Contractual Compensation Complication

Below is a student commentary by Robert Herz

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Armbruster v. Mercy Medical Group, No. 11SL-CC03016 (Mo. Cir. Div. 8 2014)

There is a general bias against construing contracts in such a way that would result in one party receiving uncompensated services.  Restatement (Second) of Contracts § 86 (1981).  It follows that there is a bias in favor of construing language as a promise, rather than a condition, so as to avoid the possibility of forfeiture.  Id. at § 227.  It appears that in Armbruster v. Mercy Medical Group, the employer has argued that it should receive services performed by one of its former employees without having to pay that former employee.  The following in an analysis based upon the facts presented and alleged in the briefs of the parties involved:

Dr. Armbruster brought a breach of contract claim against Mercy Medical Group (MMG), arguing that MMG breached her employment agreement (the Agreement) by failing to compensate her for performance of services.  Dr. Armbruster was employed by MMG as a primary care physician.  Her services as a physician were subject to the Agreement, which essentially provided that she see and treat patients, MMG would then bill the patients for services provided by her.  MMG was entitled to the revenues received from those billings.  The Agreement then provided that Dr. Armbruster’s compensation was “governed and calculated in accordance with a detailed formula described in a document entitled ‘MMG physician compensation model’.” Brief of Appellant at 7.  MMG argued that the physician compensation model (PCM) provided for Dr. Armbruster’s compensation calculation to be based on revenue received up to the date of her termination, and not after.  Dr. Armbruster argued the Agreement did not provide such a timing limitation in the compensation calculation.

The Agreement

The Agreement had three provisions pertaining to Dr. Armbruster’s compensation calculation.  The first provision stated that all “similarly situated” physicians will be compensated by the same methodology.  The second provision specified Dr. Armbruster’s method of compensation during the first three years of employment with MMG.  During the first three years, Dr. Armbruster received a minimum fixed amount of $110,000, and could also receive increases if certain criteria were met.  The third provision governed Dr. Armbruster’s method of compensation after the three-year guaranteed compensation period.

At the time of the dispute, the third provision governing her compensation had well been in effect, as she had been employed with MMG for more than seven years at the time of her voluntary termination.  This term provided that her compensation “shall be equal to Physician’s actual performance as determined by the MMG [PCM].”  The PCM was not attached or appended to the Agreement, but both Dr. Armbruster and MMG agreed that the PCM was incorporated within the Agreement.

The PCM contained three components which determined Dr. Armbruster’s compensation: “Base Compensation,” “Additional Compensation,” and an incentive compensation.  Both Base Compensation and Additional Compensation were based of “Collections.”  Both parties agreed that the term Collections meant the amount of revenues collected by MMG for services performed by Dr. Armbruster.  As noted above, the parties disagreed whether the Collections actually received by MMG after Dr. Armbruster’s termination date are computed in determining her compensation.

MMG interpreted the Agreement as not requiring it to pay Dr. Armbruster compensation based on Collections actually received after her termination date.  Conversely, Dr. Armbruster argued that Collections actually received were computed in her compensation.  MMG cited to section 6.8 of the Agreement in support of its argument, which provided that:

“Within thirty (30) days after the termination of this agreement for any reason, provided the physician is not in default under [her] or any other agreement with MMG, MMG shall pay physician … [sic] compensation of benefits which are vested and would otherwise be payable to [Dr. Armbruster] in accordance with this Agreement and MMG policies up to and including the effective date of termination.  Neither party shall have any further obligation to the other under this Agreement except for (i) obligations accruing prior to the date of termination;  and (ii) obligations, promises or covenants in this Agreement which are expressly intended to extend beyond the term of this Agreement including, without limitation, the non-competition covenant and the requirement of confidentiality of confidential information.”

Brief of Appellant at 20.

As argued in MMG’s brief, “[Dr. Armbruster] was only vested in revenues that had been collected at the time of her termination.” Id.

To illustrate, suppose Dr. Armbruster performs services on Day 1.  On Day 2, MMG receives $100 for services performed by her.  On Day 3, she resigns pursuant to the terms of the Agreement.  But on Day 4, MMG receives $900 for services performed by Dr. Armbruster.  Dr. Armbruster argued that the Agreement provides for her compensation based upon the $1000 received by MMG for services performed by her.  However, MMG argued that the Agreement provided for her compensation based only upon the $100 received by MMG prior to the date of her termination and not the $900 received by MMG after her date of resignation, even though the $900 received was for services performed by Dr. Armbruster.

The trial court entered summary judgment in favor of Dr. Armbruster’s claim for breach of contract.

“In its Order, the Trial Court concluded that ‘the contract between parties is unambiguous with respect to the provisions addressing the manner in which Dr. Armbruster was to be compensated for her services after termination of her employment with MMG.’  The Trial Court further stated that ‘the timing of “collections” is not limited in the formula in any way.  MMG, as the drafter of the employment contract, cannot have this Court rewrite the employment contract to provide terms that would support its current position that post-termination collections are not payable to a terminating physician.  The term “collections” is not so limited by any part of the employment contract.”

Brief of the Respondents at 4 (internal citations omitted).

