Last Updated Jul 27, 2010 1:28 PM EDT
By Michael Epstein, President of eDimensional, Jupiter, Fla.
My gaming accessories company lives and dies by our agreements with other companies. So when a supplier broke a contract, I was ready to sue. The problem? Going to court made zero financial sense.
So sue us...
A few years ago we signed a distribution contract with a hardware manufacturer of a gaming peripheral. We'd sell it to our customers and build up demand. In exchange, we'd have exclusive distribution rights. It was a good deal for both parties -- or so we thought.
We worked hard to sell the product. Eventually, there was enough demand that sales essentially generated themselves. We were happy. The manufacturer was happy. Everyone was making money.
However, we soon discovered that the manufacturer was undercutting our prices and selling directly to our customers. We confronted the company, saying that it was a clear breach of our agreement. Their response: "Yeah, we did that, and you can go ahead and sue us if you want."
It was a slap in the face. But after our lawyers reviewed the situation, they said, "Yes, you have a case. No, it doesn't make sense to pursue it."
There's no guarantee of success when suing someone, no matter how good a case you think you have. Furthermore, a lawsuit costs a lot, both in time and money. Many small businesses don't have the assets to divert the time and energy of their top executives to prep for a case -- we certainly didn't. So our only viable option was to walk away.
Prevention is cheaper than litigation
We have a lot of contracts and agreements with other companies -- they come with the territory of selling gaming software and hardware all over the world. Most of our agreements work out just fine. Some don't. Of the ones that don't, very few fail because someone flat-out reneged. In most cases, a breach of contract is a result of miscommunication or misunderstanding. In some ways, that's even more frustrating -- because the situation could have been avoided.
In the case of the supplier that broke our exclusive distribution agreement, however, it wasn't really a misunderstanding. They knew what they were doing, and no amount of effort on our part could have prevented them from breaking the contract.
Now, when we sign a contract with another company, we make sure the lines of communication are open. One of our staffers is specifically assigned to make progress reports, stay in touch with the partner and make sure everyone is on the same page. If a partner doesn't hear anything from you for three months, they're probably going to worry that you're not holding up your end of the deal. If they start feeling that doubt, they might pull back a bit from their responsibilities. From there, things can spiral quickly into a full-on breach of contract.
We also choose to work with companies that have been around for awhile. They know us and we know them, which helps everyone to feel more comfortable with an agreement. A trusting relationship is key to reducing the risk of a blatant breach of contract.
In some cases, we actually make verbal, rather than written, agreements with our partners. This approach forces us to maintain communication throughout the life of the agreement. It also saves money, since drafting legal documents is expensive.
We're now in a much better position to handle a broken contract. But I still find it unbelievably frustrating when we have to just walk away from a deal with another company. I used to get headaches and become almost physically ill when an agreement soured. Now, I just do what I have to do to keep the business moving forward.
-- As told to Peter McDougall
Michael Epstein started eDimensional, a $5 million video gaming accessory retail and manufacturing company, 10 years ago while he was still in college.