Category Archives: 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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Are legal details a waste of time in IP contracts?

Dancing on a pin is doing my head in!

Dancing on a pin is doing my head in!

A commenter on this blog recently challenged the idea that legal details matter in contracts.  The broad point he was making, which is one that IP Draughts has heard before from lawyers as well as commercial clients, was that most contract disputes are fact-based and do not turn on subtle legal points such as whether affiliates are parties to an agreement.

Some obvious points in favour of this argument include the following:

  1. No dispute. Most contracts do not result in disputes.  Therefore, for most contracts, subtle arguments about contract wording and structure may not matter.  Counter-argument: precise, accurate legal drafting helps to make the parties’ rights and obligations clear, which may reduce the likelihood of the parties getting into a disagreement in the first place.  Also, if you base your approach on an assumption that there will be no litigation, what is the point of having a detailed, written contract at all, as distinct from a quick email summary of price and work to remind the commercial parties what they have agreed?
  2. No litigation. Where contracts do result in disputes, those disputes are mostly resolved without litigation, or are settled before the court makes a final decision, so technical legal arguments that might be raised in court are unlikely to make much different to such contracts. Counter-argument: in IP Draughts’ experience, commercial clients ask for a legal opinion on the merits of their dispute, long before the parties get to the point of actively considering litigation.  Often, such opinions include advice on the interpretation of detailed contract wording. The legal opinion provides a context to the parties’ commercial negotiations, and may be cited in the negotiations. 
  3. Outcome often not based on wording. Even where contract disputes do reach court, it is relatively rare for the court’s decision to turn on the interpretation of detailed wording.  Often, disputes turn on the facts of the case – who did what, or said what, to whom – and are influenced by the court’s assessment of who it believes and who has “right” on their side. Counter-argument: True, there are many reasons why a party wins or loses a court case, and sometimes the strict wording of the contract is not the reason.  Nevertheless, there are sufficient instances of the courts applying a narrow focus on the wording of the contract to make getting that wording right an important part of the contract lawyer’s job.

In the IP world, a classic example of the court focussing on the detailed wording is the 2011 US Supreme Court case of Stanford v Roche, reported on this blog here. In a nutshell, Stanford University lost ownership of an employee’s invention because its agreement with the inventor used the phrase “agrees to assign” rather than “hereby assigns”.  A majority of the Supreme Court considered this wording to be critical, though a minority of the court disagreed, noting that there were only “slight linguistic differences” between the two phrases.

The iceberg that sank the Titanic

The iceberg that sank the Titanic

More generally, IP Draughts considers that taking pains to get the drafting right is likely to be symptomatic of a careful approach to all the legal aspects of contracts, including record-keeping (it is dismaying how many commercial clients can’t find the signed originals of their contracts and don’t seem to regard this as important), giving valid notices of breach or termination, being prompt and systematic in the enforcement of rights, and putting together a robust case for trial.

In summary, it should worry you as a commercial party if your contract is not well-drafted, as this may be the visible part of a legal iceberg that could do great damage to your business.

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Drafting clinical trial agreements

management forumLast week, IP Draughts participated in Management Forum’s 30th anniversary conference, Promoting Synergies Across Life Sciences by giving his all-day course on Drafting and Negotiating Clinical Trial Agreements.  His colleagues Paul and Mario were there too, giving a presentation on confidentiality agreements, which seemed to be going well when IP Draughts briefly attended.

IP Draughts enjoys speaking at Management Forum events, mainly because their representatives are a pleasure to work with.

bendallIP Draughts runs this course as a double act with the excellent Christine Bendall, who is now a regulatory consultant in the pharmaceutical sector, but earlier in her career was an IP lawyer and a partner at CMS Cameron McKenna.  Christine is also a speaker on the UCL IP transactions course and she has advised some of IP Draughts’ clients on regulatory matters.

Drafting and negotiation points from the course include:

  • Clinical trial agreements are essentially technical services agreements.  Industry practice affects their terms, but what makes them unique is the regulatory framework for products that will be administered to humans.
  • The regulations vary, depending on the product, its applications, where the trials are taking place and where the eventual product will be marketed.  Careful thought needs to be given to whether the agreement has the right terms to reflect the particular mix of regulations that apply in the individual case.  It will generally not be sufficient to pull a generic template agreement from the computer and expect it to “work” in an individual case.  The drafter should work with regulatory colleagues to ensure that the agreement is suitable tailored.
  • As well as life sciences regulation, these agreements often include terms dealing with other aspects of regulatory compliance, eg data protection, freedom of information, and bribery.  Agreements with international sponsors often ask the trial site to comply with overseas laws with which they are unlikely to be familiar, and which may not be strictly relevant, eg the US Foreign Corrupt Practices Act and the US Sunshine Act.
  • In the UK, most trials in NHS hospitals are conducted under one of the NHS standard clinical trial agreements.  Unfortunately, those agreements are not well drafted and they include some bizarre terms, eg a limit of liability for wilful default of twice the contract price.  Some other countries have “standard” agreements but the extent to which they are used in practice varies.
  • Clinical trial agreements raise basic contract issues such as who will the parties be (eg the investigator or their employer) as well more sophisticated points such as indemnities, publication rights, and intellectual property ownership and use.
Before the days of pharmaceutical regulation...

