The Software Startup and the Very Big Very Important Customer: A Cautionary Tale

To wrap up this short series about the dangers of written integrated contracts—see here about contracts meaning what they say, and here about “quantum contracts”—I’d like to put the lessons into a hypothetical that might feel a little familiar to you.

Once Upon a Time There Was a Brave Little Startup…

Let’s say you’re a SaaS¹Software as a service. provider. You have some clients, but you haven’t hit it big yet. One day, a Very Large and Well-Known firm (VLAWK) reaches out to you because they’ve heard good things about your service and they think it can solve a lot of problems they’ve been having. You find out their needs, but it’s hard to price your service. You just have never had such a big client before, and handling their load might be expensive for you. You do some back-of-the-envelope figuring and come up with: $4000 a month, for a three-year deal.
Oh, says VLAWK, that’s too much. $2000 a month, please. You do some more figures and come up with the following offer: $2000 a month for two years, then $4500 for the next two years. The VLAWK representative, who (let’s assume) has the power to bind VLAWK, tells you, in writing, that “would be acceptable.” The VLAWK representative tells you that their lawyers will “paper the deal.”²You probably have your own form contract, but VLAWK won’t deign to use it.
A few days later, you get an email from the VLAWK representative with a draft contract. It provides for $2000 a month for two years. That concerns you. Did they just miss the increase? You write to the representative: what happened? The representative writes back, a little brusquely: yes, it’s an oversight, but don’t worry about it. You detect something in the representative’s tone that he’s not very interested in further discussion. Perhaps he just doesn’t want to go back to the lawyers—I mean, who does?—or maybe have to admit a mistake to his bosses. You shrug. The increase to $4500 is clearly in writing. VLAWK would be huge for you, if you can survive the process of scaling up, if for no other reason than your profile will go way up. You take a deep breath and sign away.
One other thing you noticed: the contract has a three year term, as per your original offer. That’s weird, but whatever. You’d think a very big and important company like VLAWK would have lawyers that wouldn’t miss stuff like that.
Oh, one other thing: it also has a bunch of boilerplate at the end, including this bit of word salad:

“This Agreement sets forth the entire understanding of the Parties.”

You didn’t really take that in. If you had, you might have thought: actually, the document you’re about to sign doesn’t really set forth everything you thought you agreed to. But it’s just boilerplate, so…

Two Years Later…

Two years later, and the deal VLAWK hasn’t been great. It did raise your profile, so business is better, but you’re not really sure you’re actually making money from the VLAWK deal itself. The good news is that it’s about to become quite profitable, because soon, VLAWK will start paying you $4500 a month.
A few months into the third year, VLAWK still hasn’t upped its payments to $4500. You reach out the representative, but he’s been reassigned or he’s left VLAWK or suffered a horrible accident. You reach out to the legal department, get blown off, but finally get through to a lawyer. She pulls out the agreement and ask you what in the world are you talking about?
You’re starting to get a bad feeling about this, but wait! The emails with the representative! You forward those to the lawyer. The lawyer says, ah, now she understands where you’re coming from. But the contract says what it says.
You feel like you’ve been had. In a way, you have been had. Isn’t this fraud? You entered into the deal on the mutual understanding that you’d get the $4500. The representative hadn’t been straight with you.
You have a choice: tell VLAWK they’re in material breach and yank the service³Before you do that, make sure the agreement has VLAWK waiving the right to consequential damages!, or bear it for a while longer.

Strike Me Down with It! Give in to Your Anger!

