Monthly Archives: May 2012

What’s so bad about… assumption of responsibility? Indirect loss under English law

Some months ago, this blogger wrote a piece about indirect loss (the blog post is here  and the full article is here).  Recent and robust discussions with BigPharma over the terms of a CDA have led me look at the position again and to wonder whether the judgment of the House of Lords (as it then was) in 2008 in Transfield Shipping v Mercator Shipping deserved the critical response it received.

  There is also a note on the Anderson Law website here that looks in more detail at the issues discussed in this blog article.

The first thing to note is that there is no need for panic.  The Transfield case has not effected any major change in the law.  Subsequent cases have largely confined it to its facts rather than treating it as a new rule of general application.

The facts of the Transfield case were relatively simple.  A ship, the Achilleas, was late returning from a charter with the result that the following charter had to be renegotiated.  The ship’s owner claimed damages for the period of delay and for the reduced value of renegotiated charter.  The original terms of the following charter were especially lucrative.  The House of Lords awarded damages only for the period of delay and did not allow the owner to recover in respect of the following charter.

Hadley v Baxendale is the starting point for any consideration of a question of remoteness of damage.  That case tells us that damages for breach of contract are recoverable in respect of any loss that flows naturally from the breach or in respect of any loss that could reasonably be supposed to have been in the contemplation of the parties at the time the contract was made.  However, the House of Lords in the Transfield case appeared to conclude that loss could not be recovered based merely on what was in the contemplation of the parties at the time of the contract.  The implication of the judgments was that the defendant also needed to have assumed responsibility for a loss before any damages would be awarded.

Five Law Lords gave five judgments in the Transfield case and each appeared to take a slightly different approach.  The most eye catching judgment was that of Lord Hoffman who decided that the determining factor was whether or not the party in breach had agreed to assume responsibility for losses of the type claimed.  If this statement represented the true position at law, then the consequence would be that claimants could only recover damages for a loss where the defendant had assumed responsibility for that specific risk.

Five Law Lords gave five judgments….

In the immediate aftermath of the case, this caused a great deal of concern.  However, as is often the way with the elastic English law, subsequent decisions have quietly distinguished the Transfield case and things have carried on largely unchanged.  Most notably, the Court of Appeal in 2010 concluded that Hadley v Baxdendale remained the standard test, albeit that it had been “rationalised”.

To return to the discussions with BigPharma, I wonder whether Lord Hoffman’s concept of no liability without an assumption of responsibility would be such a bad thing.

Consider this scenario:  BigPharma wants to talk to Research Institute about a possible collaboration and to do this effectively will need to disclose sensitive information.  BigPharma is adamant that any breach of confidence will destroy absolutely all of the value in the information.  But BigPharma is unable (or unwilling) to give any hint of what that value might be, what the potential loss might be or what particular risks are causing concern.   Research Institute is pushed towards a CDA with no limitation of liability, no exclusion of indirect loss and no information that it can use to quantify the potential loss.

Leaving aside the point that much of the information will probably find its way into a patent application and be published in time anyway, Research Institute is in a bind.  It wants to talk but the CDA exposes it to theoretically unlimited liability, something which it cannot accept.  Research Institute gets no immediate benefit from the evaluation and indeed it may never benefit.  It is, on one reading, being asked to accept a massive risk for no return.

Lord Hoffman’s concept of the assumption of responsibility would give Research Institute some hope.  It would force BigPharma to provide a proper explanation of the risks they have in mind and would promote a considered apportionment of risk.  This would allow Research Institute the chance to negotiate and to avoid the spectre of unlimited liability which gives research institutions, universities and other PSREs such a headache.  Research Institute could control its exposure by specifically listing the types of loss it was prepared to assume A promising ringresponsible for.  If BigPharma cannot elaborate on its concerns, Research Institute cannot be expected to assume responsibility.

Seen in that light, the Transfield case has a promising ring to it.

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Filed under Contract drafting, General Commercial

Warrant only facts (not law or opinion)

The contract drafting world [the what world?  Never heard of it, says Mr Pettifog] is currently debating Ken Adams’ decision to abandon represents as his single word of choice to replace the US lawyers’ conventional nonsense of saying “represents and warrants” (or, sometimes, “represents, warrants and undertakes”) in contracts.  Ken is the author of a leading US textbook on contract drafting, A Manual of Style for Contract Draftingwhich is published by the American Bar Association.  MSCD recommends use of represents.  Ken now thinks he was weak to alight upon represents, and that he did so because he thought a more radical solution,  not using any of these legalistic words, would be a step too far for lawyers who are in thrall to the “magic wordery” of the courts.

