A Lawyer's Guide to Legalese: Clauses that Can Cost you Money

By Daniel M. Bernick,, Esq., M.B.A.

In our personal lives we are accustomed to signing contracts full of “fine print” and “legalese”: technical legal language that is not readily understood or appreciated except with the aid of an attorney such as credit card agreements, software licenses, insurance contracts, home closing documents.  Much of the time these contracts are mass produced and cannot be altered, so we don’t waste time reading them. 

However, in professional medical practice, there are documents that are “made to order” – drafted by an attorney upon request.  These include: physician employment agreements; shareholders’ agreements (buy-sell agreements); LLC operating agreements; independent contractor agreements; practice sale agreements (asset purchase); hospital service agreements (anesthesia, pathology, radiology); real estate leases; billing company agreements; recruiting agency agreements; income guarantee agreements, and so on.   These documents are subject to negotiation and, therefore, closer attention is appropriate. 

In an ideal world these customized contracts would be short and easy to understand.  However, a certain amount of technical legal language is useful and inevitable, just as technical medical terms are useful and inevitable in discussing medical conditions and treatments.  And some of this language can become terribly important as large amounts of money can shift hands based on only a word or two. 

Here, then, is some guidance on some frequently used clauses:

1.     Merger Clause

This Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written.

 

This is a useful clause, in that it serves to pin down the exact terms of the deal, namely those on paper.  Verbal discussions are helpful and useful in arriving at final deal terms but, in the end, the written document controls.  However, there is a human tendency to want to believe verbal assurances even if they run counter to what is in the document.  You want to believe the sales person even though what they are telling you is not on paper.  Get it in writing!

 

2.     Evergreen Clause

This Agreement shall have an initial term of three (3) years commencing February 1, 2009.  It shall automatically renew for subsequent terms of 3 years each unless either party gives written notice of intent not to renew at least 180 days in advance of the renewal date.

           

The auto-renewal, or “evergreen,” portion of the clause above is not intrinsically harmful.  However, it can hurt you if there is no way of exiting the contract other than the non-renewal notice indicated above.  The danger is that you forget about the 180 day notice requirement.  Then at the end of the three-year term, you want to exit but it is too late: You are locked in for another three-year term.

 

The remedy is to permit a mechanism of terminating mid-contract.  For instance, the language above could be softened by adding the following: “Either party may terminate this agreement at any time upon 180 days advance written notice to the other.”

 

3.     Notice Clause

Wherever a notice is required, notice shall be deemed to have been duly given if in writing and either: (i) personally served; (ii) delivered by pre-paid nationally recognized overnight courier service, return receipt requested; (iii) forwarded by Registered or Certified mail, return receipt requested, postage prepaid. 

 

This is standard language and it is also important.  For example, telling your contracted physician employee that he or she needs to be out of the office within 30 days does not end your relationship, even if the contract says you can terminate on 30 days notice.  You must actually send the employee a letter in the fashion described above.  Otherwise your obligation to pay salary will continue. 

 

4.     Cause Termination (From physician employment agreement):

 

Physician’s employment may be immediately terminated if he ceases to maintain an unrestricted license to practice medicine in Pennsylvania, if he should die or become permanently disabled, or if there is other cause, defined to mean ….[failure to maintain hospital privileges, loss of malpractice insurance, exclusion from Medicare, material breach, etc.]

 

            This language is important and should be included but, nonetheless, may not be sufficient.  Even when “cause” is defined to mean a long laundry list of bad behavior, it does not include “poor attitude,” “lack of interpersonal skills,” “poor work ethic,” or “inadequate clinical/surgical skills.”  These less concrete factors – not the “cause” bases of loss of license or privileges or malpractice — are the most common reasons for termination.   

            Thus, the cause termination clause should be supplemented by a clause permitting termination without cause, such as: “Either party may terminate this agreement without cause on 30 [or 60 or 90] days advance written notice to the other.”  Without such a 30 [or 60 or 90] day “out” clause, the parties are bound to complete the full contract term.  If one party wants to get out before then, without cause, there will likely be substantial damages to pay.

 

5.     Venue

Any action or proceeding seeking to enforce any provision of this Agreement may be brought against any of the parties only in the courts of the State of California, County of Orange, or, if it has or can acquire the necessary jurisdiction, in the United States District Court for the Central District of California , and each of the parties consents to the exclusive jurisdiction of such courts.

 

This clause is fine if all parties reside in Orange County, but what if one party is in Pennsylvania?  Then the party in Pennsylvania is greatly disadvantaged. If there is a dispute, the Pennsylvania party must hire a California lawyer and attempt to handle the dispute long-distance.  The California party has the upper hand.  This is a common problem in billing agency agreements and software agreements.  Negotiate to get jurisdiction in your home territory.

 

6.     Attorneys Fees

The parties agree that if any party seeks to resolve a dispute hereunder pursuant to a legal proceeding, the prevailing party in such proceeding shall be entitled to recover from the other party reasonable fees and expenses (including reasonable counsel fees and expenses) incurred in connection with such proceeding.

 

This language is not necessarily harmful; it may work to your benefit if you are the party seeking redress.  However, if you are involved in a contract dispute and the agreement has a clause of this kind, be wary of taking an overly aggressive negotiating position (i.e., weak argument, unlikely to prevail at trial).  If you litigate the matter and lose, you must pay the other parties’ attorneys fees in addition to “regular” damages. 

 

7.     Survival of Representations and Warranties

 

All warranties and representations made by a party herein shall survive the Closing under this Agreement for a period of twelve (12) [or 24 or 36] months.

 

This clause is important in asset purchase agreements.  Typically seller is making a long laundry list of representations that all taxes have been paid, all liens discharged, there are no employment disputes or violations, etc.  The seller can be sued if these representations turn out to be false, but only for the “survival” period.  The longer the “survival” period, the longer it will be until the seller is sure that the purchase money he received is his to keep in full.  The seller should negotiate for a short survival period (12 months); the buyer should push for a long one (24 to 36 months).

 

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These are only a few of the more technical clauses used in legal agreements.  There are many more.  Inevitably you will need to rely on your attorney to protect you, but an intelligent question or two will result in a better-prepared contract and a better understanding of the agreement to which you will be held.

 

Daniel M. Bernick,, Esq., M.B.A. is an Attorney and Principal of  Health Care Law Associates, P.C. and The Health Care Group in Plymouth Meeting, Pennsylvania