So you think you own your goodwill?

John Grant warns practitioners about signing contracts with the NHS without taking proper legal advice and explores the serious repercussions this can have.

In February 2006 we placed an advert in the dental press advising professionals not to sign GDS or PDS contracts without first seeking legal advice. There was only one dentist who responded! Unfortunately this seems to be not untypical of some members of the profession, whose attitude appears to be to sign first and worry about the consequences later.

This has led to some dentists ending up in real difficulties and costing them hundreds of thousands of pounds.

As the following examples highlight, when considering a document that may be central to the value of your business, it is crucial to have it checked first:

1) The associate

Allowing an NHS contract for performance at the practice premises to be entered into in the name of the associate rather than the principal.

This may not necessarily present an issue if there is an amenable associate at the practice who will cooperate and sign the necessary documents to enable the contract to be transferred to the principal. There is, however, no legal method of requiring an associate who has an NHS contract in their name to do so – and if they realise that this may have a significant monetary value for them, then their willingness to cooperate may diminish, or even vanish altogether. By allowing the NHS contract to be in the name of the associate, the principal risks losing the goodwill value of the practice that may be attributable to that NHS contract.

A number of years ago there was a particular case where an NHS contract worth £500,000 was entered into between the PCT (as it was then) and an associate. The associate was then approached by their PCT who proposed relocating the contract to new purpose-built premises, which the associate agreed to. In this instance there was nothing the principal could do to prevent the relocation and loss of over £500,000 worth of goodwill.

Whilst all contracts will stipulate the address at which the services have to be provided, the common position of LATs is that providing it does not cause any accessibility issues for patients, they will approve relocation.

If the principal had sought legal assistance to check the contract prior to initially signing it, these problems could have been identified and prevented.

2) GDS and PDS contracts

There are two key differences between PDS and GDS contracts:

  1. PDS is time limited, whereas GDS is not (albeit the government has the power to require contractors to sign new contracts, as this government has been discussing for years but with no new contract in sight).
  2. GDS contracts contain the power for contractors to bring others into partnership, which PDS do not. From this was born the “partnership route”, which has enabled principals to realise the goodwill value of their practices since the contracts came in, in 2006.

Initially there was an assumption that when a PDS contract came to an end, the LAT would renew it automatically. However, for many reasons, and in increasing numbers this has not been the case.

From a legal perspective, there is no obligation on NHS England to renew PDS contracts and with financial pressures from the government only going to increase, practitioners may well find that as contracts come to an end, the will be put out to tender and “sold” to the lowest bidder.

These differences between PDS and GDS contracts caused significant problems for one particular client who had a GDS contract that included orthodontic work. They were approached by their LAT who proposed to split the contract, with the UDAs under a GDS and the UOAs transferred to a PDS contract.

Realising the goodwill value of a PDS contract can be at best extremely difficult and at worst impossible. Whilst the goodwill arising from the performance of the UDAs was preserved, by agreeing to the LAT’s proposals without first seeking advice as to the ramifications of doing so, the principal effectively lost the goodwill value of the UOAs, which in this instance were again worth hundreds of thousands of pounds.

3) Incorporated practices

Finally, a situation that is far too common concerns incorporated practices and the Change of Control Clause. Most practices that incorporated after 2011 will have this added into the contract. However, many dentists did not seek advice on what it meant and what the effects of it might be.

Following incorporation, once the NHS contract is in the name of a limited company, it is almost certainly the case that the only way to sell the goodwill is by transferring the shares in the limited company. However, if there is a Change of Control Clause, then under the latest guidance issued by NHS England, any share transfer of more than10% of the shares is subject to obtaining the LAT’s prior consent. Without consent it is not possible to sell the shares and again the goodwill of the practice can be lost. Practitioners who find themselves in this situation are essentially at the mercy of their LAT – and practitioners are more than capable of figuring out for themselves whether this is a position in which they would like to find themselves.

It is not just the inclusion of these clauses that causes a problem; sometimes the wording of Change of Control Clauses means that the mere act of applying for consent triggers the right for the LAT to terminate a contract. There were also clauses that stated that consent would only be given by the LAT if it could be proven to “benefit patients, the LAT and the citizens of the city of …” (name of city to protect the innocent!).

Notwithstanding that these types of clauses have been commonplace for some years now, dentists continue to incorporate their practices without getting prior advice and in doing so potentially risk losing their goodwill value.

You don’t have to be a lawyer to know that once you sign a contract you are legally bound to it. And yet principals continue to sign contracts and agreements without first having them checked by dental legal specialists. As a minimum this can cost an awful lot in legal fees to resolve after the fact. But worse still, there may not be anything that can be done, and it could end up costing principals hundreds of thousands of pounds in the loss of the goodwill value of their practices.

John Grant of Goodman Grant Lawyers for Dentists – a Past Chairman of ASPD

For more information call John Grant on 0113 834 3705 or email [email protected]

ASPD MEMBER

 

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