Perhaps this is a familiar dilemma: you want access to the best (state-of-the-art) technology, but have no resources for this because of cutbacks and reforms. Enter: technology partnerships and MES contracts. What kind of contracts are these and what points deserve attention from a legal standpoint?
MES contracts and Technology Partnerships: what are they?
MES stands for Managed Equipment Services. These contracts are often referred to as ‘Technology Partnership’ contracts. These kinds of contracts are usually characterised by the following:
- The contract is entered into for a long period of time, often for 10 years or even much longer.
- The supplier (the technology partner) provides the customer with certain high-quality technological equipment (on the basis of purchase, hire or lease), which equipment is installed and implemented by the supplier at the customer’s premises.
- The supplier also guarantees the maintenance, availability and upkeep of the equipment and provides education and training to the users.
- The equipment is usually replaced with new (state-of-the-art) equipment after a certain period of time has passed (for example upon the end of the equipment’s useful life or another period determined in advance).
- All of this is provided in exchange for a fixed monthly payment (in the event of hire or lease) or for a (maximum) purchase price set in advance.
- This service provision is also often supplemented with additional services, such as consultancy (process optimisation) or cooperation in R&D activities.
Trend: from purchase to lease?
These kinds of contracts have become more common in recent years. Trends can also be discerned in these developments. While a number of years ago equipment was mainly offered for sale, financed models are now increasingly being used. Equipment is hired or leased, for instance. This makes sense: Because of all sorts of reforms and cutbacks, many companies, institutions and local and regional authorities do not have the resources to make major investments in one go, even though these investments do still need to be made. Suppliers are responding to this by not offering (expensive) equipment for sale in these kinds of contracts, but by hiring it out or leasing it to the customer in exchange for a relatively low fixed periodic payment.
In the healthcare sector, Philips and Siemens in particular are very active when it comes to, for example, providing high-tech medical equipment such as MRI scanners, CT scanners and ultrasound equipment. But we have seen these kinds of contracts outside of the healthcare sector as well for some time: the leasing of printers or property, for instance. Philips (Lighting) even offers ‘Street lighting as a Service’ for municipalities along a similar route.
A few points for attention from a legal standpoint in relation to MES contracts
The advantage for the supplier is clear: long-term commitment from the customer. The customer’s advantage is often (certainly in recent years) that it has its needs taken care of in exchange for a fixed periodic payment. The customer is guaranteed equipment that works well in exchange for manageable costs.
MES contracts are complex, mainly because the long contract periods mean that all kinds of different situations which can arise during the contract term must be taken into account. It is therefore an absolute must to carry out a proper risk analysis. A few legal points for attention are:
- Long contract term and state-of-the-art equipment: MES contracts usually relate to high-grade technology. The developments in this area follow on each other at breakneck speed. How do you ensure that you continue to profit from that new technology? What is state of the art today may well be the basic model in two years’ time. That is why it is often agreed that the systems to be supplied in the future must be state of the art. But what is that exactly? How do you decide what state of the art means in that case? A good definition is crucial in this context. Do you want to be a frontrunner with all the devices or do you want proven technology that has been tried and tested elsewhere, or do you want both? In the last case, where do you draw the line and how do you make that decision?
- What is actually supplied? It usually cannot be predicted what equipment exactly will be conceived of and developed in the future. When it comes to medical equipment, this will involve a significant lead time, if only because this equipment must undergo all sorts of (clinical) tests and inspections before it can be put on the market. That is why a supplier often has a roadmap as to when certain products are expected to come on the market. He could be able to provide some information on that. Nonetheless it is wise to mainly deal in functionalities rather than concrete devices (with a brand, type and serial number, etc).
- Price: What happens in the event of price decreases and increases? Hardware has the tendency to lose its value quickly. It is therefore important to build the necessary flexibility into the contract and agree on practical adjustment mechanisms for the main effects of, for instance, buying or replacing equipment earlier than planned. Will this impact the price? How do you determine the price of a device in several years’ time? You should agree on a good benchmarking arrangement for this.
- Financing: is the equipment being sold or leased? If leased, what conditions apply and how should the lease be designated, as an operational or financial lease? This designation is important in order to determine whether ownership is (ultimately) acquired after a purchase option is exercised (financial lease) or to determine whether the investments must be capitalised on the user’s balance sheet. In the case of a lease it is also important to make good agreements on what happens at the end of the contract term; will all equipment be returned to the supplier? And is that actually possible? It is wise to include an exit provision which enables the customer to continue using the equipment if a timely switch to a new supplier proves impossible.
- Freedom of choice and clinical freedom of choice? Many of these kinds of contracts involve an exclusivity clause in the sense that, in principle, only equipment from the particular technology partner may be purchased/ordered. But what if certain competitors introduce a much better device on the market next year, while you have just committed to your supplier for 10 years? Or perhaps you want to have the freedom, within certain limits, to opt for a device from a different manufacturer. In healthcare this is often solved by including in the contract the (limited) freedom to purchase equipment from third parties (Clinical Freedom of Choice). If you make use of this: who is responsible for the maintenance of that equipment? Your technology partner, or the manufacturer? There are all sorts of developments under way in this area as well: for instance, multi-vendor servicing, in which one manufacturer also services the equipment from its competitor and vice versa. This raises all sorts of interesting questions as well, of course: does this cause the manufacturer’s guarantee to expire? Can the technology partner really manage this? What if it cannot?
From a legal standpoint it is in any event important that both parties realise that the relationship is a partnership. As is the case with any interpersonal relationship, this involves give and take. To a certain point, of course. Foreseeable changes or risks must in any event be addressed as adequately and concretely as possible and must be ‘calculated through’ in their entirety in terms of finances, legalities and accounting. Adjustment mechanisms can be agreed on for the unforeseeable changes. These may be firm agreements (for example, earlier purchase = higher price) or soft agreements (obligations to consult with each other, for instance). Ideally, a customer would be wise to ensure that an interim cancellation possibility be included in the contract. A good and clear governance structure will have to be set up in order to properly manage the partnership and keep it manageable.
It should be clear that drafting, detailing and negotiating these kinds of contracts is never a sinecure. These types of contracts are well suited to our times, however, with suppliers seeking long-term commitments in order to – for instance – finance their R&D activities and customers (especially when it comes to hire and lease variants) wanting direct and permanent access to high-quality technological equipment.