By Daniel F. Shay, Esq. and Alice G. Gosfield, Esq., July 01, 2013
The purpose of a contract, as the saying goes, is to establish a “meeting of the minds.” Contracts therefore represent the mutual agreement by both parties to a shared understanding of each parties’ duties and obligations during the period covered by the contract. Understanding this concept, physicians who are negotiating contracts naturally pay a great deal of attention to the substantive sections of the contract. Clauses such as those relating to compensation, specific duties, termination, confidentiality, and non-competition are the types of provisions our clients ask us to review most often.
Physicians, however, typically gloss over other so-called “boilerplate” provisions at the end of the agreement, assuming that they are non-negotiable, or are just so much meaningless jargon and legalese. This article will dispel that notion, and explain the significance of some common “boilerplate” provisions.
When there is a dispute about the contract, the parties need a mechanism to resolve their differences. In most cases, this means they will have to go to court and litigate the matter. Litigation is contentious, expensive, and time-consuming. Moreover, it is a matter of public record, in most cases. If a contract contains an arbitration clause, however, it may provide an alternative mechanism for resolving such disputes. If a contract has no arbitration clause, a breach will leave only litigation for resolution. [pagebreak]
Arbitration may occur before or after termination, and may be binding or non-binding. If the arbitration must occur post-termination, it will require the parties to formally end the contract and then enter arbitration. By contrast, pre-termination arbitration allows the parties to enter arbitration before terminating the agreement. Accordingly, the types of disputes that will end up in arbitration will vary based on when arbitration occurs. For example, parties will be far less likely to enter arbitration to resolve minor disputes if arbitration must occur post-termination; instead, only true “dealbreaker” disputes will lead to arbitration.
Arbitration itself is also less formal than litigation, with respect to its procedural rules. For example, the agreement may state the rules by which arbitration is conducted are not the court rules of evidence — meaning that something like hearsay could be used in arbitration, where it would be excluded from a court case.
The major benefit of arbitration is that it is usually confidential and, unlike formal litigation, not a matter of public record. The public need never know the parties even entered into arbitration itself, let alone what evidence was involved, the grounds for the dispute, or the ultimate resolution upon which they agreed. [pagebreak]
Waiver of breach
A waiver of breach clause appears to be little more than jargon, stating that a waiver of one breach shall not constitute waiver of a similar breach in the future. The text of such provisions does not usually provide any context. The practical impact of a waiver of breach, however, is significant.
Contract law is, as established by courts, generally governed by an underlying theory of “equity.” In other words, contract law generally tries to find a “fair” resolution to a dispute. A waiver of breach clause is usually included specifically because of this doctrine. With no waiver of breach clause, a party which fails to object to an individual incident of contractual breach will forfeit the right to object to such a breach for the remainder of the contract. So as an example, if a contract states that payment for services must be made by the fifth of the month, and the person obligated to pay is late by a week or two, in the absence of a waiver of breach clause, the person to whom the money is owed will have waived the right to call the next late payments a breach.
This is because, under equity principles, it would not be fair for the person obligated to pay to be held to that obligation when the recipient has failed to enforce. By including a waiver of breach clause, the parties short-circuit this legal doctrine and explicitly state that failing to object in one instance will not relieve the breaching party of its duty to comply with its obligations in the future. [pagebreak]
As a practical matter, there are only two things to look for with respect to waivers of breach: (1) is the clause included at all, and (2) is the clause worded to be mutual. The clause should at least give each party equal rights in enforcing future contractual obligations in spite of having waived the obligation once.
Representations and warranties
Representations and warranties are different undertakings from regular contract terms. They act as an inducement to the party to whom the representations and warranties are made to enter into the agreement. For most contract breaches, the damages to the harmed party are the value of what he was entitled to under the agreement. However, if the representing party breaches his representations, and the other party is harmed, the other party may be able to obtain punitive damages against the representing party.
Within the context of physician contracts, typical representations include statements that you have a valid license to practice medicine in the relevant jurisdiction, that you have never been a “sanctioned person” within the meaning of the Social Security Act (meaning that you haven’t been excluded from federal health care programs, or paid penalties), that you are not under investigation by any state or federal governmental office, or that you have not entered into a settlement with any federal or state governmental office for matters relating to health care fraud. But some representations are more complex and should be read with exquisite attention to detail. [pagebreak]
Most of the time, physicians have no problem making such representations and warranties. However, given the potential for punitive damages in the event of a breach, it is essential to review these provisions and make absolutely certain you can comply with them.
