And Why Website Deals Are Such a Pain

We at Aaron & Sanders, PLLC, like to talk about how exciting technology law is, how dynamic and rapidly evolving it is; how complex, confusing and counter-intuitive it is; and most of all how it can dominate whole industries.

At the same time, a technology-based business is still a business, and that means it must also deal with what we might call “boring” law: contract formation and enforcement, sale of goods, stuff like that. It’s not dynamic and exciting, and I doubt very much there is a blawg dedicated to, say, contract enforcement. But it can be just as important.

The Halloween 2011 decision handed down by the Tennessee Court of Appeals in ICG Link, Inc. v. Steen, et al., is a case in point. The case is about a Middle-Tennessee technology-reliant business that asked a local web designer to rebuild its website, and how a failure to appreciate “boring law” ended up making both sides feel pretty burned. And this case could have been so much worse with just a slight alteration of the facts.

Build Me a Website, Sirrah!

The individual defendant in this case, Philip Steen, started and operated co-defendant Nashville Sports Leagues (“NSL”), which organizes a number of recreational sports leagues. An important part of the business was coordinating activities for and providing information to NSL’s customers and the public. Obviously, a website is just the thing for that, and, indeed, NSL operated a website, which was becoming an increasingly important part of its business. Steen organized an LLC, called “TN Sports, LLC” to operate NSL.

NSL used to have a Guy in-house who was responsible for building and operating the website, but he left to go work for ICG Link, which happens to be the plaintiff in this case. NSL naturally outsourced its website operations to ICG Link. The website was, at this point, already pretty old. NSL was becoming very successful, which meant the old website was straining under increasing loads. It wasn’t long before ICG Link was recommending a complete re-build of the site, and Steen had to agree. Unfortunately, the Guy wasn’t at ICG Link anymore, so ICG Link assigned Another Guy to the project.

Another Guy sent Steen a “quote,” which set forth a large number of features to be included in the website. These features were described in a generic way, e.g., “Site Design,” “Main Template Layout,” “Database Layout.” For each of these items, the quote set out a number of hours (in .5 increments). At the end of the Quote, Another Guy multiplied the total number of hours by the rate of $85/hour, for a total of $12,622.50. ICG Link intended the Quote to be an estimate, but Steen understood it to be a flat fee. The Quote didn’t include any other terms.

The opinion doesn’t say much about how Another Guy went about building the new website. By the time the lawsuit was filed, Another Guy had left ICG Link (of course). At trial, ICG Link had an expert testify that Another Guy had built the site using PHP5, which seems perfectly acceptable. Steen had an expert testify that Another Guy had built the site using Smarty, which was described as a “shorthand version of PHP … intended to be used for very small projects.” He further opined that Smarty was inappropriate for the new website (but the opinion doesn’t say why). (Smarty is more typically described as a web template system for PHP. I’ll defer to the web developers out there, but I don’t see how Smarty was inherently a wrong choice for the new NSL website.)

A few months later, the new site wasn’t quite finished, but ICG Link and Steen agreed to launch it. Immediately, Steen was unhappy. It was a pain for him to use because he found it cumbersome to add data to the site. This was a serious problem because Steen was constantly adding and changing data, e.g., scores, schedules, standings, rosters and the like. Also, user accounts got duplicated, and it was difficult for users to navigate, among other user-side problems.

Steen wouldn’t pay in full for the website, though he made a few payments. He seems not to have complained directly to ICG Link, but instead he hired another firm plus an additional consultant to review ICG Link’s work. Those consultants agreed that it’d cost more to fix the problems than to build an even newer website. Meanwhile, ICG Link responded to Steen’s non-payment by slow-walking the project. Steen went ahead and told his consultants to build the new, new website. A few months later, Steen told ICG that NSL was taking its business elsewhere.

ICG Link eventually sued to recover about $30,000 in unpaid invoices. It named as defendants both NSL and Steen personally. NSL countersued for the amount it cost for his consultant to review ICG Link’s work and for the cost of the new website (which was about $20,000). NSL’s theory was that the new website was so bad, it violated the “contract” between NSL and ICG.

Contract? What Contract?

