Mid-Atlantic Health Law TOPICS

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Breach a Contract, Save a Buck

Hospitals in Maryland and throughout the country are looking for ways to cut expenses to generate a profit, because hospital revenues remain flat. This task is only made more difficult because a hospital's largest expense item, labor, is in short supply. As a result, hospitals are being reengineered, whole programs are being eliminated, and vendors are being pressed for greater and greater dis­counts.

In this endeavor, hospitals are engaging consultants, time management engineers and accountants, but few hospitals are calling on their lawyers to help them save money. This oversight is a mistake.

A portion of a hospital's costs are often tied up in numerous contracts that may have made sense at the time they were entered into, but make no sense in hindsight. Perhaps it is an information technology platform that the hospital has contracted to use for years, but is now obsolete, or much larger than needed. Perhaps it is an expensive service contract for equipment that is no longer in use. Perhaps it is an employment agreement with an employee who is now overpriced or unneeded.

Whatever the category, hospital administrators should be asking their staffs to identify costly contracts that the hospital would like to jettison, and those contracts should be reviewed by counsel to find ways to eliminate or reduce the costs associated with such contracts.

A. Is the Contract Terminable?

Some contracts are simply terminable. Many administrators remember that they entered into a five-year contract, but have forgotten that such contract is terminable on 90 or 120 days' notice. Similarly, many long term contracts are terminable, provided that someone sends the appropriate notice some number of days before the contract's anniversary. A five minute review of the contract could result in the elimination of thousands of dollars of cost.

Many contracts are written poorly. Accordingly, a review by counsel can often result in a theory that will give rise to a right of termination. Moreover, identifying a colorable argument as to why a contract is terminable may result in a settlement with the other party that significantly diminishes the economic impact of the contract, even if it does not eliminate all associated costs.

In this context, it should be noted that, unless a contract provides otherwise, each party to a contract is generally liable for its own attorneys' fees. Accordingly, raising a colorable argument as to why a contract is terminable, and thereby exposing the other party to incurring significant legal expenses to enforce the contract, may, in and of itself, cause a favorable negotiated termination of the contract.

B. What Damages Flow from a Breach?

Perhaps the most overlooked strategy is remembering that a hospital always has the option of breaching a perfectly valid contract. Although non-lawyers may believe that a hospi-tal's word is its bond, American jurisprudence believes that promises are made to be broken.

The renowned Justice Oliver Wendell Holmes stated 100 years ago that there is nothing immoral about breaching a contract. It is always an option. "The duty to keep a contract...means...that you must pay damages if you do not keep it, - and nothing else."

Accordingly, if a hospital refuses to honor a long term service contract, the hospital in all likelihood only owes the service provider the profits that the service provider would have earned on such contract. Moreover, such profits are more than likely much less than the gross amount due under the service contract itself.

Similarly, failing to honor an employment agreement forces the terminated employee to mitigate his or her damages. Therefore, instead of owing the terminated employee the full amount of agreed upon compensation, generally the hospital would owe the employee only the difference between the agreed upon compensation and the compensation the terminated employee earns elsewhere.

Hospitals should not presume that they are stuck with the numerous costs associated with bad contracts. A careful review of such contracts may result in significant cost savings, and in times of lean margins, such a review may mean the difference between a hospital's profit or loss.

Barry F. Rosen
410-576-4224 • brosen@gfrlaw.com


September 12, 2000




Rosen, Barry F.


Health Care