A recent decision from a North Carolina federal court raises interesting lessons for providers surrounding contractual cure and damages provisions. Cone Health entered into a contract with Conifer Physician Services for the provision of revenue management, health information management and billing services. Cone Health has spent a great deal of effort since – litigating whether or not breaches of the agreement with Conifer had been cured and when the agreement could be terminated – all because the issues were not fully set out and clearly addressed in the agreement with Conifer.
Breach of contract and right to cure
Approximately two years into the agreement, Cone became dissatisfied with Conifer’s services and sent notice of termination, stating “[t]he specific conduct that constitutes [Conifer’s] breach [includes], without limitation,” six specific violations of the agreement. Cone thereafter contended that it had the right to assert breaches in the litigation beyond the six specifically enumerated in the notice of termination.
However, because the agreement was terminable by Cone “if Conifer failed to fix a material breach within sixty (60) days, or if a material breach was incurable,” the court held that the provision requires “Cone Health to provide Conifer notice of all of the performance deficiencies that required curing, or that could not be cured.” As a result, “Conifer could only be held liable for what it was properly put on notice of and failed to cure, or put on notice of breaches that were incurable. … Otherwise the cure provision in the contract would be meaningless.”
The court next addressed how perfect Conifer’s cure had to be in order to preclude termination of the agreement by Cone Health. To that end, the court found that a party in breach will not be deemed to have cured a breach unless it begins to “substantially perform” its contractual obligations. Curing a breach does not require perfect performance, according to the court. When drafting a breach notice, it is important for healthcare organizations to enumerate all breach issues, both specifically and explicitly, to preserve their termination rights.
Recovering lost profits
The court next addressed the parties’ contentions regarding two ambiguous provisions in the agreement. The first provision, which addressed indirect damages, stated, “Neither party shall be liable … for indirect, incidental, consequential, exemplary, punitive or special damages, including lost profits ...” With respect to this provision, Cone Health argued that Conifer was precluded from collecting lost profits for wrongful termination of the agreement. The court disagreed and held that Conifer was barred from recovering only indirect lost profits. To reach this conclusion, the court interpreted the phrase “including lost profits” as “an example of the … list of excludable damages, all of which are indirect and consequential in nature such that none necessarily flow from the breach.” Consequently, the court found the language did not preclude Conifer’s claim for lost profits that are direct damages. With regard to determining whether a party has cured a breach, providers should either establish specific standards within the agreement or accept “substantial performance.” Healthcare organizations should also exercise caution when it comes to drafting and/or reviewing “boilerplate” provisions, especially those utilizing a list of examples. As this case aptly demonstrates, it is important to consider the language that precedes a list of examples so that it does not inappropriately limit the intended breadth of the provision.
Termination without cause
The second ambiguous provision relates to when Cone Health may terminate the agreement without cause. The without-cause termination provision stated, “[a]fter the 3 year anniversary of this Agreement [Cone Health] may terminate this Agreement without cause at any time with six (6) months written notice.” Cone Health argued that this would allow it to provide notice six months prior to the third anniversary and terminate the agreement on the third anniversary. Conifer, on the other hand, asserted that this provision would allow Cone Health to provide notice on the third anniversary and terminate the agreement six months later. The court found the provision to be ambiguous and looked to extrinsic evidence to ascertain when the agreement could be terminated, including a claim by Cone Health that “Conifer’s representative drafted the Agreement.” Concluding that Conifer was entitled to lost profits through the third anniversary of the agreement, the court granted Cone Health’s motion for summary judgment on the issue. Careful drafting of notice and termination provisions is critical.
Moses H. Cone Mem’l Hosp. Operating Corp. v. Conifer Physician Servs., Inc., No. 1:13-CV-651 (M.D.N.C. Apr. 11, 2017).