Negotiating your contracts: Hidden pitfalls and traps

October 9, 2018
Martin Merritt, JD

Never agree to a deal as presented until you are provided a contract and understand the terms thoroughly.

Negotiating and reviewing contracts is probably one of the more unnerving task physicians face. That’s good! Your subconscious is sending you “danger” signals. You simply need to channel this emotion into action to protect yourself.

Sales representatives are very good at selling the benefits of their company’s product to you and your practice, with emphasis on how these benefits outweigh the cost. Essentially, the sales meeting is all about what happens if everything goes as planned. You should never agree to the deal as presented until you are provided a contract and understand the terms thoroughly. The contract spells out what happens when things go wrong. Keep the following in mind before you sign any contract.

Sales personnel will tell you anything to make a sale. 

That’s what they do. Watch for it and remember that the contract is what you are bound by. When you receive the contract, read it carefully to note where the contract deviates from the sales pitch and to determine which of three possible types of contracts you have been handed: “A”, “B” and “C”. “A” is very favorable to you. “B” is fair and balanced–so much so that you honestly can’t tell which side drafted it. “C” is only favorable to the seller. These are full of one-sided indemnity clauses, penalties, restrictive covenants, and other legal results which were never negotiated.

Under contract law, a contract is enforceable unless it is illegal or violates public policy. That means, “if you sign it, you are stuck with it, unless your lawyer can get you out.” There are consumer protection laws, but litigating them is very expensive. Retain a lawyer to review a contract before you sign it. After you sign it, all we can do is read it to you, and tell you what you have done to yourself. 

Do not be swayed by promises of cost savings.

For every business need, there is a solution that is cheaper, quicker, and has disaster written all over it. Large, well-capitalized companies often offer the best services or products but cost more than smaller competitors and are less likely to negotiate contracts. This leaves plenty of room for startups of all stripes to attempt to undercut the industry leader. Smaller companies may negotiate but are more likely to present a “C” contract, because they are undercapitalized and can’t afford liability when things go wrong. So, they write liability out of the contract.

Beta testing is code for “we don’t know what we are doing but are hoping for the best.”

Watch out for signs a startup or small vendor is trying their product to see if it works. It means they don’t really know and can’t really say if it works. This also means you are the test case. Ask for references and check them.     

Beware lockout provisions.

When you sign a contract for billing and EHR systems, in a very real sense, the vendor controls your access to the life blood of your practice. Many software as a service (SaaS) agreements often allow for a “lockout” if you don’t pay, for any reason. You must make sure that you have a right to your data in a usable form no matter why the contract is terminated. 

Keep bona fide purchasers in mind.

In many cases, you, the simple purchaser, may be asked to sign more than just an SaaS contract. The vendor may produce a finance contract, which is a type of negotiable instrument, called a “promissory note.”  Under the promissory note, you become not only a purchaser, but also a debtor, who promises to pay the payee the total obligation under the SaaS contract. This can have very negative consequences because you may be required to pay the note, even if the SaaS doesn’t work. Even if the SaaS vendor is the payee, the note will usually be sold to a bank or finance company unrelated to the vendor.  When that happens, the bank or finance company is considered a bona fide purchaser if it pays value to purchase the note without knowledge of any defenses or reasons why the note might not be owed, such as the product is defective. This means you still must pay the bona fide purchaser note even if the product failed, the same as if you had paid cash up front. Your only recourse is against the vendor. And that is where the “disclaimer of warranties” in a “C” contract will become a real problem.  

In conclusion, no matter how well the sales presentation might have gone, always remember these final words, “I need to see the contract before I decide,” and you are well on your way to successfully negotiating the entire transaction. 

Martin Merritt, JD, is the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP.