Contract termination repayments
April 19, 2005 11:07 PM   Subscribe

If a contractor terminates a job with a client before 100% of the work is completed, and has been paid a portion of their fee up front, is the contractor obligated to return the portion already paid, or a portion thereof?

This is a "hypothetical", but let's say we're talking about freelance programming work, in the state of Texas in the US. If a contract states something along the lines of, "either party may terminate with 5 days written notice, etc, etc", and the payment schedule is half up front, half upon completion, what are the implications, money-wise, when one of the parties ends the contract before work is complete? If the client changes their mind and gives notice of termination the day after the contract is signed, before any work starts, does the contractor keep the up-front money? If the contractor gets halfway throught the project, decides that it sucks, and exercises their right to terminate, do they owe their employer a full refund on the first half, or none, or some? I'm basically trying to get a general idea of how "gone" that first payment is after the contract is signed, and the work is underway. Not necessarily looking for legal advice - thoughts on business ethics and general wild speculation is welcome.
posted by Jesus Fucking Christ to Work & Money (8 answers total)
IANAL, but when I had this situation before, money that had been paid wasn't paid back. That was ethical, because a lot of work had been done in advance to win the contract. However, if this is still hypothetical, I would write it into your contract the way that you want it to happen. ;)
posted by SpecialK at 11:26 PM on April 19, 2005

IANAL, but it probably depends on whether the half up front was given to entice a particular programmer to work on the project or whether it was just part of payment scheduling. If the former, then it is gone (although this would normally be stated explicitly in the contract). If the latter, then it would be more a question of how much work has been done and what it is worth in comparison to what has been paid out. It would be very unlikely, unless there was something in the contract itself, that a programmer who did some amount of work would have to return all the money if they terminated before competion. To have done work and be forced to return the payment would be akin to have unwillingly worked for free, which is ethically, morally, and legally wrong. Ultimately, one would try to determine what the parties intended when they agreed to the manner of payment.

An analogy: An owner hires a company to level and grade some land. The owner will pay the company $100,000 total for the work. $50,000 is paid up front and the rest will be paid when certain mileposts are hit. The company does $30,000 worth of work but then pulls out for some reason. The company would owe the owner $20,000 because it has been paid $50,000 for $30,000 worth of work. The owner has to spend $5000 to find someone new to finish the job and the only other company in town would charge $110,000 for the same work. The original company that breached its contract will probably owe the cost of the owner's mitigatation of its damages ($5000) as well as the extra cost for the owner to have someone new complete the job ($10,000). Or something like that...

Usually, a well-written contract would state what would happen upon termination or breach of the contract so as to avoid such confusion.
posted by Falconetti at 11:46 PM on April 19, 2005

Well, there are practical and there are ethical issues. (Legal ones too, but not for me to answer.)

Do either of the parties want to work with the other party again? That's a practical consideration. If you've been paid half the fee, and you quit as soon as you can, well, the business that signed that contract might be pretty pissed. If you'd like to work with them again, you should discuss giving money back (at least as a good faith measure).

But if the business wants to work with the contractor again, demanding all of the cash back might not be in their longterm interests either.

As far as ethical issues go, honestly, you should be paid for the work that you did, no more and no less. If you've done half of the project, you should keep half of the total money. Work and pay should be ideally directly proportional. Where you go from there is subject to the vagaries of the law and your feelings about what benefits you most.
posted by klangklangston at 12:30 AM on April 20, 2005

IAAL, but not in Texas. The following would apply in my state.

For most contracts, the half upfront is security (for payment) rather than payment, just as the half retained is security (for satisfactory performance). In the event of a dispute proceeding to a lawsuit, the court will award money based on the amount of work done, including preparatory time that might not be reflected in tangible work product benefitting the client. But, also. . . In the event that the client simply changed his mind or otherwise did not cancel for good cause, such as dissatisfaction with the pace or the quality of work, the contractor can also justifiably claim damages, not just part payment for part work done, if he had declined other paying work to accept this contract, etc.

Depending on the amount involved, the client may not think it worth his time and effort to try to collect a refund.

A half hour with a lawyer in your state to outline your rights would only cost you a hundred bucks or so, and would be money well spent.
posted by yclipse at 3:32 AM on April 20, 2005

I don't recommend your payment schedule. This is software, not building a fence or getting your transmission fixed. Difficult for you to prove failure of consideration the way you stated it.
Let's say this got to court using the contract terms you stated. You terminate the contract and don't get back what you expected. If you sue to recover, the burden of proof is on you and the other party could pretty easily make a case to keep the up-front payment if you didn't specify the work to be done (and by when) in the body of the contract or an exhibit referenced in the contract, such as a purchase order. The contractor has your money. Your up-front payment means very little without work specifications. Pain in the ass to get your money back, not to mention legal fees if we're talking a non-trivial sum.
If the other party sues, it'd be because you withheld the final payment or a portion of it. Here again without work specifications, you're defaulting to the court's *cough* wisdom. Bad idea, especially in software.

Simple contractor rates are better; like payment each week in advance toward a ceiling amount. And specifications. And all that work-for-hire, ownership of intellectual property, etc stuff typical in independent contracting agreements.
posted by nj_subgenius at 6:32 AM on April 20, 2005

yclipse is correct
posted by caddis at 6:46 AM on April 20, 2005

Don't assume that because you're in Texas you will get your money back or that you'd win a suit. A good contract is the key. And what yclipse said about getting a lawyer's advice, though if you don't have one on retainer you should expect to pay more than a hundred bucks. You might want to get source materials from nolo press on this just to get a flavor of what a contract should look like before you see a lawyer.
posted by nj_subgenius at 7:11 AM on April 20, 2005

IANAL but to agree with yclipse:

In New York, construction contractors (and maybe all contractors, I'm not sure) are not entitled to any money until they have completed "good faith substantial performance", which means essentially completing the project. So in your hypothetical, the contractor would have to give the money back.

The situation would've been better if the contractor had been paid no money, they'd have a good suit for unjust enrichment or quantum meruit or whatever.
posted by falconred at 7:37 AM on April 20, 2005

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