Drifting into a contract is perilous
Some key points you should consider when entering a contract are outlined here by primary care partner Justin Cumberlege.
Every day, we enter into contracts without really knowing about it. For example, when you buy something at a shop, you are entering into a contract to buy the goods.
There are no written terms of that contract – you see what you buy. However, there is now consumer protection legislation which, in effect, imposes written terms on the seller, such as that the goods are fit for purpose.
Those laws do not apply to business-to-business transactions and most contracts in business are more complex, particularly if they involve the provision of services.
So it is important that you are fully aware of when you are entering into a contract and that you are certain of the terms of that contract.
That is why any contract of consequence must be in writing, carefully considered and reviewed before signing.
Here are some areas to consider when entering into a contract.
It is not unusual for standard terms for a contract to be offered for you to accept. Unlike a consumer, there is little protection for businesses if they enter into an ‘unfair’ contract.
There have been cases where businesses have successfully challenged a contract term because it was particularly unfair and unusual and the party imposing the term was able to use an unfair advantage to impose it and it had also not been flagged up by them.
In addition, if the consequence of a breach is a penalty, such as a payment which is disproportionate to the actual loss, then it may be unenforceable.
However, you should not depend on such a ruling being in your favour and, more importantly, you do not want to find yourself spending the time, costs and resources in litigation.
So, before signing, ensure you fully understand the terms, and you are prepared to accept the terms.
Do not assume that because they are ‘standard’ they are acceptable and fair.
You will, no doubt, agree the commencement date of the contract, but ensure you also check the termination provisions.
If the terms state you must give one month’s notice to terminate the contract, then your worst-case scenario is that you will have to comply with the contract for a month.
But keep in mind that the contracting party has the same right and you should consider whether you would have the ability to find an alternative contractor in such a short time.
Many ‘standard’ terms require long notice periods to terminate, and sometimes come with a catch.
They need to be read carefully. One such example is a contract which had a notice period of 12 months and two days, and the termination date had to be the anniversary date of the commencement of the contract.
By the time we were asked to terminate the contract a year before the termination date for a client, given the notice period of an extra two days and a deemed service period of two days, our client was too late, and had to wait another 12 months before they could terminate.
In addition, many contracts require an initial contractual period which could be several years.
You are probably going to be looking at the payment provisions carefully.
You need to check that elsewhere in the contract there are no further provisions regarding, for example, the increase in payments.
Sometimes it is linked to an index and the index may have nothing to do with the actual increases in costs for the provider, but could be at an advantageous rate for the provider.
For example, the retail prices index (RPI) is higher than the consumer prices index (CPI).
You should also check what interest and other implications are if payments are late.
Resolution of disputes
Another often overlooked provision is the resolution of disputes. An escalation procedure is useful and needs to be set out in the contract to be a requirement.
The procedure helps the parties agree to seek a resolution of the dispute in a quicker, cheaper and less disruptive manner than going to court – although even the courts expect parties to attempt to settle disputes through mediation first.
To begin with, there may be a requirement for negotiations to take place between the chief executives of each party and then perhaps with a facilitator from a named organisation or professional body. Failing that, you may state that mediation must be attempted before going to arbitration or court.
You may specify that some disputed matters should be referred for an expert determination. Experts are particularly useful if the matter in dispute is well defined, such as remuneration being determined on a formula if certain key performance indicators (KPIs) are met.
An expert will require all the information to be disclosed to them and then they will determine if, in this example, the KPIs have been met and, as a result, the sum to be paid.
Obtaining that determination should be significantly cheaper than going to court to prove that you were being overcharged or even to find out that, in fact, the charge was correct.
If you were wrong, you are likely to pay not only your own court costs, but those of the counterparty. Also, once you start court or arbitration proceedings, the relationship is likely to irredeemably damaged, so you will also need to find another contractor, if you can terminate the current contract.
It is also worth considering whether to state that disputes will ultimately be determined by arbitration, as opposed by the court – after an attempt to mediate. This would help to avoid the unpredictability of going to court and not knowing the background, experience and expertise of the judge who will hear the case.
Being able to agree on an arbitrator, perhaps with some expertise in healthcare issues, is a great advantage.
You are able to agree the date when the arbitration will be heard.
An arbitration is also private, so the risk of your reputation being damaged by allegations made in the proceedings being reported is avoided. These factors go a long way in justifying likely slightly greater costs than going to court.
Conduct and practice
Drifting into a contract can be dangerous and an easy cause of a dispute.
One example of this is asking a supplier to provide a service once and then, seeing that it is good, asking them to provide the service again on several occasions. In this situation you have never had written terms, and the terms of the contract have arisen by this custom and practice.
Consider what happens if they change the service without consulting you. For example, a supplier has always collected specimens on the day and provided test results within three days.
However, on one occasion they do not come and collect the specimen until a day later, and as you do not have the facilities to store the specimen, you have to repeat the test.
Who pays for this additional work? In addition, on this occasion, the supplier provides the results eight days later, so you have to postpone the appointment with the patient.
This causes the patient further distress and additional work for you in moving appointments around.
Even if the delay does not lead to a negligence action, you would like the provider to pay for your additional costs for failing to perform to the contract within the ‘usual’ time.
However, this would mean having to demonstrate that there was an express agreement that they would always collect the specimens on the day of the request and provide the results within three days.
It is very difficult to state that such a term is agreed without having it as a written performance requirement. The supplier would defend such a claim by saying though they may have done that in the past, there was no obligation to respond in that time period.
Therefore, there is no breach of contract and they have no liability for having failed to do so on a particular occasion.
If you have important contracts relying on custom and practice, ensure that they are written down and agreed upon while the relationship is strong and before anything goes wrong.
Perhaps the most common business contracts are employment contracts. Section 1 of the Employment Rights Act 1996 requires that certain information is given to an employee before the commencement of their employment.
Some terms may be the same for all your employees, such as sickness leave, pensions or training, and these may be in a staff handbook, together with some other terms not required by Section 1.
It is essential, though, that employment contracts are specific to each employee and contain all the terms which you have agreed on during negotiations, including any requirement that the employee may have to work elsewhere in the future or must attend the premises a certain number of days a week.
Employment tribunals invariably put the onus on the employer to prove their position in the event of a dispute.
Intellectual property rights
You may have intellectual property rights which you share under the contract. You should ensure those rights are not infringed by the contractor or used elsewhere without you being rewarded.
It is important that you grant a licence for the use of the intellectual property rights, setting out precisely the terms on which they may be used. Even if the intention is that they are used only for your contract, without an express agreement, they may be used elsewhere or even the contractor claims them.
Signing the contract
When it comes to signing the contract, first check that the other party exists. The contract may state a trading name or the name of a particular department of the contractor, but these are not legal entities and so, if you have a dispute, your initial issue will be proving who your contract is with.
You also need to ensure that those signing the contract have got the appropriate authority to sign on behalf of the party, such as a director of the company, whose name you can check at Companies House, or a partner in the firm.
Contracts are the lifeblood of all businesses, and while businesses should be built on relationships of trust, it depends on others performing at a certain level. If that level is not properly recorded, losses and disputes may arise later.
With a written contract, those requirements can be properly negotiated and understood by all. Without a written contract, you may find you are unable to recover the losses and damages which you have incurred as a result.
Advice relating to contracts can be obtained from Hempsons’ commercial healthcare team.
First published in the October edition of Independent Practitioner Today.