Determining Contract Ambiguity

“The cardinal rule of contract interpretation is to ascertain the parties’ intention and to give effect to that intention.”  Newco Atlas v. Park Range Const., 272 S.W.3d 886, 891 (Mo. App. W.D. 2008) (citing Sonoma Mgmt. Co. v. Boessen, 70 S.W.3d 475, 479 (Mo. App. W.D. 2002)).  Contract interpretation is a question of law.  Dorsh v. Family Medicine Inc., 159 S.W.3d 424,435 (Mo. App. W.D. 2005) (citing Sonoma, 70 S.W.3d at 479).  Under Missouri law, the parties’ intention is determined solely by the language of the contract unless ambiguity exists within the contract. Id.  Determination of contractual ambiguity is also a question of the law.  Id. (citing Yerington v. La-Z-Boy, Inc., 124 S.W.3d 517, 520 (Mo. App. S.D. 2004)).  A contract is not ambiguous simply because the parties to the contract disagree on contractual construction.  Sonoma, 70 S.W.3d at 479.  Rather, contract language is ambiguous “only it its terms are reasonably open to more than one meaning, or the meaning of the language is uncertain.” Id. (quoting Atlas Reserve Temps. V. Vanliner Ins. Co., 51 S.W.3d 83, 87 (Mo. App. W.D. 2001)).  Courts determine contract ambiguity by looking at the contract as a whole, and not by the language of the individual provisions at issue.  Yerington, 124 S.W.3d at 520.  Additionally, Missouri courts may not create ambiguity through the use of extrinsic or parol evidence. Newco Atlas, 272 S.W.3d at 891 (citing City of St. Joseph v. Lake Contrary Sewer Dist., 251 S.W.3d 362, 368 (Mo. App. W.D. 2008)).

Is the Agreement Ambiguous?

Whether or not the Agreement is ambiguous turns on the terms “vested” and “accrued” in section 6.8 of the Agreement.  It appears that the term “vested” supports MMG’s argument that the Dr. Armbruster is to receive no compensation based on Collections actually received by MMG after her termination date.  However, the term “accrued” may support Dr. Armbruster’s position that she is entitled to compensation based on Collections actually received by MMG after her termination date.

In Section 25.3 of the Restatement (Third) of Property, a future interest is vested if it is certain to take effect in possession or enjoyment.  (2011).  A future interest is contingent, and thus not vested, if it might not take effect in possession or enjoyment.  Id.  Dr. Armbruster’s compensation is contingent on MMG actually receiving the Collections.  This is because patients who have been billed for Dr. Armbruster’s services may never actually pay MMG, and thus MMG may never actually receive those collections.  Nonpayment may occur for various different reasons, such as a bankruptcy proceeding.  In contrast, Collections received prior to Dr. Armbruster’s resignation date are not contingent because MMG as actually received those Collections, and thus they are vested.

An older Missouri case has analyzed the term “accrue” in a different but related context.  See Great Western Mfg. Co. v. Burns, 59 Mo.App. 391, 391-92 (Mo. Ct. App. 1894) (citing Phillips on Mechanics’ Liens §§ 323, 329 (Ed. 1893)).  That Missouri court found that a debt began accruing when the goods were allegedly delivered.  Id.  The debt was due when the obligation had been fully performed, which was the alleged delivery.  Id.  MMG’s ‘debt’ to Dr. Armbruster was for compensation for duties performed under the Agreement.  Dr. Armbruster had fully performed her duties as a physicians in order to be compensated.  The compensation began accruing after she had performed those duties to those patients.  It follows that MMG’s obligation accruing was its duty to compensate Dr. Armbruster for her performance under the Ageement, in accordance to a formula based on Collections actually received.

As stated above, Missouri courts will find a contract to be ambiguous if the terms of the contract to have more than one meaning, or the meaning is uncertain.  Sonoma, 70 S.W.3d at 479.  Thus, if two provisions of a contract conflict with one another, then the contract is logically susceptible to two different interpretations, and is therefore ambiguous.  Yerington, 124 S.W.3d at 520.  The Agreement must then be found to be ambiguous if the definitions provided above apply because the terms would appear to conflict.

However, the Agreement may still be ambiguous even if the terms do not necessarily conflict with one another.  The terms standing alone appear to be ambiguous in and of themselves.  Section 6.8 governs “obligations accruing” but does not limit which specific obligations can and do accrue after Dr. Armbruster’s termination date.

Conclusion

Finding that the Agreement is ambiguous, as opposed to the finding of the trial court, would alter the court’s analysis of the Agreement.  If the Agreement is still found to be unambiguous, either in favor of Dr. Armbruster or MMG, the Court is restricted to its conclusion via the language of the Agreement alone.  However, if the Agreement is found to be ambiguous, as argued above, the court may look at extrinsic or parol evidence in determining whether or not Dr. Armbruster is entitle to Collections actually received by MMG after her termination date.  Newco Atlas, 272 S.W.3d at 891; Sonoma, 70 S.W.3d at 479.  Extrinsic or parol evidence might be in the form of how MMG has compensated other physicians with similar employment agreements.  Additionally, contractual construction principles also apply in interpreting ambiguous contracts, such as contra proferentem.  Brief of the Respondents at 16 (citing Burns v. Smith, 303 S.W.3d 505, 509-10 (Mo. Banc 2010)).  A substantive analysis requires an original review of the evidence, which is not practical from a mere review of the parties’ briefs.

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