Business

Don't settle for an incomplete document

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted Oct. 10, 2005.

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You may find yourself in a situation where you are asked to review and sign a settlement agreement. Not the kind that you sign to settle a lawsuit -- but a settlement that, typically, you'll sign when you decide to leave a practice and have to negotiate the end of a shareholder or employer agreement. Or the need for a settlement agreement might come up if someone in your group is deemed to have breached a contract, or if the group itself is dissolving.

To get an idea for why settlement agreements can be necessary, consider just some of the issues that have to be taken care of if a physician who is a shareholder in his practice leaves. Severance pay, redemption of stock, and return of buy-in amount are just the start.

A settlement agreement can be identified as a "release and waiver agreement" or a "redemption agreement" if you are surrendering your membership shares or units in the corporation or limited liability company. In consideration for releasing an individual from any future obligations or liabilities, there is often a settlement amount that is paid by one party to the other upon execution of the agreement.

Settlement agreements can be fiercely negotiated depending upon the circumstances, liabilities and dollar amounts involved.

It is important that you put your agreement with the other party in writing.

You should carefully review a proposed settlement agreement to ensure that all aspects of the contractual or employment relationship are addressed, including present and future liabilities and obligations.

Also, make sure that the settlement amount is accurate based upon the negotiations and any applicable calculations or redemption formulas.

This column highlights three key points you should consider before signing a settlement agreement: recitals, releases and consideration.

Recitals

The recitals of a settlement agreement set forth whom the parties are, their relationship to each other and the events that have triggered the agreement. Make sure you identify all related parties to the settlement, including any corporate entities.

You may sign the agreement individually on your own behalf and also as an authorized representative of your medical corporation.

The recitals should state the underlying events that have caused the parties to reach a settlement.

Often one of the recitals will contain language stating the parties' desire to resolve any disputes between them, including any dealings, negotiations and reliance related to their past relationship. Carefully review all of the recitals to make sure it accurately identifies all of the applicable parties and events that lead up to the proposed settlement agreement.

Release

Your settlement agreement should contain a release provision that discharges the parties from further obligations and future liabilities.

Make sure you also consider any outstanding financial liability you may have to the practice. If you have signed a promissory note or guaranteed any loans on behalf of the practice, make sure that your future obligations to repay such amounts under the note or loan agreement are released upon the execution of the settlement agreement.

Recently, a physician sent me a proposed settlement agreement that was drafted by the practice he was leaving. This proposed agreement did not contain a release for the departing physician of all debts and loan obligations that he had personally guaranteed, including the mortgage payments for the practice's various buildings. I revised the agreement to reflect such releases for our client.

Consideration

If either party pays the other party a sum of money in consideration for the releases, this settlement amount should be clearly set forth in the agreement.

If you are receiving a settlement amount, make sure that you understand how such sum of money was determined and calculated.

If you are redeeming your stock or units in a corporation or company, and the shareholder or operating agreement provides for a valuation of such stock or units, then prior to signing the agreement, make sure that the settlement amount has been accurately calculated.

You should also consider including a provision stating that your settlement agreement constitutes the entire agreement between the parties and may not be altered, modified or amended except upon the express written consent of the parties.

Before you sign any settlement agreement, make sure you fully understand the structure and implications of the settlement, the releases being provided by all parties, and the consideration that is being paid for such releases. Remember. you will have to abide by the provisions of the settlement agreement you sign as you transition out of the related contract or partnership.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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