Who wins in IP contract disputes? Actions may speak louder than words

IP Draughts likes to see clear and unambiguous contract terms.  He also likes to see clients  succeeding in contract disputes, including disputes over the performance of contractual obligations.

If a contractual obligation is clearly stated, shouldn’t it be easy to determine whether a party has met that obligation?  You might think so.  IP Draughts has had many conversations over the years with non-lawyers who view contracts as a kind of machine or computer program.  If the machine has been debugged and properly calibrated, then it should work time and time again, giving the correct answer in cases of dispute.  Human judges, with their intellectual  weaknesses and emotional prejudices, may get in the way of finding the correct answer.  It should be left to the machine to decide.

Unfortunately, this “scientific” approach to deciding contract disputes doesn’t work in the real world.  Some contractual obligations, particularly those that involve an ongoing activity, are difficult to reduce to a binary yes/no assessment.  Has the licensee used his “best efforts” in developing and commercialising licensed products?  Only a human judge can decide, by weighing up the evidence and interpreting the obligation in light of all the circumstances.

Other obligations are easier to reduce to a mechanical pass/fail test.  For example, if the obligation is to pay a sum by a set date, and the sum is not paid by that date, it may be easy to show a breach of contract.

A further complication is that commercial parties don’t always interact with one another in accordance with the contract that their lawyers have carefully drafted.  A pattern of behaviour emerges that may indicate an agreed variation of the strict terms of the contract.  This may make it difficult or impossible to enforce those terms.  For example, we have been involved in advising on a term that stated that, after termination of the contract, a party had a right to repurchase certain equipment that he had previously sold to the other party.  The term stated that, in order for this right to be exercised, notice had to be given within 14 days of the date of termination of the contract.  Notice was given but not within this time period.  The Court held that the parties had, through their post-termination discussions, effectively agreed to waive the 14-day condition, and the notice had been validly given.

On this type of issue, analysis of contractual wording can only take you so far.  A literal reading of the contract might lead you to draw the wrong legal conclusion.  You also need the advice of a seasoned litigator who can predict how the facts are likely to be assessed by the judge.

How the court decides such a case may also depend on the type of court.  You may get a more considered, analytical approach to contractual interpretation in a specialist commercial or mercantile court, or in the Chancery Division of the High Court, than in a non-specialist County Court.

With all of these uncertainties, one could be forgiven for saying that there is little point spending a lot of time focussing on detailed contract wording.  Yet there are plenty of reported cases which show parties being prejudiced by poor contract wording.  The best way of looking at it may be to think of increasing the probability of success in court by clear and accurate contract drafting.

There are plenty of other reasons for taking care with contract drafting.  Most disputes don’t reach court, and well-drafted contractual language may help to persuade the other party that it is not worth litigating over an obligation that is clearly stated.

All litigation is, to some extent, a gamble.  The legal team may be able to predict what the odds are in an individual case, and clients usually avoid litigation where the probability of success is low.  But in most cases no-one can say with certainty what the outcome will be.  This unpalatable truth can make lawyers unpopular, and lead to jibes about the legal profession making difficult what should be simple.  The reality, though, is that there is complexity in how people, including commercial parties, interact with one another.  The courts have the task of reducing this complexity to a simple decision in favour of one party or another.  A well-drafted contract can help the court in this process, but it may not address all aspects of the dispute.

Fixed price quotes for advising on transactions: when do they make sense?

In the last couple of weeks, IP Draughts has been helping a high-tech company to obtain some further investment (a few hundred thousand pounds).  We were asked to cap our fees at £5,000 on the basis that the investor’s lawyers were agreeing to the same cap and were using some “standard” documents for the transaction.

The documents have now been agreed and, much to our surprise, the total billable time on this matter is likely to be within the cap.  Past experience suggests that, more often than not, capping fees is a mug’s game for the lawyers concerned, as too many aspects that can increase costs are outside an individual lawyer’s control.  We have seen transactions where one or both parties or their lawyers took an inflexible stance or a “Rolls Royce” approach to negotiating every clause at great length, where the negotiations stopped and restarted several times, and where the parties’ expectations were too far apart.  We have also seen parties who worked out their priorities and negotiating positions in “real time”, rather than planning ahead.  We have seen parties who wanted to be educated about the significance of every clause.  All of these features tend to increase the amount of legal costs.

So, what was different on this occasion, which kept the legal costs under control?  Several aspects, including:

1. The investor’s lawyer had agreed to cap his fees at £5,000.  We have recently seen transactions where the investor’s legal fees have been more than 10 times this amount, for investment in an early-stage technology-based company.  In our view these amounts are disproportionate, and inevitably lead to greater legal costs on the part of the company’s lawyers.  The investors need to take charge, simplify and standardise their expectations, and instruct their lawyers not to take every point that presents a potential risk.  Only if this is done can the lawyer be confident about keeping legal spend to a minimum.  The investors also need to choose the right lawyers.  Using a leading, blue-chip firm for an investment of anything less than, say, £10 million, is almost certain to be wasteful of legal costs.
2. The transaction used template agreements.  Of course, this is no guarantee that the contents of the templates will be acceptable to the company and existing shareholders.  As might be predicted, the draft agreements in the present case did include some distinctive provisions that reflected this particular investor’s priorities.  In most areas, though, the documents were relatively straightforward and this made it easier for us to point out those areas where we felt the investor was taking a different approach.
3. Our client was experienced and willing to take decisions. Once we had pointed out an issue to our client, he had the necessary skills and experience to take a view on whether the issue was one he wanted to pursue and how he wanted to pursue it.  This saved a great deal of our time, which might otherwise have been spent in (a) explaining numerous points in detail to our client, and (b) if the client wished to pursue them, negotiating them line-by-line with the other party.  It also helped in this case that our client and the investor had a good relationship and were able to discuss points in a reasoned and reasonable way.

Would we do it again?  Perhaps.  Before doing so, we would want to assess whether the parties, their lawyers, their documentation and their approach to negotiations were all aligned with a low-cost, efficient approach.