7th Circuit revives Reid Hospital’s breach of contract dispute

The 7^th Circuit Court of Appeals has overturned summary judgment against Reid Hospital, finding the custom-tailored language in a contract the health care provider signed with an outside vendor for billing and collection services makes clear the parties did not intend insulate the vendor entirely from damages.

Reid Hospital and Health Care Services, Inc., based in Wayne County, contracted with Conifer Revenue Cycle Solutions to handle the “revenue cycle” including billing, processing paperwork and collecting payments. According to court documents, Conifer cut corners by reducing staff to a bare-bones crew and neglecting many duties.

After two years, Reid Hospital opted to bring its revenue operations back in-house. However, when a consultant hired to help with the transition found “several significant errors in Conifer’s work,” the health care provider sued for breach of contract.

The 80-page agreement between the two parties included changes to common-law default rules of contracting. In particular, the contract caps both direct and indirect damages, such as consequential damages, unless the hospital can show that Conifer engaged in “willful misconduct.”

Conifer was granted summary judgment by the U.S. District Court for the Southern District of Indiana. The lower court read the contract as defining all the lost revenue claims as being claims for “consequential damages” which were barred without a showing of “willful misconduct.” Further, the court concluded there was no evidence of such misconduct since Conifer showed its cost-cutting decisions were motivated by its desire to save money rather than by malice toward the hospital.

The 7^th Circuit reversed and remanded in Reid Hospital and Health Care Services, Inc., v. Conifer Revenue Cycle Solutions, LLC, 20-1735.

“Given the way Conifer framed its motion for summary judgment, we must assume that it breached the contract substantially and on a large scale,” Judge David Hamilton wrote for the court. “…The text and overall context of this complex multimillion-dollar contract for specialized services made clear that the parties did not intend to insulate Conifer entirely from damages for its breaches.”

Conifer argued the contract wording defined all lost revenue as consequential and thus not recoverable. Also, the vendor asserted the record shows – and common sense confirms – the cuts in costs were done to stop its own losses and not out of ill will to the other party in the contract.

The 7^th Circuit pointed out the contract agreed upon by “these sophisticated parties” contained a glossary of 66 contract-specific terms and phrases in the “Certain Definitions” subsection along with additional definitions listed in the appendices. Since “consequential” is not in either section, the appellate court held the ordinary meaning applies.

“To be sure, lost profits and lost revenue are the classic examples of unrecoverable consequential damages from (Hadley v. Baxendale, 156 Eng. Rep. 145 (1854)), but not all lost revenue is consequential by definition in all cases,” Hamilton wrote. “… Hadley was about a contract for delivery. But this is a contract for revenue collection, after all. It is not hard to see how a breach of this contract could, would, and did lead directly to lost revenue.”

The 7^th Circuit also noted the use of “willful misconduct,” a concept from tort law, is an “awkward fit” in a contract law. Unlike tort law, the state of mind of the breaching party is not something courts typically consider in contract disputes.

Yet, Reid Hospital and Conifer chose to include the concept in their contract. As such, the 7^th Circuit was not persuaded by Conifer’s argument that it did not engage in “willful misconduct” because its decisions to cut costs were made to be more “efficient” in its internal operations.

The 7^th Circuit noted contract law will tolerate breaches that done for economic efficiencies but, in this instance, the parties chose to include an exception to this understanding.

“Even if the ‘willfulness’ of a breach is ordinarily irrelevant in determining damages, the parties here opted to change that rule,” Hamilton wrote. “They agreed that willful breaches of this business contract should be treated differently. If Conifer, entrusted with the responsibility of collecting Reid Hospital’s revenue, chose to breach while disregarding the probable (nearly certain) harm to the hospital, its conduct could be deemed willful misconduct… .”