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Contract Caveats

From: The Hospitalist, December 2007

Essential factors to consider when signing on the dotted line

by Patrick T. O’Rourke and Kari M. Hershey

It happens at least once a year. One of the physicians we represent calls and says, “I want you to look at a contract I signed.” It’s the equivalent of a patient coming to the emergency department to show the doctor the job he did with his own stitches. Although you can try to clean up trouble spots, you can’t achieve the best result.

Nonetheless, because we know some hospitalists will continue to enter employment contracts without consulting an attorney, we want to provide some basics for evaluating contracts. These can be agreements signed with a hospital or hospitalist group, or with a group practice that covers a hospital or healthcare system.

Appropriate Mindset

Parties enter contracts expecting a mutually beneficial relationship. But our job is to assume the relationship will not only fail, it will go down in flames. By assuming worst-case scenarios we can assess the risks and benefits of each contract provision.

Identify the Parties

Although this may seem self-evident, it’s not. A physician may think he’s contracting with another physician, but the agreement is with a corporation. There are various options for structuring healthcare entities, each with advantages and disadvantages. All are designed to limit liability. There are also legal limits on physician arrangements with certain types of entities. It’s important to understand how the entity with which you’re contracting is organized and operated.

The status of the contracting physician is equally important. A hospitalist can contract individually as an employee, independent contractor, member (full or limited), or through his/her own professional corporation. These options have significant implications for compensation, tax, insurance, and liability.

Make sure any contract you enter contains all the terms of your agreement, written in an understandable way with terms acceptable to you. Evaluate what you’re getting, not getting, and giving. Understand the implications if the deal goes down in flames.

Define the Purpose

Many contracts begin with recitals, or introductory paragraphs that explain the reasons for the contract. Most people zoom past the recitals—but that’s a mistake. A court asked to resolve a contract dispute attempts to construe the contract in a manner that effectuates the parties’ intent. Make sure recitals accurately state the parties’ intent.

Know the Benefits

All contracts include “consideration,” which is something of value exchanged for contractual obligations. What constitutes fair consideration varies by contract. Important considerations include:

  • Compensation (salaries, bonuses, payment formulas, and profit distributions);
  • Insurance (health, dental, vision, life, and disability);
  • Paid time off (illness, vacation, and professional meetings);
  • Retirement plans (401k and profit-sharing plans);
  • Professional fees (hospital privileges, professional organizations, medical license, drug enforcement, administration registration, continuing medical education, subscriptions);
  • Malpractice insurance and tail coverage;
  • Indemnity; and
  • Services and equipment (billing, support staff, equipment, and other resources).

All benefits must be adequately described in a contract to be enforceable because most contracts include “integration” clauses stating that the written agreement is the entire agreement between the parties and “no other agreements, written or oral, exist.” Courts will not let parties claim benefits not reflected in the written contract.

Know the Obligations

For a legally binding contract, each party must incur an obligation in exchange for consideration. For example, in a services agreement, a physician can readily agree to provide medical services in exchange for compensation and other benefits. Most contracts fail to provide enough detail about how obligations must be performed. When a physician agrees to “devote their full professional attention and best efforts” to a practice, what does that mean? Who determines whether one has devoted his “best efforts?”

Provisions that impose duties or obligations as described in other documents are also troublesome. Courts enforce obligations imposed by other documents incorporated into a contract, even if a party did not possess the other document at the time he signed the contract. Never agree to obligations contained in a document you haven’t read.

Reasonable Termination

Except for duties imposed by law or contract, parties generally don’t have continuing obligations to each other. For example, most states presume employment is at-will: Either party can terminate the employment at any time, without notice, for any lawful reason. Thus, the manager at McDonald’s can terminate a cashier in the middle of a shift because he thinks the cashier is rude. The cashier can quit his position in the middle of a shift because he doesn’t like his job.

Contract obligations limiting the circumstances under which employment can terminate comprise a major exception to employment at will. For example, a physician might agree to provide 90 days’ notice before leaving his employment. While the physician might agree to this provision, certain circumstances should allow for immediate termination. This includes when the practice has financial issues (fails to pay the physician or enters bankruptcy), allows insurance to lapse, fails to provide adequate staff, improperly bills, or sells to another owner. A healthcare entity can also have legitimate reasons for immediately terminating a physician, such as loss or suspension of his medical license, hospital privileges, or DEA registration.

Provisions that allow termination for vague reasons such as “conduct detrimental to the practice” or “failure to provide services in a professional manner” are problematic. It wouldn’t be hard to manufacture an instance where a physician engaged in conduct detrimental to the practice. Being late for an appointment is detrimental to the practice but probably unavoidable in some circumstances.

Be wary of contractual provisions that give one party unilateral or unlimited discretion over a term.

Evaluate Survival Terms

Some relationships simply end, with the parties going their separate ways. But contracts often include obligations that survive termination. A party to a contract should always make sure to understand the scope and effect of any contractual provision that continues after the parties’ relationship has otherwise ended.

In physician contracts, the most prevalent survival provisions are non-compete clauses. Non-compete clauses provide a good model to discuss post-termination obligations. A standard non-compete clause might read like this:

Dr. Jones will not, in the three years immediately following termination of this agreement, practice medicine in any location within a three-mile radius of any location where he has provided services for P.C.

If Dr. Jones has performed surgery at both area hospitals while under contract, this clause could require him to pack up his stethoscope and leave town. When coupled with a provision allowing an injunction or liquidated damages, non-compete clauses are a big deal and give rise to lots of lawsuits. Even in circumstances where a non-compete clause is unenforceable, a party is unlikely to receive a favorable determination without substantial litigation. Negotiate a non-compete clause or other survival terms everyone can live with.

Understand Remedies

Lawyers use the term “remedy” to describe the recourse available when a party breaches an agreement. Remedies come in three basic forms:

  • Compensatory damages;
  • Liquidated damages; and
  • Equitable relief.

Compensatory damages are monetary awards designed to compensate an injured party for actual loss. The party seeking compensatory damages must prove the nature of the injury and the amount of compensation that should be awarded.

Liquidated damages are monetary awards to compensate a party for an agreed-upon loss. So long as the parties agree it would be difficult to calculate an actual award of damages, that the amount of liquidated damages is reasonable, and that the award of liquidated damages is not punitive, a court would likely enforce the liquidated damages provision.

Because liquidated damage provisions relieve a party of the burden of proving actual damages, they should be carefully considered.

Equitable relief consists of non-monetary remedies, such as an injunction. If a party agrees to injunctive relief to enforce a contract term, a judge could order the party discontinue certain conduct. If the party disobeys, he/she could be held in contempt of court and jailed. Injunctive relief alters a legal presumption that breaches of contract can be remedied through monetary awards. TH

Patrick O’Rourke works in the Office of University Counsel, Department of Litigation, University of Colorado, Denver.


This copy is for your personal, noncommercial use only. No part of this article can be reproduced without the written permission of the publisher. Order presentation-ready copies for distribution to your colleagues, clients, or customers by contacting our reprints department at reprints@wiley.com. Copyright © 2009 Society of Hospital Medicine, administered by John Wiley & Sons Inc.

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