Category Archives: Contract drafting

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

adams onOccasionally, IP Draughts provides a link to another blog article that he has found interesting.  The link below is to an article by Ken Adams, reviewing the book: The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design.

The book focuses on a contract clause that is commonly used in financing transactions, known as a pari passu clause, which was the subject of a famous court case. The authors research and discuss why this clause has remained in common use, mostly unchanged, despite the court case seeming to establish that the clause had a different meaning to what everyone in the industry thought.

If you are interested in understanding the dynamics of contract drafting and how “Big Law” goes about preparing and negotiating contracts, IP Draughts recommends that you read both the book and Ken’s article reviewing it. The book has been sitting on IP Draughts’ desk for some months, and he has contemplated writing a review of it, but now there is no need to do so.

Link to Ken’s blog post (with review article embedded): here.

The book can be bought from Amazon here.

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by | 14 April 2014 · 10:54 am

And breathe out… information is still not property

...but not my database rights

…but not my database rights

IP Draughts has reported before on cases where English courts, high and low, have confirmed that information is not property (though confidentiality “rights” may be treated as a type of intellectual property). Recent examples include Lord Neuberger’s judgment in this case, and  this Court of Appeal case where the court side-stepped the issue. The issue may seem rather academic or philosophical, but it is important for contract drafters who wish to avoid making meaningless statements such as that the “Results” belong to the “Sponsor”.

The issue has emerged again in another Court of Appeal case, Your Response Limited v Data Business Media Limited [2014] EWCA Civ 281, which was published last week. The court was asked to decide two points:

  1. Can a database service provider exercise a common law lien (sometimes referred to in the English cases as an artificer’s lien, and in the US as a mechanic’s lien) over a database, until the client has paid all outstanding fees relating to the provision of database services.
  2. In a contract that has no termination clause, and where there is an implied term allowing termination on reasonable notice (see Martin Baker v Canadian Flight Equipment Company [1955] 2QB 556 and a steady stream of subsequent cases), what is the length of reasonable notice in the present case?

ejector seatThe second point, while interesting for drafters of IP agreements (the Martin Baker case, for example, concerned the termination of a patent and know-how licence agreement), was a purely factual one.  The court decided that 3 months’ notice was appropriate.

On the first point, the main problem with applying a common law lien in the present case was that a database did not amount to goods, and common law liens have traditionally applied to goods. For example, if you have your car serviced, the garage can exercise a lien over your car until the service charge has been paid.

Moore-Bick LJ, who gave the lead judgment in the Court of Appeal in the present case, quoted extensively from Diplock LJ’s analysis of the nature of the lien in an earlier case. That analysis included the following statements:

[Common law lien] is a remedy for breach of contract which the common law confers upon an artificer to whom the possession of goods is lawfully given for the purpose of his doing work upon them in consideration of a money payment. If, pursuant to the contract, the artificer does his work, he is entitled to retain possession of the goods so long as his charges, whether agreed in advance or (if not so agreed) payable upon a quantum meruit, are satisfied.

It is a remedy in rem exercisable upon the goods, and its exercise requires no intervention by the courts, for it is exercisable only by an artificer who has actual possession of the goods subject to the lien. Since, however, the remedy is the exercise of a right to continue an existing actual possession of the goods, it necessarily involves a right of possession adverse to the right of the person who, but for the lien, would be entitled to immediate possession of the goods.

Applying this description (and in particular the phrase “actual possession of the goods”) to the present case led Moore-Bick LJ to a series of legal questions, including:

  • what at common law is understood by actual possession.
  • whether it is possible to have actual possession of an intangible thing,
  • whether it is open to this court to recognise the existence of a possessory lien over intangible property and if so,
  • whether it would be right for it to do so.

chatelaineWith liberal use of Norman French legal expressions, Moore-Bick LJ concluded that a database was a chose in action, and not a chose in possession or chattel. Put another way, the database was intangible property, to which might be attached certain rights of action, eg to sue infringers of database right, but it was not “goods” that could be possessed. Therefore the common law lien did not apply and it was not appropriate for the court to extend the scope of this law to new forms of property such as that in a database. On this last point, the judge disagreed with the views of the learned authors of a legal textbook, The Tort of Conversion, whose arguments were cited in this case.

At this point, the other two judges in the Court of Appeal weighed in, with Davis LJ muttering about the law of unintended consequences not being part of English law (he was concerned about the impact on lenders whose security would be prejudiced if a new form of charge was created), and Floyd LJ (the only intellectual property specialist on the panel) remarking:

If [counsel for the service provider] were right that the database could be possessed and could be the subject of a lien and that its possession could be withheld until payment and released or transferred upon payment, one would be coming close to treating information as property.

In Floyd LJ’s view, this would be a significant departure from established law.

Separately, there was a question of whether the service provider had exclusive control over the database (another essential element for the lien to apply), and Moore-Bick LJ concluded that it did not, in that the client had continuing access to the database during the contract term.

The narrow point from this case is that a common law lien over goods does not apply to intangible property such as a database.  The database service provider does not have any common law right to withhold access to the database until his fees are paid.  The parties can, however, agree such a right as a term of their contract.

