Clawback Clauses; will yours hold up in Court?
If an associate fails to meet their UDA target and the NHS imposes a Contract Sanction as a result, the Practice will want to ensure that they are protected against any losses. This can be achieved by inserting a clawback clause into the associate agreement, requiring the associate to pay a fixed amount for any unachieved UDAs.
However, care must be taken when using clauses of this type. Enforceability will depend on whether the clawback clause is considered to be a ‘penalty clause’ or whether it is truly a ‘liquidated damages clause’.
Is the Clause a Penalty?
In order to be a valid liquidated damages clause, the amount being claimed for non-performance must be a genuine pre-estimate of the loss that might be incurred; so in summary, what will it cost the practice if the associate doesn’t meet its individual UDA target. Crucially, it does not matter if the loss turns out to be less; the amount in the contract can still be claimed.
If the amount is not a genuine pre-estimate of the loss, then it might be deemed a penalty clause. Such clauses are unenforceable as a matter of public policy.
To decide whether a clause is in fact a ‘penalty’, rather than the real estimate of losses, the court will ask the following questions:
1. What is the nature and extent of the innocent party’s interest (i.e. the practice’s interest) in the performance of the relevant obligation?
A dental practice will clearly have a real interest in the associate meeting their UDA targets, as non-performance could result in the practice not meeting its overall targets and a Contract Sanction being imposed by the NHS.
2. Is the remedy stipulated in the clause out of all proportion to the innocent party’s legitimate interest in enforcing the other party’s obligations under the contract?
This looks at whether the clause is extravagant or unconscionable, and whether it is meant to punish for non-performance. Clauses should only require the associate to pay a sum if the NHS were to impose a sanction. The amount of money sought should be at the rate of the UDA, times the number of unachieved UDAs; no additional sums should be added. In these circumstances it is unlikely to be considered a penalty, as it is a genuine pre-estimate of the likely sanction that could be imposed for non-performance. However, a word of caution; we have seen clauses that state that the associate will pay an amount even if the NHS does not impose a sanction. As long as the associate is only paid for the UDAs completed, this is likely to be considered a punishment for non-performance, as the practice will have been paid by the NHS and the associate for the same UDAs
3. Is the amount being claimed a genuine pre-estimate of loss?
Parties are allowed a generous margin in respect of the pre-estimate. Specifying the value of the UDA is likely to be considered a genuine pre-estimate of the loss, as this is what the NHS is likely to seek by way of a sanction.
Even if the clawback clause is valid, the associate may have arguments in defence of enforcement, namely:
- The practice has prevented the associate from completing its obligations under the contract. For example, by restricting the time the associate can undertake NHS work within the contracted hours or by failing to introduce new NHS patients to the associate.
- The practice has failed to comply with any procedural requirements. If the clause requires the practice to notify the associate of the clawback within a specified time period but fails to do so.
- The practice has not properly quantified its loss under the clause. For example, if the associate is not the only individual to have underachieved, but the practice is seeking to recover the full sanction from that particular associate. This will not be a defence to the clause entirely but to the amount claimed.
- The clause contravenes the provisions under the Unfair Contract Terms Act 1977. This carries its own legal test that is too complex to examine in this article.
Even if the clause is deemed a penalty, it is possible that the Practice would still be able to claim losses for breach of contract in the normal way. However, having a clawback clause is more desirable, as it is easier to recover the fixed losses.
Conversely, such a clause can limit the amount of damages you can recover to the amount stated. If the losses are greater than the amount in the contract you will lose out. This is why it is important to consider what the potential losses are and set the amount accordingly.
If you need assistance drafting your clawback clause or advice on enforcing such a claim, please contact our team on 0207 388 1658 or at firstname.lastname@example.org.
Laura Pearce, senior solicitor