Contract law; don’t get your hands tied in a ‘bad deal’
DENTAL BULLETIN, ISSUE 46
Businesses, in the most part, are free to negotiate any terms they want when entering into a contract. The courts generally take the view that both parties will have an even bargaining power and will be able to state what terms they are willing to agree to.
However, this is not always the reality. Small dental practices often deal with large suppliers, who use standards terms which a dental practice will feel obliged to accept. These terms will be in the supplier’s favour, not yours, leaving you exposed to a ‘bad deal’ which you cannot get out of.
What can you do to ensure you get the best deal for your dental practice?
Forming a contract
The first step is to understand when a contract is formed, namely when party A makes an offer to party B and party B accepts that offer. This can be done in writing or verbally. As such, email correspondence or even a conversation on Facebook could result in a contract being formed.
The offer must contain some consideration between the parties, for example party A agrees to provide a service and party B agrees to pay money for that service. Here, the payment of money would be the ‘consideration’ element of forming the contract. Finally, the terms of the offer must be clear and unambiguous, if not the court might imply terms into the contract which you do not want.
Remember, a contract does not need to be signed for it to be binding. If the parties are acting in line with the terms of the contract, their conduct will be deemed acceptance of the terms.
The danger for dental practices is that practice managers inadvertently enter into a contract via email which the practice is then bound by. In order to avoid this make sure your managers are well trained and/or instruct them that they cannot enter into contracts on behalf of the practice.
Terminating a contract
Given how easy it is to form a contract, you would think ending it would be just as quick. Sadly, that is not always the case. Hence why it is so important to ensure you know what you are signing before forming a contractual relationship.
The simplest way to end a contract is for both parties to perform their obligations under it. But what if part way through a contract it is not working out or is not what you envisaged? Both parties could agree an early termination. If an agreement can be reached, make sure you are not losing out financially by agreeing to an early exit.
Many contracts are for a fixed period. In such cases, large suppliers are unlikely to want to agree an early termination, as you will be a regular source of income for them. You will therefore need to see if there is a termination clause allowing you to give notice to end the contract early. If there is such a clause then simply provide notice as per the contract.
We regularly see fixed term contracts without termination clauses; again because this is often in the supplier’s favour. Unfortunately, this can leave dental practices in a difficult position. If the contract is for an indefinite period, the court will imply a termination clause into the contract. However, if the contract is for a fixed period, it is unlikely the courts would imply such a term.
In these circumstances, if you terminate a contract early, without the right to do so, you will be in breach of contract, which could result in you paying out damages to the other party. Unless you can show the supplier has committed a fundamental breach of contract in some way, allowing you to terminate the contract immediately.
What would constitute a fundamental breach? Some examples include providing goods or services not fit for purpose or if goods or services are time critical, not providing them on time.
Make sure you have read the clauses before entering into any contract. Remember you always have the right to negotiate on the terms before agreeing to anything.
5 Main clauses to look out for in a contract
When reviewing a contract, look out for;
- Termination clauses. Do you want to be tied into a five year contract without the right to terminate it early? If the answer is no, make sure the contract contains a clause giving you the right to end the contract on one months’ notice.
- Early termination payments. If the contract is for a fixed period and there is no termination clause, a supplier will often add a clause in to say that the customer will pay a fee if the contract is terminated early. For example, if there is a monthly fee payable, the remaining payments left to the end of the contract. You need to consider if you are happy to pay these fees.
- Excluding liability. Often a party will seek to exclude its liability completely if they fail to perform an obligation under the contract. You should consider how much loss you could suffer if such liabilities are excluded and if you can take that risk.
- Limiting liability. As well as excluding liability a party will seek to limit how much it will pay for any breaches. Again you need to consider if such limit will cover your losses should the other party breach its obligations.
- Exclusivity clauses. Such a clause would prevent you purchasing products from other suppliers. Do you want to be bound by this exclusivity?
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Laura Pearce, Senior Solicitor