"Binding" Contracts

Growing up, there is a a sense that contracts are completely binding.  They are like death and taxes- you can't escape them.  Then after your first apartment lease goes awry or you decide you want out of that pain-in-the-ass 2 year agreement with your cell phone company, you get a little nugget in your head that contracts really aren't so rock solid.

The myth is that all contracts are binding during their duration.

The truth is that a contract is only as solid and binding as the early termination penalties are painful. 

For example, when you sign a 2 year agreement with a cell phone provider, you get a highly discounted phone and monthly service plan with some bells and whistles, such as a phone upgrade.  The early termination fee for most cell phone companies is somewhere between $200 and $400.  If you really hate your provider, it might be worth it to you to get out of that contract.

In business to business contracts the idea is similar, though the stakes are a little higher.   As a service provider to another business you usually have 2 options - a fixed fee contract or an hourly contract.  Hourly contracts typically require 30-60 days written notice to cancel.  That's it.  Because it's an hourly rate, they aren't beholden to pay the service provider anymore than what they work for.   These types of contracts are far from rock solid and make it easy for the business to cancel.  

A fixed fee contract with a set end date is truly the way to go for a service provider.  They are less messy for billing and require a penalty for early cancellation, which often requires the other party to pay up to 75% of the total contract fee. But even in a fixed fee situation, if the business carries a bigger stick (i.e. a bigger bank account) than the service provider, if they want out of the contract, they'll find their way out.

This doesn't mean that no contracts are ever truly binding.  You can certainly have a lawyer draw up a contract that leaves no loopholes for exiting early.  However, in this day and age, businesses, as an allegory for all people, are commitment-phobic and will want some way to get of the contract. 

Sometimes even good working relationships can't save a contract.  They aren't necessarily worth more than the value of the cancellation penalties.  If I learned one thing from my first boss, it was that business is not meant to be personal.  But as human beings, we form attachments to the things that we've built- we pour a little bit of ourselves into our work ( I know I do, it's one of my worst faults) and it becomes personal. At the end of the day though, if canceling the contract equals a better payoff for the business, the contract is going to go away, relationship or not.

Don't kid yourself with contracts.  Do the smart thing and read your contracts front to back or better yet, have a lawyer review it so that you can best understand it's content.  And if you are the one writing the contract, make sure you have a lawyer at the very least read it over to ensure you aren't setting yourself up for failure.