A Look At Contracts

Joe Pharmacist walked into my office and threw some papers on my desk. “Would you look over this contract and see if you can break it?”

As I perused the material, I murmured, “I learned in law school that there are few contracts a first year law student could not break.”

Joe sighed happily.

Some minutes later, I looked up at Joe. “You are about to start the fourth year in this contract for employment. This has been in place for three years. Why do you wan t to break it?” I knew but wanted him to say it.

And he did. “The clause that defines my salary.”

Joe brought me this contract in the years during the pharmacist shortage, when salaries jumped every year. However, the contract provision for Joe stated that he would receive X dollars per year for the next five years. It was a good salary when he started working for his employer, but three years later his pay was lagging behind the average. Two more years and he would be lagging severely behind his fellow pharmacists. This was not a contract a first year law student could break, which made Joe very unhappy.

Contracts ARE A big part of a pharmacist’s life. Buying or selling a pharmacy, setting up vendors, making agreements with providers, picking a PSAO, purchasing equipment or drugs, creating a corporation or partnership—these all call for contracts. Employment contracts are resurfacing with the end of the pharmacist shortage, though the provisions are now much more favorable to employer than employee.

This blog entry is focused on the WRITTEN contract. There are other types, such as verbal or implied contracts. However, parties and/or courts may view them differently than what is below.

Contracts are are land mines for the uninitiated. There can be, and often are, hidden provisions or phrase in provisions that a contract-naïve person is not going to catch. As one person put it to me the other day when asking I review a vendor contract. “Would you please find all the ‘gotchas’?” Above, Joe suffered a ‘gotcha’ by failing to note that his pay would remain the same annual salary for five years.

The other ‘gotcha’ that got Joe was that he did not have a lawyer review the contract. I am not going to lcture you on the need for a lawyer—you all are smart people.

Let us look, though, at what a contract is. The definition is a binding agreement between two or more parties that is meant to provide some benefit to all the parties.

What are the essential elements of a contract?
1. A MEETING OF THE MINDS. This means that all the parties understand and agree on the aims and terms of the contract.
Pharmacy hires Joe P to be a pharmacist. Joe will work 40 hours a week and be paid $100K each year for five years. Both parties understand that Joe works for Pharmacy, how much Joe works, and what Joe’s annual salary is.
2. MUTUAL ASSENT or more often “offer and acceptance.” This is usually a mutual promise by each party.
Pharmacy says, “Joe, I offer you employment at our pharmacy.” Joe responds, “I accept your offer.”
3. CONSIDERATION This states that both sides must benefit from the contract.*
Joe understands= that he will be paid a good wage for his work. Pharmacy understands that they will get a pharmacist to work.
4. LEGAL PURPOSE A contract can only be for a legal purpose. Contracts made for illegal acts are automatically void.
A contract for Joe to work at a pharmacy is legal and can be made only if Joe is a licensed pharmacist. It is an illegal act for an unlicensed person to perform the duties of a pharmacist.
5. COMPETENT PARTIES Both parties must be competent. That is, they must be able to both understand the terms of the contract as well as be able to fulfill their obligations under the contract.

Having determined what is required to make a contract, what should the pharmacist look for in one? It is made up of several provisions (also known as clauses).