The trial court and the appellate court agreed that both ICG Link and NSL had a major problem with their legal theories. There was no contract between the parties. The law maintains something of a legal fiction that a contract arises when there is a “meeting of the minds.”* Unfortunately, when the relationship goes to heck, no one can quite remember what it was that the parties agreed to, and that beautiful, perfect moment when the parties’ minds met is lost forever.

* You can think of a contract as a kind of a Zen or Platonic concept. It exists in the abstract, “out there” somewhere, but somehow ultimately unknowable. Instead, we must rely on evidence–writings and (if allowed) oral remembrances–to piece together what really happened when the “minds met,” an imperfect, sublunary approximation of the perfect, quintessential contract. In this way of thinking, if the contract has been reduced to writing, the writing isn’t the “contract” (though it’s called that); it’s just the best evidence of the contract’s terms (and definitive evidence if the contract is well and thoughtfully drafted).

In this case, the court held that there wasn’t enough evidence to show that the parties’ minds ever met. Specifically, there wasn’t enough evidence to show what NSL thought it was getting in exchange for the $12,622.50.* Somehow, just saying that you’ll be spending 40 hours on “Site Design,” 18 hours on “Main Template Layout” and another four hours on “Database Layout” isn’t good enough. One suspects that Another Guy had a good sense of what he would be doing and would be delivering with each of those items. The problem was that he didn’t tell Steen–and Steen (or anyone in Steen’s position) would have no idea. It was like saying, “For $12,622.50, I will give a car that has wheels, an engine and a drive-train.”

* The court seemed to assume that the quoted price of $12,622.50 was the actual contract price (or, would have been, had there actually been a contract). I’m not sure I’m convinced. While the price set forth in a “quote” will often be the contract price (if a contract is formed), in this case, it looks a lot like an estimate. Another Guy was primarily providing the number of hours for each stage of the project, and I think most people know that these are usually estimates. The reason why website developers (and for that matter lawyers) bill by the hour is that it’s really hard to predict with any certainty how long a project will really take. Still, Another Guy could have avoided the whole problem by, you know, calling it an “Estimate.”

So, fine, there’s no contract, but now we have a weird situation. Another Guy did offer to build a website, Steen said OK, Another Guy built it (and apparently went way over-budget). Does this mean that NSL doesn’t need to pay ICG Link anything?

You Get What You Deserve. And That’s All.

No. That would be an anomalous result, and the law has a way of dealing with situations like this when two parties behave as though they were under some sort of contract but no contract was, in fact, formed. This concept goes by several names: quasi-contract,* quantum meruit (“the amount that is deserved”) and unjust enrichment. The idea is that if you perform a service for someone, it’s clear you’re not doing it as a favor, and the other person accepts and benefits from your service, the law will find some way to compensate you, even if there’s no contract.

* Most people make a Hunchback of Notre Dame joke here. I’ll spare you.

So, ICG Link gets to collect the entire $30,000 in open invoices? Again, no. Quasi-contract is an imperfect substitute for an enforceable contract because it uses an entirely different method of calculating damages. In a contract case, ICG Link would have gotten whatever NSL agreed to pay, no matter how bad a bargain it would have been for NSL. Under that theory, ICG Link would have received about $30,000. (There was actually some dispute about the hourly rate.) But under quasi-contract, the court is supposed to conduct an independent inquiry into the actual value of the services rendered. Given what was delivered, what would a reasonable person have paid?

The appellate court held that no reasonable person would have paid $30,000 for the new website. Although the website was functional, it had a lot of problems. Most important, it was too difficult for Steen to use efficiently, and there were some other problems.

The parties didn’t put on any proof about the value of the new website. Fortunately for the court, Steen and ICG Link’s president had a testy email exchange on that subject, with Steen writing that the new website was worth $15,000. The court seized on that and held that ICG Link’s damages were $15,000, less any payments NSL had made, less whatever NSL had spent on the consultants it hired to review the new website’s problems. When all was said and done, the damages were all of $8842.50.

Wait, What?

Oh, and the court held that, Steen was personally liable for the judgment, even though he had organized an LLC and sincerely believed he was acting on the LLC’s behalf when he had these dealings with ICG Link.

I’ll discuss why Steen was personally liable (and how he could have avoided it), and draw some lessons from this decision in my next post.

Thanks for reading!