Ken now proposes to abandon represents and to use instead the phrase states the following facts, which is to be combined with a separate clause providing that the stater of the fact is liable in damages if the fact turns out not to be true.  Some commentators think that he has finally lost his marbles.  IP Draughts is still mulling over whether this proposal supports (some of) Ken’s stated objectives, ie using “standard English”, improving the clarity of the drafting and thereby making it less likely that parties will go to court over the meaning of the words used.

IP Draughts has a niggling concern that in everyday usage, “stating” something could be thought of as less than a promise for which the stater takes legal responsibility.  Even though this problem is solved with the separate clause that Ken proposes, is this any more straightforward than using the single word warrants which arguably has less everyday baggage than states; the former might be recognised by the non-lawyer as a technical word on which he should seek advice as to the legal effect of the word in the contract.

Interesting as this all is, it is not the main purpose of this blog posting.  Instead, the discussion of states on Ken Adams’ blog flushes out an issue that has been at the back of IP Draughts’ mind for some time: what is it sensible for a party to warrant?  Sometimes warranties (and for now, IP Draughts will refer to these pesky provisions as warranties) do more than state facts that are within the  warrantor’s knowledge.  When they do so, they often seek to allocate risk for the unknown or unknowable.  Is this a legitimate function of a warranty?

Let’s consider some examples, extracted from a published precedent for an aircraft lease (not drafted by us!):

In order to induce the Lessor to enter into the Agreements and to lease the Aircraft to the Lessee hereunder and as a condition precedent of the Lessor’s agreement to lease, the Lessee hereby represents and warrants that:

  1. it is a company duly incorporated in [     ] with limited liability and no order has been made or petition presented or resolution passed or is contemplated for winding up the Lessee;
  2. it has the power to enter into and perform its obligations under the Agreements and that it has taken all necessary corporate and/or other action to authorise the making, delivery and performance of the Agreements which constitute the legal, valid, binding and enforceable obligations of the Lessee; and
  3. the choice by the Lessee of [      ] law to govern this Lease and the submission by the Lessee to the jurisdiction of the English courts are valid and binding.

Leaving aside the legalistic, belt-and-braces wording in the introductory part of these warranties, and the use of represents and warrants, which parts of this text are sensible to warrant?  (Also leaving aside the cynical comment that if you want the money for your aircraft, you just have to sign the lease, warts and all.)

In IP Draughts’ view, it should be relatively straightforward to warrant the incorporation part of clause 1 as this is a factual matter; the second part of that clause, dealing with winding-up, is also factual, but should perhaps be revised to make it a knowledge-based warranty.

Similarly the first part of clause 2 should be do-able, up to the word “which”.  But is it sensible to warrant that the Agreements are legally enforceable on the Lessee?  This is not a statement of fact: it is a legal question.  IP Draughts notes that in US transactions one often sees the parties’ attorneys issuing opinion letters on just this point.  Ultimately, it can only be a matter of opinion as to whether obligations are legally binding, until a court (having jurisdiction and subject to any right of appeal) decides the matter.  Similarly, the warranty quoted at clause 3 is not a factual matter but a question of law, and completely outside the control of the Lessee.

Pushback can be very hard work

If the Lessee pushes back on these points in negotiations, the Lessor’s response may be that there is a potential risk to the Lessor that the Agreements are not binding on the Lessee or that the named courts will not accept jurisdiction, someone has to take these risks, and the Lessor wishes the Lessee to take the risks.  While IP Draughts can see the spreadsheet-logic of this position, he is not convinced that it is a suitable subject for warranties.  If such a risk-allocation measure is to be included (rather than just tell the Lessor to take his own legal advice, and point out that all transactions involve risk), it might be better expressed as an indemnity, perhaps in a separate agreement (because if this Agreement is not binding, perhaps the indemnity won’t be binding either).

In the case of IP contracts, an example of a warranty dealing with a legal question is “The Licensed IP is valid and enforceable”.  Many licensors would strongly resist such a warranty on commercial grounds.  Perhaps there is also a technical point to be made, that warranties should only deal with questions of fact, and all warranties that go beyond questions of fact should be deleted as a matter of principle.

Do you agree?

