Can Pay-What-You-Want Businesses Sue Non-Paying Customers?

With the ever omnipresent ghost of Christmas commercialization turning the Season of Giving into the time of year where corporate fat cats can get their poorly run companies back into the black just enough to justify taking their huge bonuses, it nice to see that some businesses still know what it means to give back to their community.

Not only is Curtis Masters’s benevolence, in the form of his pay-what-you-want plumbing services, a much needed lifeline for poor Texans with a plumbing problem or two, but Masters’s kindness is also doing wonders to repair the stereotypical image of the shady plumber.  That kind of PR is priceless.  Masters has apparently been operating his business this way for over 15 years.  But according the 63-year-old plumber, the move to a pay-what-you-want operation wasn’t so much a strategic marketing move, but rather a call from God.  Masters states that he was told by God to use his master (ba-dum-bump) plumbing skills to help people in need and that he believes as long as he functions like this, God will provide for him.  Regardless of your views on religion, you have got to admire Masters’s commitment to his beliefs and his customers.

Now what Masters is doing is obvious very generous, especially in this current economic recession of ours; but what caught my eye about the story was the more obvious fact that there are probably a lot of people out there who would be perfectly happy letting Masters walk away with nothing for his work.  In fact, in the new report Masters even states that he has had some customers who seemed like they could pay more, but instead paid nothing for very complex work he did for them.  Of course this is to be expected when one functions on a pay-what-you-want business model.  Healthy fast food chain Panera Bread learned this the hard way after it had to shutter its third pay-what-you-want experiment in Portland, Oregon after it was getting too many non-paying customers and local homeless shelters started sending their hungry clientele its way.

But still, it seems a little wrong that people could easily take advantage of Masters’ kindness.  One of my friends asked me after reading this story if Masters could opt to take any legal action against any customers who he felt paid him less than what he should have gotten.  This is a question that seems like it should have an easy answer, but it turns out that like most things in law, the answer is a little more complicated and ultimately unclear.

When parties decide to exchange promises to perform duties in exchange for money or something in return, a contract is formed.  In legal terms, this contract formation process is called offer, acceptance and consideration.  If any of those factors are missing, a contract isn’t formed.  In addition, even when a contract is not clearly laid out, courts can infer that an implied-in-fact contract was created and award damages for a breach of contract.  An implied-in-fact contract usually arises in situations where services are exchanged for pay, as in Masters’ plumbing work.  These types of contracts occur when a party is unjustly enriched by receiving a benefit that they didn’t pay for, but knowingly accepted.  In these cases, a court can award the party that gave the benefit the fair market value for his or her work.

So it would seem that under an implied-in-fact contract theory, Masters and other do-gooders could possibly recover payment from entitled deadbeats too cheap to cough up some dough.  Masters provided a plumbing service, his customers authorize and allow him to work on their pipes, and they are obviously enriched by the services he offers because their plumbing is fixed.  All this appears to be grounds for a court to infer the formation of an implied-in-fact contract.  But the problem comes in when you factor in how Masters and other pay-what-you-want businesses functions.

Masters tells his customers up front in person and in writing that they are allowed to pay whatever they can afford for the work he provides.  Courts have long held that parties are free to contract in whatever way they wish as long as the parties both enter their contract knowingly without undue influence and that the agreement itself is legal.  From this perspective, an argument can easily be made that Masters, and other businesses like his, entered into the contract fully aware that he could come out of the other end with nothing, and that furthermore he expected that it could happen.  So in this sense, Masters wouldn’t have any recourse against non-payers.

What’s the answer?  Like I said, it’s not clear.  But it definitely would be an interesting case for a court to decide since there are good arguments to be made on both sides.

What do you guys think of pay-as-you-go business models?  Should cheapskates be forced to pay if they can afford it and how much?