Beware termination rights in your contracts
Journal of the Michigan Dental Association (June 2018)
Question: I recently told a supplier of dental products that I was terminating my contract with them. I did so because I found another supplier who has a better reputation for service and lower prices. I was surprised to receive an invoice from my former supplier in the amount of $2,875.00 for “termination fees”. When I called to complain I was told that these fees were called for in my contact. Why am I being charged to move my business to a better supplier? Is this legal?
Answer: It may or may not be. The answer depends on the language included in your contract. As has been stated in this column countless times, you must carefully review your contracts. The only thing more important than making sure the contract reflects you are getting the terms you expected may be making sure you have a clear and unencumbered right to terminate without cause.
Termination rights can be problematic. For example,
- Your right to terminate may be restricted, only exercisable at certain times (e.g. you may only be able to send a termination notice during the last 90 days of the year or current contract term). The failure to send the termination notice at the right time usually means that the contract continues until the next time sending a termination notice is allowed (e.g. in another year or at the end of an extended contract term for any number of years).
- Your right to terminate may be subject to you paying a termination fee or other consequences.
These restrictions, generally, are legal if they are unambiguously spelled out in writing, bargained for, supported by consideration, termination fees must reasonably approximate actual damages and otherwise are a part of an enforceable contract. You must understand what your termination rights are prior to entering into any contract.
There should be a good reason for any restrictions on your right to terminate. If not apparent you should ask why the restriction is being imposed. Why can you only terminate during the last 90 days of the year? Is there some administrative reason that makes it impossible for the other party to process a termination other than at that time? Why are you being charged a termination fee? Did the other party incur substantial up-front costs that it needs a certain contract term to recoup? Or is the other party afraid of competition, preferring to include termination fees in its contracts to disincentive its customers from terminating instead of competing on price and with superior service and quality?
Waiting until you desire to or have actually terminated to address an unfavorable termination provision will rarely be successful. Once a contract is signed (and assuming it is legally enforceable) the other party has little incentive to negotiate. Your only choice may be to litigate if the dollar amount resulting from you not terminating as required by your contract or the amount of a termination fee is enough for the other party to pursue. Whether, in your case, $2,875 is enough for this to occur you find out soon enough if you decide not to pay.
The best practice is to read and understand the termination provisions in your contracts, ask questions and negotiate up front. You should also shop around and compare contract terms. Just because one supplier imposes termination penalties does not mean all the suppliers available to you do.
NOTE: Dan also spoke at the Michigan Dental Association's 2018 Annual Session. Coverage from the June 2018 Journal below.
About Daniel Schulte ...
Daniel J. Schulte has more than 20 years experience representing small business owners in all aspects of transactional, operational and regulatory legal matters. A Certified Public Accountant as well as an attorney, Dan is the firm's managing partner and chair of the Health Care Practice Group.
He regularly advises and counsels concerning the formation of business entities, the preparation and review of business and corporate contracts, the purchase and sale of ownership interests in businesses and/or their assets, and the purchase, sale and leasing of real estate. A significant component of Dan’s practice involves representing healthcare professionals in state regulatory matters, including disciplinary and other licensing disputes with the State of Michigan, and federal regulatory matters including fraud and abuse issues. He also counsels on the anti-kickback and Stark laws, preparation of compliance programs, and responding to and negotiating settlements in connection with government enforcement actions.
Dan is well-known for his knowledge and experience in the area of association law, and is primarily responsible for the firm’s representation of the Michigan State Medical Society the Michigan Dental Association and the Michigan Osteopathic Association. His work related to association law includes the drafting and review of new legislation and the preparation of Amicus Curiae Briefs for filing in Michigan’s Supreme Court and Court of Appeals on a variety of topics affecting health care professionals practicing in Michigan.
Dan writes articles and presents frequently before legal, medical and business groups on a variety of topics, including HIPAA, the HITECH Act, the Stark Law, the fraud and abuse laws, health care compliance plans, business succession planning, asset protection, and estate and tax planning.
He is ranked among The Best Lawyers in America®, and has been named a “Michigan Super Lawyer” by Thomson Reuters.
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