Close-up image of contract form on a deskTime spent drafting and negotiating an agreement often pays dividends in assuring that each party gets the benefits they desire through the agreement and incurs obligations no greater than they intended. Two recent cases, discussed below, demonstrate how small drafting oversights resulted in significant litigation costs to the parties and in one case, the party’s loss of the prime benefit they sought from the arrangement.

Arbitration Agreements Signed Under a Power of Attorney

Beverly Wellner and Janis Clark (POA holders) each held a power of attorney (POA) affording her broad authority to manage her family members, Joe Wellner and Olive Clark, respectively. When Wellner and Clark were admitted to a nursing home, the documents to admit them included an agreement to arbitrate any and all claims or controversies arising out of or in any way relating to their stay at the facility. The POA holders signed the arbitration agreements. After Joe and Olive died, their estates sued the nursing home alleging that their deaths were caused by the facility’s negligence.

The nursing facility moved to dismiss the wrongful death cases, arguing that the arbitration agreements prohibited bringing the disputes to court. The Kentucky courts refused to enforce the arbitration agreements, holding they were invalid because neither POA specifically authorized the POA holder to enter into an arbitration agreement. The Kentucky Supreme Court based its determination on the Kentucky Constitution which “declares the rights of access to the courts and trial by jury to be ‘sacred’ and ‘in-violate.’” According to the Kentucky Supreme Court, “a general grant of power (even if seemingly comprehensive) does not permit a legal representative to enter into an arbitration agreement for someone else; to form such a contract, the representative must possess specific authority to ‘waive his principal’s fundamental constitutional rights to access the courts [and] to trial by jury. ’”

The U.S. Supreme Court held that the “Kentucky Supreme Court’s clear-statement rule violates the Federal Arbitration Act by singling out arbitration agreements for disfavored treatment. …” “A court may invalidate an arbitration agreement based on ‘generally applicable contract defenses’ but not on legal rules that ‘apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’ … By requiring an explicit statement before an agent can relinquish her principal’s right to go to court and receive a jury trial, the court did exactly what this Court has barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement.” Consequently, a POA need not include a statement specially authorizing the holder to sign an arbitration agreement

Agreement Fails to Clearly Express the Parties’ Intent

A radiology practice group comprised of five physicians entered into an exclusive joint venture arrangement with a hospital for the provision of radiology professional services in a newly-established outpatient diagnostic imaging center. After splitting into two groups, the five physicians attempted to divide up the hospital contract based upon the number of physicians in each new group. Shortly thereafter, these physicians sold their interests in the imaging center to the hospital.

After the split, the radiologists agreed to furnish professional supervision and interpretations of the studies performed at the imaging center on a joint exclusive basis through the two new groups. According to the agreement, each physician group would provide radiology services pursuant to a schedule (coverage schedule) for the initial contract year and in subsequent years, the two physician groups would agree to the coverage schedule for the next year; if they were unable to agree, the preceding coverage schedule was to remain in place for the following year. After noticing a substantial drop-off in referrals from the imaging center, one of the physician groups filed suit against the hospital for breach of contract.

The Nebraska Court of Appeals held that the agreement between the two groups unambiguously grants the parties the exclusive joint right to provide radiology services for the imaging center but does not “not specifically grant an exclusive right to perform necessary services at [the imaging center] based on the outlined schedule … and does not indicate any prohibition from either provider to perform radiology services during a week ‘assigned’ to the other provider.” Thus the hospital could use one group to provide all of the services without breaching the agreement, despite the fact that the physicians had intended a pro-rata split of the service volume.

The moral of the story here is that drafting must be specific, and clearly express the parties’ intent. In this case the court held that the agreement should have delineated that the hospital could use only the specified group for the specified week. It did not do so. As a result, “[t]he Hospital did not have an exclusive requirement to use [either group] based upon the outlined schedule, only an exclusive requirement to have [one of the groups] as [its] provider.”