How to Avoid Unintentional Binding Contracts
If you run a small business, the lesson I learned from this colossal mistake might benefit you one day in case you ever find yourself in a similar situation.
What is a binding contract?
If you begin work on an assignment before having a signed agreement, you are creating a binding contract. That can cause a typical pitfall business owners sometimes face.
The legality behind a binding contract is that acceptance of an agreement is implied and binding when you perform a task. It does not have to be a signed contract.
The example below is from my personal experience. Still, it will show how you might unintentionally bind yourself into a contract to which you don’t agree.
This true story will show you what can go wrong.
It all started when two fellows told me that they wanted me to create an interactive pay-per-call dating service for a business they were planning.
Pay-per-call services were once a big thing in the 1980s and ’90s. People would dial into the service and use the keys on their phone to interact with menu prompts. The phone company charged for the call and paid the provider from that revenue.
Three tasks were required:
- One of those fellows who contacted me was an investor in start-ups and ran a company that sold radio advertising.
- The other fellow was a radio DJ with a professional voice. He could create radio ads for the planned dating service. He also could make the voice prompts required for the application.
- The fellows needed a computer programmer who could create the application. That’s where I fit in.
The Structure of the Application
The idea for the dating service was to allow men and women to record a personal profile in their voice. Other callers would select from a menu to listen to profiles of people of the opposite sex and by age range. As they browse through recorded profiles, they could leave a private message for anyone they liked.
The user’s profiles were publicly available, that is, anyone calling in could listen to them.
Only the intended recipient could pick up the private messages. Therefore, people could safely leave a callback number. Callers would be charged by the minute on their phone bill while listening to profiles and leaving messages.
My First Mistake
That’s the idea for the application. Now I’ll tell you what happened and how I lost my rights by letting these fellows use my software prematurely.
These two fellows offered to share one-third of the company proceeds with me. I accepted that plan and began to program the system.
We were working out the details of the agreement while I was programming. That was my first mistake. I should have waited until we had a signed contract with all the details exactly as I would want. But that wasn’t so bad. I still would have maintained control of my rights to the software as long as I didn’t give it to them.
How I lost my rights
We never resolved one particular clause in the contract.
They sought an agreement that if any of us dies, the other two will get the share of the deceased.
I felt that anything one does to create income should pass on to their spouse if they didn’t survive, so I preferred the agreement to reflect that idea.
We never finalized that one last detail in the agreement, and the day came when I finished the programming of the system. One of the fellows said,
“Listen, Glenn, you finished the programming, and we are ready to get started. Why don’t we begin running the system, and if we still don’t agree on things in a month, we’ll shake hands and walk away as friends.”
I fell for that without realizing the legal consequences. I installed my software on a computer and connected it to the phone lines at their premises, so that the dating service would be online. Then they started running radio advertising.
I lost my rights by letting them use my software.
The service was an overnight success. Soon the first payment came in from the phone company. I saw the check. It was for $100,000.
I asked for my third, but they told me that since this is the first check, we should put it back into the company. That made sense to me, and I went along with it.
A month later, another check came in for roughly the same amount. Once again, they came up with an excuse for not giving me my third.
In the third month, they didn’t show me the check because we were having issues agreeing to that last point for the contract. I insisted that I get my third of the proceeds now, or else I’ll pull the plug.
“Pay me, or I’ll pull the plug!”
They told me that I couldn’t do that:
“If you pull the plug on the computer, we’ll sue you for disrupting a million-dollar corporation.”
Do the math, $100,000 a month is a million a year! I asked my attorney if they could sue me for that since I never signed the contract.
My attorney told me that by giving them the software and hooking up the computer to run the business, I had legally agreed to do business without an agreement that would have stated my compensation.
My attorney went on to explain that if I pulled the plug, they could indeed sue me. However, if I don’t pull the plug, then they can’t do anything against me, but I could sue them for nonpayment.
Therefore I left the system running and initiated a lawsuit.
The suit dragged on for a whole year. After several months one of the fellows came to me and said,
“Glenn, you can keep us tied up in court forever. We have the money to fight you.”
I told my lawyer,
“I created a monster I cannot fight, and I need to discontinue the lawsuit.”
My lawyer realized that I would indeed be wasting time in court. So he worked out a settlement instead, where they would pay me for the development of the system.
That’s a one-time payment, with no ongoing residuals. I blew it. I knew that would be the best I could get out of it at that point since I lost my rights due to the unintentional binding contract to provide the system free and clear.
That one-time payment was nothing close to what I would have made sharing one-third of a million dollars — every year.
Lesson learned. When you do something without pay or a signed agreement to the method of payment, you are showing agreement to working for free.
About the Author
I write about life from a personal view to help and inspire others with what I’ve learned, based on my studies and experience.