The wider point is that a senior English court has made clear, once again, that English law does not recognise intangible property as goods, and nor does it recognise pure information as property.

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Filed under Contract drafting, Databases

Using the right words in contracts: knowing your 3Rs

learningThe 3 ‘R’s – for readers who have not come across this expression – are the basic subjects one first learns at school: reading, [w]riting and [a]rithmetic.

In this article, the 3Rs have a different meaning. We discuss 3 words used in contract law that start with an ‘r’.  They are technical, legal expressions, and many of us get by without using them at all, in contracts or elsewhere. Yet they feature in standard textbooks on contract law and in case law. The larger point is whether it is necessary to understand and use legal terms of art in contracts.

flynnThe 3 words are: revoke, repudiate and rescind. While they have other meanings in everyday life (eg if the authorities revoke – take away – your driving licence for drinking alcohol or speeding), these verbs have specific meanings in contract law. Like the Three Musketeers, they have a colleague who might be one of them, yet is slightly apart.  The noble Gascon of the contract world is (in noun form) restitution. Their colleagues in the corps of musketeers – rectification, release and replevin – will not be discussed in this article. Nor will their decrepit former colleague, rescous, which should not be confused with a type of wheat grain popular in North African cooking.

This article was prompted partly by a question that Ken Adams raised yesterday on Twitter:

adamsKen has followed up his question with a blog posting, titled simply Revoke. He suggests that there is no need to use the word revoke in relation to an IP licence, and that terminate is preferable.  IP Draughts agrees, but on technical questions of law he always keeps an open mind.  Property law has developed in strange ways over centuries (just think of the many types of legal and equitable interest that have been recognised) and there may be some point lurking in the shadows of old case law that he has not considered.

Whenever he hears any of the 3 R-words in a contract law context, IP Draughts has to concentrate to remember what they mean and to make sure he is not mixing them up.  Think of this article as remedial therapy for IP Draughts.  By forcing himself to articulate the different meanings, they may finally sink into his head. References below are to the leading tome, Chitty on Contracts, Volume 1, General Principles (30th edition, 2008).

Revoke

licence revokedOne of the traditional requirements for a binding contract is that one party makes an offer and the other accepts it.  A party can usually withdraw an offer before it is accepted.  The technical term for withdrawing an offer to enter into a contract is to revoke the offer (Chitty, 2-060).  Looking at the word revoke, it appears to have an etymology that suggests another word, “recall”.

This is different to terminating a contract that is already in existence.

Another sense of revoke is where a right or privilege that has been granted is subsequently withdrawn.  A driving licence may be withdrawn by the court for motoring offences such as speeding.  Some people use the term revoke for the termination of an IP licence, as the article linked above mentions.  As IP licences typically form part of contracts, this usage could be said to form part of contract law, but it is not conventional to refer to revoking a contract, and Chitty makes no mention of this usage.

Repudiate

In fact, there seem to be a pair of words with very similar meanings in contract law: repudiate and renounce.

IP Draughts is familiar with the expression “repudiatory breach” where a party acts in such a way as to make clear that he does not intend to perform his obligations under the contract, and the other party is entitled to “accept” this repudiation and terminate the contract.

Chitty seems to prefer the term renunciation for this type of breach (Chitty, 24-018) although the word repudiation appears in the discussion of several types of termination, eg in relation to contracts with minors (Chitty 8-031).

Rescind

voidThe correct use of the term rescind is to describe a situation where the contract is treated as never having come into existence, and not the situation where a contract is terminated part-way through its ‘life’.

For example, if a contract is terminated by acceptance of a repudiatory breach, this is sometimes inaccurately described as a rescission (Chitty 24-027).

Rescission from the start of the contract (ab initio) may occur if a party is induced to enter into the contract by (for example) misrepresentation or mistake (Chitty 6-103).  If rescission occurs after the contract has started, it will have retroactive effect to cancel the contract (Chitty 6-106).

Discussion

The 3 R-words have acquired different meanings in English contract law.  The differences in meaning are quite subtle.  A breaching party may repudiate the contract, but termination only occurs if the other party accepts the repudiation.  If a party is induced to enter into a contract by a misrepresentation, he may be entitled to rescind the contract. Contracts cannot generally be revoked, but an offer to enter into one can be revoked before the other party accepts.  There is also a suggestion that a licence can be revoked.

And this is just what the terms probably mean in one country’s development of the common law.  There is no certainty that these terms have identical meanings in other common law systems. It seems even less likely that there is an identical meaning in civil code systems, and if the words are translated into other languages, the subtleties of meaning may be completely lost.

rwordIP Draughts view is that it is better to avoid using terms such as rescind, revoke and repudiate in a contract, and instead to state specifically what rights and remedies and party has, eg the right to terminate for breach.  If termination is to be retroactive, this should be specifically stated. By using legal expressions of this kind, you may point a court to a particular understanding, based on case law, which may or may not work in the context of the contract under discussion.  Or you may find that the court is not familiar with the meaning you intended, particularly if the case is litigated outside your home jurisdiction. Or you may even use the wrong expression anyway – easy to do when they are so similar.

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