Category Archives: Commercial negotiation

Let’s get rid of the ratchet men

two wayLast week, IP Draughts co-presented a two-day course on clinical trial agreements. With practice-based courses, the discussion becomes interesting, at least for the presenter, when the people attending provide their own insights on the topics being discussed. This happened in abundance last week, and IP Draughts is grateful to all who contributed.

A theme that emerged in this course was whether a company’s template agreements should focus solely on providing maximum protection for the company, or instead should try to provide a balanced set of reasonable obligations on both parties.

What prompted the discussion was IP Draughts taking the class through the terms of a US biotech company’s template clinical trials agreement. The terms were excessively one-sided, giving the company maximum flexibility to tell the investigator what to do or not do.  They seemed to ignore the fact that the investigator has certain responsibilities under EU regulations to be responsible for its own actions and to seek consent from regulatory bodies (eg ethics committees), rather than just dance to the sponsoring company’s tune. It was interesting to compare these terms with the terms that are generally used in the UK, as issued by the Department of Health and negotiated between interested parties. The latter terms are much more pro-investigator, but they also try to address issues of concern to both parties including their regulatory obligations.

The wider issue is whether a company should have standard contract terms that seek to provide maximum protection to the company and largely ignore the interests of the other party. This type of approach is common in some market sectors. In M&A and some financial transactions, it seems that a buyer/investor will often wish to include in the agreement as many provisions as possible to protect its interests and minimise its risks. Or at least, they won’t tell their lawyers to minimise the use of legalistic contract terms, which may amount to the same thing.

This seems to have led to the proliferation of practices that, in other market sectors, can seem ludicrously aggressive and one-sided, eg demanding indemnities in respect of all breaches of warranty, having a party “represent and warrant” (supposedly to give additional remedies in tort as well as contract), and so on. It seems that lawyers in those sectors rarely stand up to their clients and tell them to stop being extreme and to stick to some simple, balanced terms. That just isn’t “done”. A forratchetmer colleague of IP Draughts, a corporate lawyer, called the lawyers who indulged in this type of competitive negotiation “ratchet men”, because they would squeeze out a concession, bank it, then move on to demand another, moving only in one direction like a ratchet mechanism.

In IP Draughts’ world, lawyers are usually “on tap” rather than “on top”. In other words, they are there as a resource but do not usually dictate the structure and agenda of negotiations. In this world, there is pressure to keep contract terms as simple as possible, and not to take extreme positions, because it is not efficient and does not lead to harmonious negotiations. A factor that possibly influences the negotiations is that these contract relationships tend to be long-term and require cooperation between the parties, rather than being a one-off in the way that an M&A deal tends to be.

IP Draughts suspects that some in-house lawyers, influenced perhaps by their training in large law firms, consider it to be their job simply to draft terms that protect their organisation, and that including terms to protect the other party is not part of their brief.

IP Draughts would like to encourage all lawyers to draft balanced documents, and all clients to give clear instructions that this is what they expect. By all means weight them to some extent in favour of your client or your employer, but not at the expense of seeing the other party’s point of view or addressing their legitimate concerns.

 

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Filed under Commercial negotiation, Contract drafting

Managing ambiguity in IP transactions

uncertaintyA job description recently caught IP Draughts’ eye. It requires candidates to “demonstrate the ability to operate effectively in highly ambiguous situations”. (The vacancy is for a legal manager in a university technology transfer office. If you are interested, you will need to hurry: the deadline for applications is the end of this month.)

Brief searching on the internet confirms that this quality is much valued in senior managers of organisations.

Ambiguity in this sense doesn’t seem to have quite the same meaning as a contract drafter might use it, to describe a contractual obligation that, through imperfect wording, may have more than one interpretation. Used in this way, ambiguity can be contrasted with uncertainty. The meaning of a contractual obligation may be uncertain, without there being any choice of meanings.

