December 5, 2018
The goal of every contract is for the parties to the contract to understand their contractual obligations and avoid contract disputes. When a party fails to meet a contractual obligation, communicates an intent to fail the obligation or otherwise appears not to be able to perform a contractual obligation, the contract is breached. The essential elements of a breach of contract are: (1) the existence of a contract; (2) breach of the contract; and (3) damages which flow from the breach.
When physician employment contracts are breached either by the physician or the employer, the parties often separate and move on without litigation. However, when physician contract breaches are litigated, the most common cause of action relates to breaches of non-compete provisions. See the previous blog on non-competes. Recently we have represented a number of physicians sued by their employer for breach of contract unrelated to non-compete breaches. Those lawsuits have included causes of action for insufficient notice of termination, misrepresentation of board certification eligibility and failure to repay promissory notes.
Because we are seeing more litigation for breach of contract, we thought we would end this series on employment contracts with a brief overview of the legal components of breach of contract.
The two most common remedies for breach of contract include money damages and specific performance.
1. Money damages. A money damage award includes a sum of money for financial losses caused by a breach of contract. There are two kinds of money compensatory damages that the non-breaching party may be entitled to recover. General damages are the most common type of damages awarded for breaches of contract and are intended to cover the loss directly and necessarily caused by the breach of contract. Special Damages (also called “consequential damages”) cover any loss incurred by the breach of contract because of special circumstances or conditions that are not ordinarily predictable. These are actual losses caused by the breach, but not in a direct and immediate way. The non-breaching party must prove that the breaching party knew of the special circumstances or requirements at the time the contract was made in order to obtain special damages.
2. Specific performance is an equitable remedy that compels one party to perform, as nearly as practicable, his or her duties specified by the contract. Specific performance is available only when money damages are inadequate to compensate the plaintiff for the breach.
An important limitation on the award of damages is the duty to mitigate. The non-breaching party is obligated to mitigate, or minimize, the amount of damages to the extent reasonable. Damages cannot be recovered for losses that could have been reasonably avoided or substantially ameliorated after the breach occurred.
Defenses to Contract Breach
Certain acts or circumstances may cause a contract to be void or voidable. These are called defenses to contract because they can be reasons why a court might not enforce the agreement at issue.
1. Illegality and unconscionability. A contract is void if it requires the performance of an act that violates a relevant law, such as a statute or regulation. A court may also refuse to enforce a contract that contains unconscionable elements (even if it does not violate a specific law), or terms that would lead to a result that offends justice. In such a case, a court may choose to enforce the contract in a limited way that avoids an unconscionable result. Examples of illegal physician employment contracts include contracts that violate the corporate practice of medicine prohibitions, the Stark Law or the Fraud and Abuse: Anti-kickback laws.
2. Duress and undue influence. Contracts made under duress are voidable by the party against whom certain types of threats are made. Undue influence is a related concept, which occurs when one person takes advantage of another’s mental state or his knowledge of another’s personal weaknesses to impair free will and induce the formation of an unfair contract. Bereavement, senility, and lack of sophistication are examples of situations where one party may end up being unduly influenced by another.
3. Misrepresentation or fraudulent inducement. If a party can demonstrate that a contract was the result of fraudulent inducement by the other party (i.e., the party was induced to enter into the contract by false information or the withholding of information that the other party was under a duty to disclose), the contract is voidable by the defrauded party.
4. Public policy. Certain types of contracts are considered void for public policy; that is, they are legally unenforceable because the subject matter of the contract, while legal, is something in which courts choose not to involve themselves or that the courts have held are in opposition to the public good.
5. Misunderstanding. A misunderstanding may prevent the creation of a contract where it is sufficiently clear that the parties do not have the same understanding of the contract’s material terms.
6. Mistake. Mistake is related to the concept of misunderstanding. There are two types of mistake. The first is mutual mistake, where parties enter into a contract while both of them are mistaken about the same basic set of facts. Generally, a contract resulting from mutual mistake is voidable by the adversely affected party. The other type of mistake is unilateral mistake, where one party uses words that are clear and unambiguous but has made a mistake of fact that, had he been aware of it, would have caused him to express himself differently. A typical case is where a party makes a simple error in mathematical calculation, and offers a purchase price based on his miscalculation. Whether unilateral mistake will void the contract depends on the facts and circumstances.
7. Impossibility. Performance of a valid contract is excused where facts that a party did not cause, and could not reasonably have anticipated, intervene to make performance objectively impossible. Objective impossibility is where such an event has made performance impossible by anyone. Subjective impossibility is where performance is made impossible only for the specific party involved. Courts have held that only objective impossibility discharges the duty to perform. Some examples include where a change in the law or act of government make performance illegal, where the subject matter of the contract is destroyed by supervening event, or where a person promising to perform services dies or becomes seriously ill. An intervening event that makes performance more expensive or difficult, on the other hand, does not amount to impossibility, even if performance becomes unprofitable.
8. Frustration of purpose. A contractual obligation may also be discharged where the purpose or value of the contract has destroyed the value of performance for all parties, thus causing a frustration of purpose of the contract.
The best course of action when a party to a contract wants out or cannot perform is to consult legal counsel regarding strategy and options. Resolving contractual issues prior to breach is optimal and sometimes contracts can be amended to address concerns. If a breach of contract is inevitable, work to mitigate damages and examine possible defenses to the breach.