A business owner entered into an agreement with a consultant to receive advertising and internet marketing services for his business, who promised him that marketing the business on social media would increase the number of customers. Although the consultant presented himself as one with experience and expertise in the field of digital marketing, the business owner felt that in practice he was not receiving proper service and products and the results he expected to derive from the service were far from what was expected. Does such a situation allow the business owner to cancel the contract or unilaterally stop paying?
When parties enter into a contract, each assumes a certain risk. This risk lies in the commitment itself, as during the execution of the contract, changes in the market, expenses or income may be discovered that will make the transaction less worth-while or even loss-making. The contract, by its nature, binds the parties thereto even when the circumstances have changed and the transaction has turned out to be less profitable than expected. Therefore, in most cases, lack of profitability or economic loss does not constitute grounds for cancelling the contract or unilaterally cease payment and each party has a responsibility to examine the transaction in advance, assess the risks and take such into account. Exceptions to this rule exist, but they are limited to cases of fraud, coercion, misrepresentation or deception, fundamental error or material breach on the part of the other party.
However, as to forecasts, it is important to note that not any representation that was made and not realized will be deemed a breach or misrepresentation and this depends on the scope of the undertaking taken by the service provider. Thus, for example, a distinction must be made between contracts that commit to a certain result, where the very existence of a discrepancy between the result and the obligation may be deemed a breach and an obligation that is an endeavor to achieve a result, which is not guaranteed, and to the extent that reasonable efforts were made but did not bear fruit, this will not be deemed a breach.
In a case heard in the Court of Ashdod in September, 2020, business owners refused to pay for online advertising services, contending that they were presented with a representation that the services to be provided would lead to a rapid and significant growth in customers and the financial turnover, but this did not actually happen. In that case, it was found that increasing the customer base and the business revenues (as opposed to other quantifiable written obligations) was not a certain and guaranteed result, and the services promised in the agreement were only means to achieve the desired result. However, in that case, the service provider partially (and sometimes minimally) performed the actions to which it committed in the agreement and therefore the Court found that it must repay part of the funds received.
In another case heard in the Court of Bat Yam in September, 2022, authors who contracted a publisher contended deception and misrepresentation as the engagement did not lead to significant worldwide sales of books as expected in light of alleged promises received. In that case, the consideration was not contingent on result, and even if in retrospect the promises turned out to be empty promises, this does not establish a mistake or deception that establishes a right to cancel the contract. These are expectations and hopes for the future, which are not a mistake in the transaction, but at most a mistake in profitability thereof.
In order to avoid unpleasant surprises in the future, it is important to take several important steps when entering into a contract, such as: In-depth examination and due diligence: It is advisable to ensure that comprehensive examinations have been carried out on the transaction, starting with the economic situation of the other party and continuing with an analysis of the financial risks involved, taking into account the relevant market and industry. Judgment and realistic forecasts: It is important to conduct prudent negotiations and build the contract on the basis of realistic forecasts and not solely on optimistic expectations or promises by the service provider that presents a "rosy" picture of the situation. Contractual security cushion: It is possible to incorporate clauses in the contract that allow adjustments in extreme situations such as a force majeure clause or price adjustment in the event of significant changes in the market or unusual inflation, a clause that allows the contract to be cancelled with advance notice or due to failure to reach quantifiable minimum targets, and even a mechanism for reducing consideration in such cases. In light of this, it is vital to conduct careful and professional negotiations before entering into a contract, with a thorough understanding of the risks involved in the transaction and to be assisted by lawyers who specialize in contract of such nature who can help identify the risks in advance and formulate a clear and balanced contract to protect the rights and minimize exposure to future risks through mechanisms to mitigate such.