Instead, the term seems to be used in management theory to refer to dealing with uncertainty. Another way of referring to this quality is that a person is required to have the personal qualities to exercise good judgment in situations where he has incomplete information or conflicting pressures. This approach is sometimes contrasted with the one required for a techical role, such as a patent attorney, where the dominant requirement may be to apply technical skills in a consistent and rigorous manner.

IP Draughts can certainly see that senior managers need to be able to manage ambiguity, though if they are managing a team of technical specialists they may need to keep their feet in both camps, and be able to switch into technical mode when the situation requires.

It seems that one way of managing ambiguity is to build up a consensus among one’s colleagues.

alarm bellApplying these ideas to the task of drafting and negotiating IP contracts, several alarm bells go off in IP Draughts’ mind.

First, that (to put it provocatively) taking a touchy-feely approach to deciding what should be included in the contract is likely to result in sub-optimal terms. Instead, a careful analysis is required of the risks, the parties’ bargaining positions, the alternatives to doing the deal, terms that are deal-breakers, and so on. Once the analysis has been done – and it may be that you have incomplete information for making some of that analysis – a judgment call may be required. But the technical approach should be the starting point.

Second, that the drafting of the contract is a technical task, which requires the rigorous application of technical skills and not a “managing ambiguity” approach. “Drafting by committee” is the worst way of drafting, except perhaps in the final stage of negotiations, when there are only a few outstanding points, and when text can be displayed on a projector screen for all the negotiators to agree upon in “real time”.

Third, that the commercial decision-maker in negotiations may need to manage ambiguity when deciding how far to push a point. Sometimes negotiators refer to “constructive ambiguity” when agreeing a contract term that is not clear, but which they think gives them some “wriggle room” to argue for a particular meaning if a dispute arises. In IP Draughts’ view, some negotiators are far too sanguine about accepting terms of this kind, and the practice should be kept to an absolute minimum, if it is used at all.  He knows that some lawyers and commercial managers have a different view on this point.

In a university setting, there is so much ambiguity (in the management theory sense) that it is very easy to take bad decisions in relation to IP contracts based on a “muddle through” approach. Sources of ambiguity include:

  1. Are we trying to do a good IP deal, or to promote a researcher’s academic career, or to get technology out into public use, or to obtain short term revenues?
  2. Are there any terms that we cannot accept, or are unattractive contract terms just one element that goes into the mix when a senior manager takes a “managing ambiguity” approach to deciding whether to accept a deal? (Other elements may include keeping an important academic happy.)
  3. Do any of us have a good general overview of all the issues that go into an IP transaction, including legal risk issues, getting the technology into public use, advancing the research interests of the university, understanding how far one should push a commercial company in difficult negotiations, being willing to forego important funding if the terms are not right, and so on. Universities tend to be siloes of expertise, with the top management sometimes woefully under-experienced in the realities of commercial negotiations and commercial risk management. This may mean that the decision-maker (if one can be clearly discerned in a committee-based structure) lacks the necessary information and experience to manage ambiguity in an appropriate way.

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As was mentioned earlier, another way of labelling this subject is to refer to exercising good business judgment; this label focuses on the outcome rather than the process of arriving at the outcome, but they may amount to the same thing. In the context of negotiating contracts, lawyers are sometimes asked for their views on what terms should go into the contract; in other words, to make a judgment call.

wise monkeysThe traditional approach of external law firms is to drum into their junior associates the importance of avoiding giving a view on any commercial issue, and to keep good file notes to demonstrate how pure and undefiled they have been in relation to giving commercial advice. Commercial issues are for the client to decide! Of course clients don’t like this response, when they ask their lawyers for assistance on a difficult commercial issue.

IP Draughts chafed against this instruction when he was a junior associate, perhaps because he had been an in-house lawyer for 3 years before joining a traditional law firm. In-house lawyers are expected to be part of a commercial team, and not to stick to a purely technical role.

25 years on, IP Draughts can see some merit in the traditional approach. Nowadays he has enough experience to make commercial judgment calls; then he probably didn’t. Really, the client should only ask a partner or very senior associate to help with commercial questions.