Jurisdiction and venue
When both parties are from the same state, this section is generally not problematic. However, when parties to a contract are from two different states, the contract typically will indicate which state’s laws will be followed when resolving disputes. States vary in the obligations they impose on physicians including with regard to restrictive covenants as well as regulatory issues. The controlling law provision does not necessarily also indicate where disputes will be settled; that matter is controlled by venue. This may be a matter of greater or lesser significance to the parties, depending on the geographic distances involved. For example, if both parties are in southeastern Pennsylvania, setting the venue for dispute resolution in Philadelphia may not be much of a burden. By contrast, when one party is located in Florida and the other in California, setting venue in Los Angeles or Miami will be a hassle for at least one of the parties.
Bear in mind that if either aspect — jurisdiction or venue — is not specified, the matter may have to be settled in court, which will likely lengthen the amount of time it will take to resolve the issue and increase the fees that must be paid to each party’s attorney. For this reason, it is often better to include, at the very least, which jurisdiction’s laws will control. Typically, whichever party has drafted the agreement will specify their own state’s laws and may also specify their own state as the venue for dispute resolution. [pagebreak]
Amendments and notice
The amendment provision of an agreement typically will state that amendments must be in writing and signed by both parties to be considered legally binding. When this is the case, an amendment will look like a shorter version of a contract. In some cases, however, amendments may be made unilaterally. For example, most managed care contracts permit the managed care organization to make amendments unilaterally. If the participating physician or practice does not wish to sign, they may refuse to do so, but will be ejected from the network. In other settings, if the physician objects, the agreement goes on as before. In some circumstances, there may be no consequences for failure to accept an amendment. Amendments also relate to the exhibits and attachments to contracts; if the amendment applies to the contract as a whole, and an exhibit or attachment is “incorporated by reference,” then those provisions are just as much a part of the contract (and thus subject to the amendment provision) as something like a compensation clause. Thus, a change to an employee handbook which has been “incorporated by reference” into an employment contract as an exhibit will trigger the amendment provision.
Notice is simply the section which specifies how the parties are to contact each other, and where to send such communications. Notice may be effectively made in any number of ways, but typically will involve either delivery by hand, facsimilie, nationally recognized overnight service, or certified return receipt mail from the USPS. The particular form(s) of notice required by the contract are important. Notice sections may “deem” delivery to have been made when certain things have happened (e.g., “Three days after the date of any such communication when sent by certified return receipt mail”). In that case the recipient will be considered legally to have received the notice even if the letter was lost in transit for three weeks. In general, “deemed” delivery is unnecessary in an age with tracking numbers and delivery confirmation. We usually recommend it be removed. [pagebreak]
In an era full of mergers between physician practices and large institutions, the assignment clause of a contract can be crucial. Assignment clauses generally prohibit a party from transferring its obligations under the contract to a third party without first getting written permission from the other party to the contract. For example, in a personal services agreement, the party that contracted with Dr. Smith must give permission if Dr. Smith wants to exit the contract and be replaced by Dr. Jones. Likewise, if a payer has a contract for reimbursement with a group that merges with a health system, in the absence of a permission to assign the contract the new entity will not necessarily get the same rates or obligations.
Similarly, when a physician practice is purchased by a health system, all of the contracts to which it is currently bound must be reviewed to determine whether they can be assigned to the health system purchasing the group. In some cases, the other parties will have no problem, or the contracts will be redundant with those of the health system and can be terminated. In others, the health system may want the contract to continue, which will require the parties to determine whether the contract can seamlessly transfer, whether the other side will grant permission for such a transfer, or whether the health system and the other side must negotiate new terms. [pagebreak]
The “boilerplate” provisions clearly are meaningful and significant for both parties to a contract. The promises made in a representation and warranty carry stiff potential penalties if the representing party breaches them; an amendment provision could change the basic understanding of the parties; and the absence of a waiver of breach clause can turn a friendly ignoring of a technical violation of the contract into an elimination of the underlying obligation altogether. Understanding the importance of these provisions is essential when reviewing a contract. Even if the reviewing party lacks the leverage to force a change (such as an inability to alter the venue and/or controlling law for resolving disputes), it is still worth understanding the importance of such a provision.
It can still be a headache to review a contract in such fine detail. An attorney can help toward this end, but your understanding of the importance of these clauses can help you to point your attorney toward issues that matter to you, and can help you understand what your attorney is telling you when they give you their review.