What does it mean for a contract to have “teeth”? Maybe this is just lawyer talk, but we often resort to analogies to explain what the purpose or end goal is. You may have heard, for instance, of “carrots and sticks”? Well, we aren’t horses being led in a race and the use of sticks is well in the past. “Teeth” simply means that the contract can actually ‘bite”. Many contracts are boilerplate but do not necessarily give you a truly practical remedy outside of suing. And, well, suing can be expensive, especially when it comes to damages which can be hard and expensive, if not sometimes outright impossible, to quantify. You’d have to prove you were actually damaged by the breach and spend money on consultants and resources best spent elsewhere. And, in the end, maybe you weren’t damaged at all. You picked up the pieces and stemmed the bleeding, or you just can’t prove it, even if you were. In the latter case, not being able to prove it may be the same nada, at least in the court’s eyes. The simple fix: liquidated damages. Liquidated damages are a statement between the contracting parties of agreed upon damages for breach, set in advance. Then you only have to prove the breach, and, potentially, that the liquidated damages are fair. The purpose: so they will think twice before doing it, or, at least, their lawyer will warn them about it.
Here are a few examples:
Ditching the job
Your contract says that they have to give 90 days’ notice, so obviously they have to give 90 days notice, right? What are you gong to do if they don’t? Fire them? Ha. Sue for lost income or the cost of physician coverage when you simply reassign patients to someone else? The cost of litigation may far outweigh the gains even if the jurisdiction will still award you lost income expectation damages. Teeth: Set $ damages for each day of inadequate notice, and have them forfeit any bonus or post-termination accounts receivable credit entitlement.
Stealing money
The contract says all collections and claims payments for their services belong to you. What if they divert insurance payments to themselves? Pocket cash pay? Teeth: Hold them liable for more than 100% of the diverted funds, such as a multiple of 1.25 – 1.5 times what they steal.
Violating a restrictive covenant
Proving a breach of a covenant is the easy part. Were you damaged? Did they actually divert patient or referral source goodwill? Teeth: A certain dollar amount for each day of the breach. This ties the damages to the actual period of the breach, rather than a massive amount even if they only breached for a few months. A set dollar amount over 1 to 3 years can really add up. Scary! Many jurisdictions are passing laws, however, limiting the amount of damages for breach of a non-compete to a reasonable amount, such as 1 year’s gross pay. Want to know an interesting tidbit? Some jurisdictions outlawed liquidated damages for breaching covenants, so what did lawyer’s do? We added “buyout” clauses allowing for you to get out of the covenant by paying a set amount. Do you see a difference? Well, the courts do.
Other types of “teeth” include:
Fired for doing something bad
Think twice, or you won’t get your bonus and may forfeit credit for continuing collections that come in after you leave.
Not completing medical records
Make the earning of relevant compensation, such as the direct % of that patient’s collections or any bonus contingent on completing records, especially when they leave. If the records aren’t proper, then the practice might not be able to substantiate payment entitlement in the event of an audit later, and have to pay it back.
Legal fee and cost reimbursement
The decision to sue is a cost-benefit one. If it costs more to sue than the ultimate “winnings”, it is not worth it. However, if the losing party has to reimburse the prevailing party for their legal fees and other expenses incurred, it can serve as a dis-incentive against both breach and bringing baseless legal action for harassment purposes. If you have to pay not only your own legal and expert fees but also the other party’s attorneys and consultants, that would make almost anyone think twice. Note this is automatically the case for employees in most jurisdictions with regard to wages and other pro-employee protections, but there are other types of claims as well.
Promissory Note
If you lend money, a separate loan document can more easily be enforced outside of the existing underlying contract that led to the loan. This, of course, depends on whether the loan is contingent on terms in the underlying contract, such as not breaching or remaining employed for a minimum period of time.
Confession of Judgment
Why sue through an extended complaint and discovery process at all? Give me a signed judgment now and I’ll hold it in escrow. When the time comes, I’ll just file it with the court along with proof of the breach. This can be aggressive and is typically reserved for limited circumstances. Not all jurisdictions enforce them against their residents.
Interest
You owe me $1 today, but I don’t have it, so I lose the opportunity to invest it and earn a return or my own interest on it. Similarly, the longer it takes you to pay me should be taken into consideration. Why should you owe me a $1 today and still owe me the same $1 a year from now? Now you’ve had the use of that $1 to earn a return and interest. The contract should impose interest for every day they do not pony up (uh oh, another horse reference..I swear I’m not a “horse guy”). With the dollar increase on the damages compounding over time, this may be enough to bring them to the table sooner.
A few end thoughts:
While it might not always be enforceable to offset the liquidated damages against what you owe them as compensation, it’s better to have money in the hand than pay it and chase it, so add that right of offset to the contract as well. Note though, that you can’t just willy nilly come up with a number. It should be based in actual analysis of reasonableness. A penalty is not enforceable in most jurisdictions, but liquidated damages are, and reasonableness and actual legitimacy is the line that separates the two.