Also, IP Draughts is less naive than he was as a junior associate. He has learnt that, while some clients want you to be part of their commercial team, appreciate  a “roll your sleeves up” approach, and won’t blame you if your commercial view turns out to be wrong (this is the type of client we try to cultivate), others take a more hard-nosed approach, and quite like the idea of being able to blame their lawyers for their own, poor decision-making. With the latter type of client, it makes good sense for the law firm to take a hands-off, ultra-careful approach.

 

 

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Just get the deal done!

try harderRonald Reagan once declared that the most terrifying words in the English language were: I’m from the Government, and I’m here to help. IP Draughts has a candidate for the most frustrating words that a contract negotiator will hear: just get the deal done.

Typically these words are uttered by a senior executive who has no direct involvement in the negotiations, and who is impatient for an agreement to be signed.  They may be passed down through several layers of management, like Chinese whispers, until they reach the poor, bloody infantry who are trying to ensure that the contract terms are appropriate for the organisation.

sopOften, it is not clear what this message means. IP Draughts would like to suggest that companies implement a Standard Operating Procedure (SOP) for Pressurising Negotiators. This will ensure that senior executives and contract negotiators have a clear understanding of their roles and responsibilities when pressure of this kind is applied.

Under the SOP, senior executives would be able to choose which of several messages to pass down to the negotiators.  For instance, they might include the following alternatives, each of which is followed by an explanation of what the instruction really means.

  1. Just get the deal done (my decision) – A1.” I have carefully considered the outstanding points in the negotiations and, based on my greater knowledge of the company’s commercial priorities, I have decided to concede all of those outstanding points in order to get the deal done in time for [the end of a financial reporting period] [the office golf outing]. Please just accept the terms on offer and get the agreement signed.
  2. Just get the deal done (my decision) – A2.” I have carefully considered the outstanding points in the negotiations and, based on my greater knowledge of the company’s commercial priorities, I have decided we can probably concede all of those outstanding points in order to get the deal done in time for [the end of a financial reporting period] [the office golf outing]. However, there are still a few [days] [hours] [minutes] to go before that deadline, and I would like you to keep negotiating as hard as you can right up to that deadline and [concede] [come back to me for a final decision on conceding] when there is no time left for further discussion.
  3. Just get the deal done (my decision) – A3.” I have no interest in the contract terms, and no real understanding of the risks involved in accepting those terms, but I have decided to concede all of those outstanding points in order to get the deal done in time for [the end of a financial reporting period] [the office golf outing]. Please just accept the terms on offer and get the agreement signed.
  4. Just get the deal done (I’m not responsible) – B1.”  I have no interest in the contract terms, and no real understanding of the risks involved in accepting those terms, but I am frustrated that the agreement is taking longer to negotiate than I would like. I hope that my instruction to get the deal done will somehow make the negotiators work harder to get the deal done. At the same time, please note that I haven’t instructed you to concede important points, just told you to hurry up and get the deal done: you are responsible for deciding what terms to accept in the contract, and I will blame you if the terms are not appropriate.”
  5. Just get the deal done (I’m not responsible) – B2.” I have no interest in the contract terms, and no real understanding of the risks involved in accepting those terms, but I am frustrated that the agreement is taking longer to negotiate than I would like. My interest is purely in the getting on with the project after the agreement is signed. I hope that my instruction to get the deal done will somehow make the negotiators work harder to get the deal done. I haven’t given any thought to who is responsible if my pressure results in a sub-optimal deal, nor am I really sure who takes the final decision on accepting contract terms.  I will probably blame you and/or deny responsibility if problems emerge after the contract is signed.
  6. Just get the deal done (I will support you) – B3.” I am frustrated by how long the negotiations are taking, and I felt it was important that you should be aware of my perspective as a senior member of the management team. My advice is that the parties should move promptly to a conclusion. However, I do not wish to interfere with the negotiations and I  trust you to proceed in the best way for our organisation. I will support you fully if the negotiations stretch out for a longer period, as I know you are doing your best for the organisation. Equally, if you decide to concede points in light of my advice, and in future the company suffers from these concessions, I will support you in that decision.