Before the days of pharmaceutical regulation…

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What is the primary role of a contract manager?

how to sellDo you believe that contract managers are there to strike a good deal? Or to protect the organisation from risk? Or to make sure that the contract wording reflects the deal that has been struck?  Or to advise senior management of the implications of the contract?  Or to be an internal champion and advocate for “best practice” in the structuring and negotiation of contracts? Or all or none of the above?

Does your organisation give the contract manager the power to veto deals? To refuse onerous liability terms?  To certify whether deal terms comply with company policies and accept or reject contracts accordingly?  Or are they there as a facilitator and coordinator, with the real power resting elsewhere?

Do you expect the contract manager to be skilled at marketing, negotiation, contract drafting, handling legal and regulatory issues, understanding the technology, products or services at issue, and generally being the representative “face” of the organisation?  Or is their role limited to only some of these areas? Do you provide in-depth training to allow the contract manager to excell at all of their allotted roles?  Who is responsible for the areas that the contract manager is not expected to cover?

Most importantly of all, have you told your contract manager what you expect them to do, and how you expect them to do it?  Or do you assume that they are a skilled professional, that they must know what they are doing, and if they are unclear as to their responsibilities it is up to them to tell you?  Do you judge them on whether they make their internal “customers” happy, regardless of whether they are protecting the organisation?  Or do they also have a responsibility to protect the organisation, that other voices in the organisation may not have? Do you support them in making unpopular decisions? How do you weed out the mediocre and the incompetent, while rewarding and encouraging the excellent? In fact, do you have any objective criteria for assessing performance?

In some organisations, people know what they are expected to do, are given realistic goals and assessed against those goals.  In others, people seem to do what they do because they have always done it that way, and because no-one is looking critically at the role or performance in the role.

In the area of contract management, several factors conspire to make it difficult to assess whether a good job has been done.  These include:

  • organisations that do not have clear policies or guidance on acceptable or unacceptable deal terms
  • expediencysenior management who decide, on grounds of expediency, to go ahead with a deal even if it doesn’t comply with the policies or guidance (if they exist) or against the recommendation of the contract manager.  This may be done, for example, because the CEO wants to hit a sales target, or because a university president wants to keep a powerful professor happy
  • organisations where the only expertise in contracts resides with the contract managers, and not with senior management, so contracts do not get critically reviewed at a senior level.  IP Draughts recalls a shocking conversation with a university vice-president in charge of the university’s commercialisation activities, where the VP stated that he didn’t like looking at contracts
  • heavy workloads for the contract manager that make it impossible to undertake a thorough review and processing of all contracts
  • under-resourced contracts departments that don’t have the ability to hire outside professionals to fill in the gaps of knowledge and expertise within the department

The answer to many of these problems is planning.  In IP Draughts’ view, in well-run organisations that enter into contracts:

  1. Someone in senior management will have responsibility for managing the contracts managers and setting ground rules.  They don’t need to be a contracts specialist, and probably they won’t be, but they need to take seriously their responsibilities in this area, and ensure they have the necessary knowledge to oversee this area of specialisation.  They need to be someone with real power in the organisation (probably not someone who has been moved sideways to ease them out of another role) and they should generally support and back up their contract managers in internal negotiations.
  2. Oliver broke an unwritten policy guideline by asking for more?

    Oliver broke an unwritten policy guideline by asking for more

    The organisation will have written guidelines on preferred and unacceptable terms.  Those guidelines will be understood by both contracts managers and senior management, and will generally be followed.  There may be cases where they are not followed, but this should be the exception rather than the rule.

  3. If the workload of the contract manager is too heavy to give full attention to all contracts, the organisation must either (a) promptly recruit the necessary number of managers and/or (b) institute a triage system, under which contracts are risk-assessed and allocated to different types of contract review (or no review at all, if that is considered appropriate).  High value and high risk contracts should be given whatever resource they need, including external legal and regulatory support if required. The risk assessment should be reviewed periodically, and refined if necessary, but the assessor should be given space to make some mistakes.
  4. The terms of signed contracts should be reviewed periodically to inform (a) whether the guidelines are being followed, (b) whether the guidelines should be revised, and (c) the performance of the contract managers against those guidelines
  5. Contracts managers should have regular reviews of their performance, as should the senior manager mentioned in point 1 above.  Best practice should be encouraged and rewarded.
  6. When resourcing contracts departments, a sufficient proportion of the resourcing should go into the above areas, rather than just the front-line firefighting.

Are these the right areas on which to focus?  Are they realistic?  Your comments, as ever, are welcomed.

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