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Using reason key when negotiating purchase agreements

Co-operation and the ability to find compromise are keys to crafting an efficient purchase agreement, Toronto health lawyer Michael Gleeson tells AdvocateDaily.com.

Gleeson, partner with DDO Health Law, has negotiated numerous contracts with service and equipment providers on behalf of health-care organizations, many of them publicly funded.

“Hospitals and other organizations in the health sector have a large number of contracts going through their doors, so the negotiations have to be efficient,” he explains. “We try to be reasonable when it comes to the allocation of risk, depending of course on precisely what is being purchased, what it’s being used for, the relationship between the parties, and who has leverage.

“Finding compromises that allow both parties to protect their key interests is important to achieving a solution that reduces the chance of a dispute,” Gleeson adds.

Still, there are always negotiating points where one party cannot be flexible, he says. For Gleeson’s clients, their publicly funded status often means that legislated and regulatory requirements set hard boundaries in terms of what will be acceptable.

“I try to convey to clients that each side will have different areas of concern,” he says. “For the suppliers, business interests are more at the forefront. They don’t want to put all their eggs in one basket, or enter an agreement that could potentially bankrupt the whole organization.”

While purchase agreements in the health sector cover some of the same ground as those you’ll find in other industries, Gleeson says there are certain clauses that he sees consistently being the subject of negotiation in his field. These include:

Risk allocation 

Gleeson says clauses concerning indemnities, limitations of liability, and insurance all come down to who’s responsible if things go wrong.

“In some circumstances, it might seem to make sense to force all the liability to one side, but because you want the agreement to be done, and to maintain a good relationship with the supplier, you might try to reach a reasonable equilibrium,” he says.

Typically, that means each side will be held responsible for issues arising from their own negligent acts and omissions.

“That way, as long as you’re doing your job properly, you shouldn’t be taking on much exposure. If you do something wrong, you can expect to be held responsible,” Gleeson says.   

Liabilities can also be limited in circumstances where the parties can agree on a capped amount, he says, explaining that hospitals are particularly keen to minimize their exposure to privacy breaches and other potentially high-value items.  

When it comes to death or bodily injury involving a service or piece of equipment provided under one of these agreements, Gleeson says the parties will adopt a similar approach.

“If the cause was the supplier’s — because of a faulty product or improper service — then you want them to take full responsibility for the costs associated with the damage. But, if the hospital does something wrong, then you would expect them to protect the supplier against that risk,” he says. “It’s mutually beneficial and reasonable.”

Limited warranties

Gleeson says vendors like to protect themselves with limited warranties guaranteeing the functioning of a product for a fixed length of time, as long as it’s used properly.

“The point is that if you tinker with the equipment, or make changes without consulting with the supplier, then they can’t be held responsible for that,” he says. “Or if you’re using it in a way that’s not set out in the relevant instruction manuals, it’s the same principle.

“Sometimes vendors want to make these warranties extremely comprehensive to the point of almost excluding them from any liability, which is not reasonable,” Gleeson says.

Privacy and confidentiality

“This is becoming more and more important than ever to our clients,” he says, adding the potentially high cost of a breach in this area makes these clauses among the most heavily negotiated in shared-service agreements.

However, Gleeson says that the highly regulated nature of his public sector clients proves helpful since privacy legislation provides a useful guide for what should go into purchase agreements involving health-care providers.  

“The agreement puts into words who is responsible for what based on the legislation. Sometimes clients are not familiar with the applicable legislation, so it’s often helpful for us in getting to a place where both parties are comfortable,” he says. 

Termination rights

Clauses concerning termination acknowledge that not all agreements will work out in practice, Gleeson says.

“You need to know under what circumstances you can get out,” he says. “A breach of the contract is usually grounds for termination, but there might also be a right to terminate for convenience, with the proper notice.

“It can be of benefit to both parties, so long as it’s reasonable, and getting to that point will depend on the circumstances, how payments are structured, and what the obligations of each party are under the agreement.”

Jurisdiction

Gleeson says the governing law of the agreement is usually determined by the location of the parties.

“It’s more convenient from the perspective of obtaining legal advice, being familiar with the law, and getting to court should anything go wrong.” 

When the parties are located in different jurisdictions, he says his clients usually have less flexibility in terms of the governing law.

“The insurance that hospitals receive are generally from one or two providers that specialize in the sector, but typically the coverage is not applicable to claims settled outside Canada,” Gleeson says. “If hospitals have a dispute with a vendor, and the claim is heard in the U.S. and goes poorly, then it’s going to be a big problem if they don’t have the insurance proceeds to cover that liability.”

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