any other costs. They are also not entitled to use, distribute, or modify any of the work you have done. They are liable for damages if they do so, and you should make that explicitly clear to them.

The rest falls under exact wording of the contract, so if you post it up I might be able to provide a little more advice.

I can't post it verbatium, due to names, numbers, and addresses. Here it is though:


The only thing I see that makes me question my protection is the part about them owning it. The line prior to that tells me that they only own it if they accept it, which they did not.

Edit: Yes, I know this a weak, vague, and muddy contract. I learned from it already.

Them owning it is due to the loophole in work-for-hire copyright. Whoever did 'x' owns the copyright to it, even if they were paid by someone else to develop it. If they didn't have this, then you would hold all rights to the source code, could put your own license on it, and charge them for it. You could even release it to the public domain, thus nullifying their competitive advantage.

However, since the work was not completed, paid for, and accepted they do not own any of it. You could make an agreement to sell the work you've done, say for the 35%. However, they currently have no rights to it and if you discover that they have used it, then you can sue. While I am not sure what you could expect, it would definately be more than the cost of development as it should be an incentive against such actions.

I find it suprising that they even gave you money down. Its a horrible agreement - I wouldn't contract out work with it. It doesn't even give the right to terminate the contract, which might mean that its binding and that if you complete the work, they are liable. You should talk to a lawyer, because it looks as if they are not in the position to break the agreement.

While I have not been a contractor, I am currently contracting out work. If you PM me your email address, I will strip out the personal information and send you the PSA our contractor used. It should be a good template for you, as it is a very well designed document.

PM sent. Thanks.

A couple of things I may have failed to state already:
- The customer provided this "contract". They claim their lawyer wrote it for them.
- The "Contractor Name" was very similar to the business name I use, only it was appended with ", Inc." -- This may or may not be a leverage point, because I did still sign the contract.

Again, thank you very much for the advice and opinions. You guys are great!

A bald faced lie.

Okay, so now that I've got a good sense that I'm on top, I need a little more advice.

What would be the best course for action in me telling them that I won't pay anything more than the $500? Should I even pay the $500?

Sure, I'm still trying to get a lawyer to help out, but I need to get this taken care of ASAP, if I'm doing anything.

OT: I'm so glad I decided to make use of this forum. You guys are amazing. Thanks!

6th Law of Pricing: If they don't like your work, don't take their money.
-G. Weinberg, The Secrets of Consulting

You do not know their true motives for breaking the contract. Would you have not met the deadline, had they not wanted to void the contract? If you could have or would have finished very shortly afterwards, then they have an alternerior motive. It may be to get 90% of it for free, or because they have changed direction and decided they don't need your software. You can't take their claims at face value, because you don't really know what is happening.

If you want to act like a professional contractor, then take the high road and return the down payment. However, you do not have a company or significant experience that this will harm future relationships, so you have a lot of flexibility. If their concerns were unfounded, then you could check with a lawyer to see if they are allowed to void the contract. You probably can force them to pay, but likely with legal threats and potentially going to small claims court. If you are the one filling, I believe you get to choose the district (which means if they are not local, its a real pain for them). If you go down this road, it probably won't seem worth it in the end.

I would probably agree to return the down payment, not pay any "fees", and make it painfully clear that you own all rights to the source code. That means that if they use any of your previous deliverables, you will seek damages. This should only scare them if they are truly trying to get your work for free.

I personally think they gave up on this idea and now don't want to pay. That means their only interest is making back all their money (hence, you paying for their website fees). This would mean they will fight tooth-and-nail not to pay you, and make your life hell if you don't return the money. Its better to walk away with dignity, learn from this experience, and ensure that future contracts avoid this situation from occuring again.

I realized I only answered the second question, but not the first.

Simply be honest about why you will not pay extra. The contract doesn't stipulate any additional fees and you never required them to supply hosting. That is a seperate expense that is in no way related. There is no legal or ethical grounds for you paying hosting fees. Do not try to sneak in a snide remark or act upset, just be professional and straight to the point. Stay emotionally detached.

You also noted originally that they agreed to extend the deadline, but not in an ammendment. This is a verbal contract and is legally binding. They should have no cause for voiding the contract. So again, they are not canceling it because of your quality, but due to reasons outside of your control.

You also said that they are using a previous deliverable. You should stress that with the contract void, you demand either a new contract be drafted for them to license or buy the offending code, or it be immediately removed. If they stall on you, send a cease and desist letter from a lawyer - that should scare them straight. Make sure that they know you are serious and will seek damages, because while you will be professional and allow them to void the contract (although they have no grounds or rights to), you will not be used and pushed around.

While contractors must always be professional and at the whim of their clients, they need to have a backbone. Be fair and stand up for yourself.

Of course, now he has the problem of legal costs. If they paid him, say $500, and a lawyer charges him $250 for two hours of work, and he owes others for work, he could get in a hole.

He could return what he was paid, minus what he owes others, with the stipulation that he owns the material, minus what they paid others to do. Of course, they could still sue for damages.

He could also do nothing and hope the other party moves on but this could be dangerous if they decide to sue for $30,000 in damages later on.