1. A contract will open up with a statement of the intent of named parties to make an agreement. The important thing to look for here is to make sure all the parties are named.
2. The next provision should explain the terms of the contract, how each party benefits, the obligations of each party, the benefit for each party, etc. This is often referred to as the “Recitals.” FYI, this is where Joe P above failed to notice his pay remained the same for the five year term of the contract. Understandable in a way, as the Recitals are often quite lengthy. In his contract, salary, hours to be worked, duties to perform, length of contract, performance requirements, termination of contract, etc, were all spelled out. Though no provision of a contract should be seen as unimportant, this one may well be the most important.
3. Non-Disclosure/Non-Compete. When a contract ends, either by term of contract or by breaking (the legal word is usually “breaching”) the contract, quite often there are duties, requirements, etc that carry on afterwards. These clauses, often together, define a time period and geographic area where a departing party may not engage in work or activities that either directly or indirectly interfere with work or contractual activities of the other parties of the contract. Further, proprietary information learned during the time when the contract was in place must be protected and not disclosed to other parties, even after the contract period has ended. For example, even after five years, Joe may leave his employment but he may not disclose proprietary information about Pharmacy to its detriment.
4. Indemnification. This holds the parties responsible for any harm done by a breach of contract. It may also release some parties from certain liabilities. For example, Joe P may be required to take responsibility for any error he may commit and release Pharmacy from any liability arising from that error. Attention should be paid here to see how liabilities and responsibilities are defined for each party. Again, looking at Joe P making an error; he needs to make sure that errors due to the facilities or company policies are not his liability.
5. Integration. This may be titled otherwise, but this clause states that the agreement, or contract, is totally within the writing of the contract. He contract is the totality of the agreement between the parties. No other writing or verbal statement counts once this contract is signed. This clause may also state the conditions for amending the contract. Look carefully at these (well, OK, you need to look carefully at everything) to make sure that if amending the contract becomes necessary, it is not too difficult to do so.
6. Force majeure. This clause looks to whether the contract, or its provisions separately, can withstand an outside force that materially affects the contract. FM may be a new law, an Act of God (tornado, flood, etc), terrorism, etc
7. Assignment. This means being able to pass along your interest in the contract to another party. This would be Joe P finding a pharmacist to fulfill the last two years of his contract. The new pharmacist would have to 1) agree to all the terms that Joe agreed to, and 2) probably would have to have the OK to step in from the other parties. Quite often, assignment of interest is forbidden in a contract, but not always. When it is, assignees need to look as hard at the contract as the original party, as they assume the liabilities as well as the provisions.
8. Insurance. If not mentioned in the Recitals, there usually will be an Insurance clause. This can cover not only malpractice, but also an Act of God or other type of economic loss. For example, an indie pharmacy generally has a life insurance policy on the owner-pharmacist in the event of unexpected death. The proceeds from the policy may pay the bills while a new pharmacist is found, pay the pharmacist, or settle debts while closing the pharmacy.
9. Disputes between the parties. This provision will detail the steps an aggrieved party must follow in order to seek legal redress for alleged harm to that party. These may include mediation or arbitration before being able to enter the court system. These steps can, in some cases, make it extremely hard for a party to seek to set things right. This provision is an excellent reason why a pharmacist should have an attorney look over every contract, and the lawyer should give a little extra attention to this clause.
10. Governing law. This provision will name the state whose law rules in any legal dispute between the parties. Just because you are in Kentucky, that state’s law does not necessarily govern a legal issue; contracts can state that another jurisdiction’s law will be applied. Quite often, this is New Jersey, as that state has corporate-friendly law.
11. Invalidity of a provision. This one simply says that if, for any reason, a provision of the contract is found to be invalid, the contract continues without it, if it can.
12. Compliance with laws. This is usually in the Recitals, too. The provision simply says that the parties will obey all applicable laws, and when law and policy conflict, the law wins.

OK, those are the basics of a contract. Keep in mind that this is a general review of what a contract is and what makes it up—do NOT treat this blog entry as black letter law.

Though it is a piece (or several pieces) of paper, the contract is as important as the car or vehicle you buy. It would be worth your time (and money) to have an attorney review it with you and discuss the various provisions in the document.

 

*This required element is under serious attack these days, with third party insurance companies making contracts that pay cost LESS a determined percentage. A loss on certain products is expected to be overcome by sales of other cheaper or generic medications. However, shrinking reimbursement is making this harder. Whether this provides a basis for vitiating a contract remains to be seen, but we can expect lawsuits soon as pharmacies, especially indies, fight to hang on.

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