Let’s say you give in to temptation. VLAWK is mighty ticked and sues. You lose. The written contract says what it says, and that “integration clause” that was just boilerplate means that the written contract supersedes any previous agreement or promises, including the email exchange you had with the representative. What’s worse, unless the agreement waived the right to consequential damages⁴I.e., damages that flow foreseeably from the breach but aren’t directly caused by the breach. Although such a provision wouldn’t be likely to benefit VLAWK, it’s so common that VLAWK might include it without thinking. Boilerplate can fool the big boys, too., you might be liable for VLAWK’s lost business caused by suddenly losing your service, and for VLAWK’s efforts to find a replacement provider.
But what about the fraud? Sorry, but that requires VLAWK to have purposefully induced you to enter the contract with a promise that it had intention of carrying out. But what happened here is that VLAWK just decided to follow the contract. Even if you could track down the representative, he testifies that, at that moment, he was completely sincere about the $4500. It’s just that, for some reason, you decided to give it away.⁵Also, many states won’t recognize a claim for promissory fraud where there’s an integrated written contract that you were permitted to review before signing. Lesson: it’s almost never fraud, even when it really feels like fraud.
Want to hear something weird? Now might not be the best time to tell you, but if you hadn’t signed the contract, you’d have the agreement you thought you had. It wouldn’t be bundled up nice and neat into a single writing, but the email exchange you had with the representative⁶Remember, we’re assuming he was capable of binding VLAWK. probably forms a contract. The essential terms are all there. Everyone knows what services you’re providing and how much you’re going to be paid. True, there might be some details in the written contract you’d miss⁷Like that waiver of consequential damages, if any., but you’d be getting paid the $4500 a month… OK, I see that I’m not making you feel better, so I’ll move on.

Hades after he learns about integration clauses but before he learns about ambiguity. (We got this via GIPHY.)

If You Kept Your Cool…

OK, let’s say you grit your teeth and bear it. You decide to terminate the contract at three years, at which point, you’ll have leverage to get more from VLAWK. So you timely send out the appropriate notices of termination. But that lawyer writes back: are you joking? The contract is clearly for four years, she says. You respond that she must the joker here, because there’s a special provision in the contract that limits the term of the contract to three years, clear as day. She responds: Then how do you explain the provision that fee of $2000 a month is good for four years. She points to your email exchange with the representative as support.
Somehow you keep your head from exploding. A year ago, those emails didn’t mean anything. And how the lawyer has the gall to quote them back at you?
Well, she’s not crazy. The contract contains a contradiction, at least a superficially one. One term says three years, the other four years. Regardless, you’re not backing down. You say: Nope, it’s three years, and I’m cutting you turkeys off. We can negotiate an extension if you want.
Assuming cooler heads don’t prevail⁸Hopefully, VLAWK sees the peril of its position., and assuming VLAWK really needs your service⁹Otherwise, it’d just find a new vendor—and maybe sue your business for good measure., VLAWK probably sues your business at this point.¹⁰If you signed the agreement in the capacity as the President, CEO or whatever of your company, VLAWK will have to content itself with suing your company and not you, unless you haven’t been treating your company as an entity separate from yourself/. It wants “specific performance”¹¹An “equitable” remedy that forces the defendant to perform under the contract rather than just award money damages. It’s fairly unusual, since it requires that money damages be incapable of making the plaintiff whole. Here, VLAWK would argue that suddenly turning off the service would have unpredictable effects that can’t be adequately measured. I’m not sure how receptive a court would be to that. that forces to keep the service for another year. The court confronts the contradiction. I suspect that most courts would find the contract to be unambiguous about the three-year term, because it’s not fatally contradicted by the four-year language. But if the court decides the contract is ambiguous, you have problems because your own emails show that both parties expected a four-year deal. The integration clause wouldn’t prevent the consideration of the emails because the court would just be using them to clear up an ambiguity, not to add, modify or delete a provision.

The Moral?

If there’s a moral here, it’s this: You have more control than you might think, even if you’re dealing with a real VLAWK. The difference in bargaining power might be great, but don’t cede more ground than you have to. Sometimes, you’ll have no choice but to roll the dice on a sketchy deal, but you can still minimize the risks, and at least you’ll be entering the relationship with your eyes open.
Thanks for reading!

Rick Sanders

Rick is currently General Counsel for Software Freedom Conservancy. Previously, he has been practicing law as an intellectual-property litigator since 2000.