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Filed under Contract drafting

Dynamic law firm marketing

It’s that time of the year again, when we are told that we have been nominated as UK law firm of the year in a specialist category, and all we have to do is pay the nominating magazine a sum of money.

Before going any further, we should distinguish between these commercial propositions and the leading legal directories such as Chambers and IAM Licensing 250; the latter do not require the payment of a fee, conduct research and interview firms’ refereees and, we are pleased to say, include us in their recommendations despite our refusal to pay for glossy adverts.

Coming back to the first category of magazine, we currently have the opportunity to be UK Technology Law Firm of the Year (for a minimum advertising option of £650), and a separate opportunity to be included in a unique, international directory of lawyers where we will be highlighted as the UK specialists in life sciences law (for a fee of £600).  Following our survey on IP Draughts a year ago, we think we know what our readers think we should do with these opportunities.

Close, but not quite there…

Which is just as well, as we don’t have an advertising budget.  If we did, it might be better spent on creating our own adverts.  But how can we distinguish ourselves in the marketplace, when there are already so many Anderson law firms out there?

We bring you a selection of marketing materials that are not ours (Anderson Law LLP), but which are from other Anderson law firms, and give us some interesting templates to consider.  IP Draughts is particularly taken with the strapline of Anderson Law, LLC, in the second example shown above: ‘Cause You’re Gonna Need a Good Lawyer!, while the third example, from Anderson Law Firm, LLC, makes him paws for thought.

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Filed under &Law Updates

Which law should govern my IP contract?

Many IP contracts are made between parties based in different countries or US states.  Often, one of the points for negotiation is which law should govern the contract.

Sometimes, this point is easily resolved, as in the following examples:

  1. If a Japan-based multinational is negotiating with a small English company, the parties may be happy to agree English law.  The multinational may have English lawyers on its staff, or be willing to pay for external legal advice, and may have a general level of comfort with English law.
  2. If a US-based pharmaceutical company is negotiating the terms of a clinical trial agreement with a French hospital, the company may realise that there is very little chance of the hospital agreeing anything other than French law.  There may, in any case, be advantages in having contract issues (eg indemnities) dealt with under the same system of law as that under which liabilities arise (in this case, including liability for personal injury to patients on whom the trial product is tested).

More commonly though, in IP Draughts’ experience, each party wants its own country’s law to govern the contract, and negotiation is required to resolve this issue.

Note that this posting is about which law should govern the contract.  This question is linked to, but not the same issue as, which courts or arbitration body should have jurisdiction to resolve any contractual dispute.  See this earlier post about choices in relation to arbitration.

Law and jurisdiction can be split in several ways

If disputes are to be referred to a court, then IP Draughts’ strong view is that law and jurisdiction should not be split. In other words, don’t choose (as happened in a case on which IP Draughts’ former firm provided expert testimony) English law in the Utah courts.  In IP Draughts’ view, this is a bad compromise, as it requires the judge to decide the case on the basis of a law in which he or she is not an expert.

In relation to arbitration, bear in mind that procedural issues will likely be decided according to the law of the “seat” of the arbitration, including any appeals to the courts of that jurisdiction against the arbitrator’s decision.  For legal simplicity, IP Draughts preference would be to have any arbitration conducted at the same “seat” as the location of the hearings, and to have the law of that location govern the contract.

Sometimes, though, parties want to split the law and the location of the arbitration.  IP Draughts understands that it may be possible to have the arbitration hearings at a different location from the official “seat”, so if English law is chosen but hearings are to be physically located in, say New York, it might be desirable to state that the seat of the arbitration is in London so as to keep all the substantive and procedural issues under one system of law.  This point goes beyond IP Draughts’ experience or legal knowledge, and in any event the legal position may differ according to national law; specialist legal advice should be sought before trying anything fancy along these lines.  The safest approach may be to have law, seat and hearings all in one place.

Coming back to choice of law, parties tend to like what they know.  IP Draughts is qualified in English law, which is an example of a common law system (and distinguishable from civil code systems).  He works in a large, industrialised country that may be described as being North European in its business approach (or Anglo-Saxon, depending on which way you slice it), and his clients tend to be high-tech businesses and universities.  Therefore, IP Draughts preferences, other than English law, include:

  • In Europe: Sweden, Netherlands
  • In North America: New York, Massachusetts
  • In the Far East: Australia, Singapore, Hong Kong

IP Draughts asks readers to comment on these preferences and to state their own preferences and reasons.

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Filed under Commercial negotiation, Contract drafting