Have we missed any of the most likely alternative meanings? What is your experience of giving, or receiving, an instruction to get the deal done?

 

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Filed under Commercial negotiation

Commission payments: always button down the contract terms

300px-Flag_of_Kazakhstan.svgLast week’s reported judgment of the case of Stein v Chodiev & Ors [2014] EWHC 1201 (Comm) in the English Commercial Court prompts several thoughts.

  1. IP Draughts’ recent and slightly flippant comments on this blog about the English courts being happy to hear disputes involving Russian oligarchs were too limited in scope: the English courts are happy to hear disputes involving Kazakhstan oligarchs as well. The first three defendants in the above case, popularly known as the Trio, are famous as the billionaire founders of ENRC Plc, or Eurasian Natural Resources Corporation, which was listed on the London Stock Exchange on 12 December 2007, but which (in the neutral words of the judge in this case) has very recently been re-privatised. For a more controversial discussion of the de-listing, see this news item in the Guardian from last Summer.
  2. Leading counsel on each side of this dispute were from the same set of barristers’ chambers, Essex Court Chambers. The terms “Chinese walls” doesn’t seem quite apt when the parties are from Kazakhstan and the USA. Let us hope the clerks didn’t make any mistakes in delivering papers to the wrong counsel. If the head clerk, David Grief, is on a traditional percentage of fees, he must have been quite pleased with these briefs!
  3. The case concerned the payment of commission of several million dollars in relation to fund-raising activities. Leading counsel for the Applicant (plaintiff to you and me), Daniel Oudkerk QC, comes from the employment bar, which is less surprising that it might at first appear. Commission cases, and their close relative, bonus cases, often require a mixture of commercial law and employment law expertise. Until recently, IP Draughts’ firm was involved in a commission case in which we hired the excellent Stuart Ritchie, who became a QC during the time we were instructing him. Stuart’s chambers specialise in disputes that are at the interface of commercial and employment law. Choosing the right barrister for a case is one of the more important skills that a solicitor can have.
  4. Drafting commission terms is a highly-skilled task, which requires the drafter to think through scenarios and make sure the wording is clear and gives effect to the parties’ intentions. Sometimes, the parties have not thought enough about those intentions and need to be prompted with “what if” questions. For instance, what happens if the deal is done after the commission agreement is terminated, but the party was involved in securing the deal? What happens if the target was known to the principal before he was introduced by the other party? What happens if the deal is not structured in the way the parties anticipate when the commission terms are agreed? And so on.
  5. Sometimes, and as the defendants argued unsuccessfully was the arrangement in this case, payments are to be made at the discretion of the employer or principal. Court cases can turn on whether the discretion has been exercised in a reasonable way.
  6. chicken feedWhen dealing with the super-rich and super-powerful, it is very easy for the person seeking the commission to become a kind of courtier at the principal’s court. In other words, rather than rely on well-written contracts, the courtier accepts the assurances of the principal and hopes that, by keeping the principals’ goodwill, he will get the payments he was hoping for. After all, the amounts at stake are mere “chickenfeed” to the principal. Perhaps it is just the cases that IP Draughts sees, but in his experience this is a very high-risk strategy. It gives the courtier no definite protection (unless the court can be persuaded – see below) from the principal who no longer sees the value in the courtier, perhaps because his mind has been changed by the comments of others at court. IP Draughts has no knowledge of whether this happened in the present case, but notes that the commission terms were kept unwritten at the request of the defendants in this case, for reasons that were never really explained.
  7. Despite the relative lack of written evidence of the contract terms in the present case, the court found for the applicant. It seems he impressed the judge in the witness box, unlike the Trio. It is surprising to IP Draughts how many witnesses in English commercial cases fail to get the basic technique right – be consistent, don’t overstate, admit weaknesses, be reasonable, demonstrate trustworthiness. Perhaps different techniques of persuasion are needed in other countries’ courts, but IP Draughts doubts it.

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Filed under Commercial negotiation, Contract drafting, General Commercial