Franklin Hospital, a small regional hospital, entered into a three-year contract with PT Service, a company that provides physical therapy. Under the contract,
whenever a patient in the hospital needs physical therapy, the hospital contacts PT Service who then sends over a licensed physical therapist. The hospital
agreed to pay PT Service an annual retainer of $10,000 to cover the costs of maintaining a list of readily available physical therapists. The hospital also
agreed to pay an hourly rate of $100 for actual services rendered. Out of this $100/hr., PT Service pays $75/ hr. to the therapist.
During the first year of the service contract, Franklin Hospital received a number of complaints from patients about the quality of the physical therapy.
Concerned about potential liability and the hospital’s reputation, the hospital terminated the contract. The contract specifically gave the hospital the right to
terminate for cause but the contract failed to define cause. PT Service claims that its quality of service was excellent, meeting the highest professional
standards.
Upset that losing this contract may hurt its reputation in both the physician and hospital administration communities (important sources of referrals), as well
as remove a steady stream of business, PT Service sued the hospital for wrongfully terminating the service contract. PT Service is seeking $150,000 in
damages, which consist of $20,000 for the annual retainer over two years, $60,000 for unpaid services, and $70,000 for the anticipated profits over the
remaining two years of the contract.
Discuss some of the strategies each side would use if they were to try to negotiate a settlement. What are the factual strengths and weaknesses of the
parties’ positions? What additional information might be needed? What might each side view as a reasonable settlement?