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Evaluating Hidden Pitfalls in Contracts

by admin on September 13, 2021 No comments

Contracts are a fact of life for all businesses.  But many businesses have in-house attorneys or contract specialists that manage the review and negotiation of the terms and specific conditions of each contract.  Smaller health care providers may not have the luxury of someone on staff to assist with contracting, someone who is particularly astute with contract language and pitfalls.

To evaluate and avoid some of the more common pitfalls, it is critical to review each contract in its entirety, whether the contract is to lease your office space, for internet service in your office, or rental of highly sophisticated medical equipment.  Having an attorney familiar with healthcare law review your agreement is certainly one way to identify and avoid the most common pitfalls.

Some common contracts that health care providers may encounter include:

  • Independent contractor/employment agreements
  • Management services agreements
  • Office space leases (and timeshare licenses for shared office space)
  • Telephone/internet/other service provider contracts
  • Hardware purchase or lease agreements
  • SaaS (Software as a Service) agreements

COMMON CONTRACT CLAUSES AND CHALLENGES:

Although many agreements may seem to be “set in stone” with very little room for negotiation (also known as “boilerplate agreements”), the health care provider should not be afraid to request edits to an agreement if the proposed language is not acceptable.  And, although each agreement will look different, all agreements will contain some common sections/paragraphs that are important to consider:

  • “Whereas” clauses- these are the preambles to the agreement that frame out the purpose and scope of the arrangement. When done well, these can help in evaluating whether the agreement properly reflects the intentions of the parties.  When drafted poorly, these “whereas” clauses can create confusion and misunderstanding down the road.
  • Definitions- Sometimes contracts have a “definitions” section, making it easy to locate terms that are defined for use throughout the agreement. In other cases, the definitions appear throughout the agreement as a term is first used.  Regardless, definitions are not to be underestimated in importance as a definition can control the rights and duties of each party.
  • Term/renewal- The term of the agreement (the duration) is often coupled with language that specifies when/how the agreement might renew. Be cautious of any agreement that contains auto-renewal language (know as an “evergreen clause”) and the timeframe necessary to give notice if you do not intend to renew.  And, set yourself a calendar reminder for a short time before that decision must be made and notice delivered so you do not inadvertently allow an agreement to automatically renew.
  • Termination- These provisions often favor the drafter of the agreement. Pay close attention to any unilateral right to terminate without cause or a unilateral right to terminate for cause based on totally subjective criteria (e.g., in the sole discretion of the other party).  In healthcare, it is important to be sure the other party is not an excluded provider and maintains whatever licenses are required to provide any services you are obtaining.  As a result, most agreements for healthcare services should contain a right to terminate immediately for cause in the event the other party loses its license or becomes an excluded provider.
  • Compensation/costs/cost escalations- Understanding what you must pay under any agreement is critical for financial and budgeting purposes. Hidden costs or cost escalation clauses can cause significant financial hardship to an organization.  As a result, make sure you require your service vendor to list all costs in one schedule, including any add-ons (such as one-time charges) and potential cost escalations.  Where a cost escalation clause is included, consider negotiating that cost escalation out altogether for the initial term, particularly if it is a multi-year contract.  You should also consider making sure any cost escalation is tied to an economic indicator such as inflation or cost of living.  If the language is not sufficiently objective and measurable, cost escalations could be at the whim of the vendor and make a multi-year contract untenable.
  • Scope/description of services- Similar to the “whereas” clauses, any clause of a contract that purports to describe the scope of services should be carefully scrutinized. Know what you are buying- or what you are required to provide.  Make sure this clause contains sufficient detail to describe key duties.  Often, it is helpful to think of contracts in terms of each party having responsibilities to the other and having two separate clauses, one for duties of the vendor and the other for duties of the buyer.  That might seem unusual, but a buyer often has duties under a contract and listing those in a single separate clause allows you to assure you meet your obligations in that regard.  Examples can include the need to provide internet connectivity, maintain certain insurance, pay the established fees monthly, etc. You should also consider including service/performance standards, i.e., uptime, downtime, frequency/timing of services, particularly where your business is heavily dependent on the performance of the vendor.
  • Restrictions:
    • Exclusivity- In the healthcare industry, it is not uncommon for vendors or purchasers (regardless of whether the contract is for goods or services) to seek an exclusive arrangement. If you are the first to own a piece of equipment in the geographic area, perhaps you want to protect that leading market position and want to restrict the vendor from selling to others in the area for a period of time.  If you are a medical director at a local hospital, that hospital may not want you to be a medical director at other hospitals.  And if your business model is to provide deep discounts for volume purchasing (as in a group purchasing organization), you may want to restrict your buyer from purchasing from other vendors.  Exclusivity can be both a positive and a negative.  Careful assessment of the needs of the organization is important prior to committing to an exclusive relationship.
    • Non-competition- This is another area fraught with challenges. All non-competition clauses contain 3 key elements:  scope of services restricted, definition of the restricted geographic area, and duration.  The scope of any restriction should be carefully examined to determine if it is reasonable under the facts and circumstances of, and the relative benefits derived from, the arrangement.  Under Florida law, any restriction must be reasonable in time, area, and line of business.  Certain rebuttable presumptions are created under that law depending on the nature of the relationship between the parties.  For example, a non-compete in the case of employees/independent contracts is presumed reasonable if less than 6 months in duration and presumed unreasonable if greater than 2 years in duration.  There is no similar rebuttable presumption associated with the geographic scope of a restrictive covenant.
    • Non-solicitation- This clause can create challenges where employees voluntarily leave one employer and move to another that happens to be a party to an agreement with the original employer. Avoiding some of the more common challenges in this regard is easy if the language excludes hiring without prior solicitation, meaning that a violation only occurs if the new employer actively solicited a particular individual.  A violation would not occur if the new employer simply advertised the job and the individual applied for that job.  Lastly, poaching of employees can go both ways.  As a result, you should consider a mutually reciprocal non-solicitation clause.
  • Insurance- Insurance clauses should not be overlooked. This clause often specifies the insurance requirements of each party, not just to the level of limits, but also requiring the other party being named as an additional insured and requiring notice in the event of any changes to the policy.  Failure to comply with these requirements can constitute a material breach under the agreement.  Also, regardless of whether you are buying or selling, you may want the other party to maintain insurance.  So, although the proposed language may be an obligation of only one party, it may be more appropriate to make it a mutual obligation.
  • Indemnification- This is one of the clauses that could have “hidden costs” that are often overlooked. Indemnification clauses require one party to “indemnify, defend and protect” the other party from claims.  The term “indemnify” means you may be required to pay the other party any costs they incur in connection with a claim made against them.  Consider: (a) do you want the right to hire/pay for counsel to defend? (b) is there a requirement that the costs be “reasonable” to avoid exorbitant attorneys’ fees and costs that are not consistent with the market? (c) is your company able to undertake such an indemnification and will your insurance provide coverage in such a case?  Given the above concerns, this is another area where a mutually reciprocal provision might be appropriate.
  • Dispute resolution- Some contracts include a waiver of a right to a trial by jury. Others contain complex provisions for the parties to submit to an alternative method to resolve disputes, either binding or non-binding mediation or arbitration.  This can certainly be favorable in avoiding the expense and time of formal litigation.  But it may not be right in all cases.  Careful consideration should go into a decision to agree to any alternative dispute resolution arrangements.
  • Governing Law/Jurisdiction/Venue- These three terms are used in virtually all agreements and will limit where the parties can bring a lawsuit and what state law will apply to the decisions of that court. When dealing with large national or multinational companies, their boiler-plate agreements will require a lawsuit to be brought in their home state and local court, forcing the other party to incur substantially more expense in traveling to the other state and prosecuting their case.  In general, it is recommended that the language allow for a lawsuit to be filed in the jurisdiction where the services were rendered.  Governing law should then be the law of that jurisdiction.  If a company refuses to change its contract language in this regard, consider the alternative of requesting the company to delete the clause from the contract.  The net result in that case is that existing law will apply to determine the appropriate jurisdiction and venue.  When the law is applied without reference to a clause in the agreement, the party can file in the jurisdiction where the service was rendered.

There are certainly myriad issues to consider when reviewing a written agreement.  This article is not meant to cover them all, but rather to assist in the recognition of common pitfalls and what you should consider when reviewing an agreement.  The article should also provide some validation for the lay person who tries to review a contract and gets lost in each “notwithstanding” and “provided therefore”.  Despite the best efforts of attorneys over the years, contracts are still not written in language intended the lay person.  As a result, it is always a good idea to have an attorney with experience in healthcare review any transaction documents.

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