The Bad Business of Handshake Contracts

Third Quarter 2011Newsletters Staying Well Within the Law

I frequently have the opportunity to speak with young physicians finishing their residencies and fellowships. One of the questions that often comes up is whether an informal “handshake” deal is sufficient or if a formal written employment agreement is necessary in order to secure a job. Typically this question is prompted by a situation where a physician already in practice tells the young physician that he or she will have a job and need not worry about the contract. What this tells me is that many physicians are still under the mistaken impression that formal legal contracts are merely an unnecessary formality, and this misunderstanding is being perpetuated by many “experienced” physicians.

Of course, if the parties to a verbal arrangement keep their word, no formal written contract would be needed. Unfortunately, however, what this line of thinking fails to recognize is that contracts are for when people don’t keep their word. Ideally, once a contract is signed, it can be put in a drawer and hopefully will not need to be looked at again. However, contracts are for the rainy day when everyone is not getting along and perhaps the practice isn’t making as much money as everyone thought it would. As is often said in business, plan for the worst but hope for the best, and the same applies to contracts — whether they be for employment arrangements, joint ventures, medical directorships or the purchase or lease of real estate or equipment. Contracts should be drafted with the “worst case” scenario in mind so that if things don’t work out, the parties have a clear path to resolution even if that means dissolving the relationship.

At the outset of a business relationship, the parties to the arrangement are typically optimistic about the prospects of the new relationship and may find it difficult to conceive of the possibility that the business might fail or the relationship might sour. In fact, when businesses are doing well, there is usually little reason to revisit the underlying contracts. Rather, it’s when finances get tight or people go through life changing events such as divorce, disability or death when the contacts usually come into play. Consider too that when one of those events happen, you may no longer be dealing with the senior physician with whom you had a great relationship. Instead, you may be negotiating with his or her spouse, children or estate representative — and your personal relationship may suddenly have little meaning.

They next time you are presented with a business opportunity, whether it’s an employment arrangement, medical directorship or otherwise, keep the following points in mind:

  • The contract should be in writing, signed by both parties and include all of the relevant terms including what each party is obligated to do under the arrangement and how the contract can be terminated.
  • When reviewing a contact, consider the worst case scenario and try to determine if the contract clearly deals with that scenario.
  • Make sure the contract is written in language that an independent, objective third party could understand. The parties negotiating the contract and the attorneys involved may no longer be available to help interpret the agreement if in the future, interpretation is called into question.
  • If a contract is not clearly understandable, it should be rewritten in understandable terms. For contracts involving complex financial formulae such as income division calculations, consider attaching financial sample calculations to help with interpretation.
  • Finally, physicians should always remember that business is business. It’s not personal, and business relationships — even with colleagues, friends and family members — are best documented in written, legally binding agreements.

For more information about this topic, please contact Todd A. Rodriguez at 610.458.4978 or [email protected].