Category Archives: Contract drafting

Contract drafting: art or science?

volunteerContracts are voluntary. Two or more persons come together and agree to be legally bound to one another to do things, such as make payments, perform work or deliver goods.

Subject to a few basic requirements, the law provides remedies to ensure, or at least incentivise, parties to meet their contractual obligations. Those requirements are of different kinds. There are the technical ones for a contract to exist – offer and acceptance, consideration, requirements for writing, etc. There are the public policy ones – eg obligations to do illegal things are not enforceable. There are a few others “at the margins”, eg occasionally contracts may be void for mistake, while insurance contracts are subject to greater obligations of disclosure than most contracts. There are rules on how to bring a breach-of-contract case and as to the remedies that can be obtained, but they need not detain us here.

where's the beefUsually, these requirements and rules are in the background. They provide a context for parties who enter into a contract, but they are not usually at the forefront of the parties’ minds. Instead, they care about the substance of their obligations to one another – the content of the contract.

English law cares little about that content. It is a private matter for the parties to agree. The law implies certain obligations into the contract, usually only the bare minimum to make the deal work and usually only to deal with points that the parties haven’t thought about and agreed explicitly.

The court’s main roles in a contract dispute are to work out what the parties have agreed (including any implied terms), and then work out whether they have done what they agreed to do. Often, these roles require the court to do two things: (1) identify and interpret the terms of the contract, and (2) decide what the relevant facts are, eg as to their conduct in relation to the contract.

The latter task is often messy and takes most of the time of the court – hearing witnesses, reviewing records etc. At the time of entering into the contract, this messiness is all in the future. Negotiations sometimes seem to assume a strict adherence to the procedures set out in the contract; in practice this rarely happens.

whisperThe task of construing the contract relies more on the analysis of words than the hearing of evidence of who said what to whom etc. Usually. In an ideal world. In reality, the evidence sometimes intrudes and influences the judge in his analysis. Sometimes this is considered necessary to do “justice” in the case. Anyway, judges are not computer programs and are not always consistent in their interpretation of the words used. Whisper it quietly, but some of them are not very good at linguistic analysis.

Yet, it is not a free-for-all. There are some rules on how the contract should be construed. Parties are assumed to have agreed the terms set out in a signed written contract. What those terms mean depends on the words used and how they are interpreted. Words can mean different things to different people. English law is usually interested in what those terms mean to an outsider who has the background facts. In other words, not the subjective views of the parties.

So, when it comes to interpreting contracts, there are some pressures in favour of strict linguistic analysis, and some towards a more human approach that relies partly on how the parties are perceived to have behaved. This makes it difficult to predict how a court will interpret and apply a contractual obligation. It also depends partly on the court. In the past, IP Draughts has challenged a barrister who advised that a County Court would not hold a party to do something within a strict time limit set out in the contract, as a condition of exercising certain contractual rights. Surely the contract was clear and should be enforced by the court, IP Draughts queried. Perhaps you might get that approach from some Chancery judges in the High Court, sniffed the barrister. But not in the County Court. Not on this fact pattern.

There are limits to how far good contract drafting will take you, if your objective is to win in court. But there are other reasons for drafting contracts well. Having clear contract terms may help the parties to avoid a dispute over their meaning, so that they don’t need go to court.

Thus, excellence in contract drafting and excellence as a contract lawyer are overlapping circles in the Venn diagram of commercial life, but they are not identical or even sub-sets of one another. Sometimes, as a lawyer, doing one’s best for a client may involve drafting a contract in a way that could be viewed as sub-optimal from a pure contract drafting perspective. This should never be used as an excuse for shoddy drafting.

So, is contract drafting an art or a science? Viewed as a discipline where clarity, consistency and lack of ambiguity are among the main requirements, it may be more science than art, more like a computer program than a literary essay.  For jobbing lawyers who have to deal with messy realities of life, the scientific approach has its place, but other factors may also need to be considered. These factors may include:

  • being asked to start with a template agreement whose terms have involved over time, and where the client may be both unclear on why some of the terms are present and reluctant to drop provisions that may provide theoretical protection
  • pressure from parties and their lawyers in negotiations, where sometimes it is necessary to keep one’s powder dry for the most important revisions
  • lack of time or budget to improve the drafting to the extent one would like
  • prioritising a favourable interpretation in court over clarity in drafting, if (as sometimes happens) the two conflict, eg by using jargon that one knows the court will understand, even if the parties find it difficult

As conflicting priorities and other human factors intrude into the drafting process, a more ad hoc approach to drafting is likely to be taken. This approach could be viewed as closer to an art form than a scientific process. Whatever approach is taken, the drafting should reflect a set of drafting principles that place a high priority on clarity and accuracy.

 

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A fresh look at indemnities

have a goFollowing last week’s post about indemnities, IP Draughts has had a go at drafting an indemnity clause from first principles, without ‘cutting and pasting’ any traditional indemnity language. His attempt can be found here.

Some points to note:

  1. The core parts of the indemnity are in clauses 1.1 and 1.2. These clauses simply use the term “indemnify” and avoid wording such as “hold harmless and defend”. Instead, the scope of the indemnity is explained in later clauses.
  2. The indemnities are designed to place responsibility on a licensee of intellectual property to indemnify the licensor, except where the liability arises from the licensor’s breach of contractual warranties (in which case the licensor indemnifies the licensee). For example, the indemnity under clause 1.1 would operate if the licensee sells a defective licensed product, his customer is injured and the customer brings a claim against the licensor.
  3. The defined term “Commercialising Entities” broadens the reach of the indemnity beyond that of many indemnities, and IP Draughts is in two minds about this aspect. It might be argued that, as the indemnity covers claims made against the licensee by third parties, it is unnecessary to spell out who those third parties might be, eg by referring to ebaythe indemnity covering use of a licensed product by people far down the supply chain, eg the child of someone who buys a licensed product on eBay from the licensee’s customer. However, an alternative view is that if the indemnity is intended to cover all liabilities that may arise from the use of the product, it is best to be explicit about this aspect. IP Draughts would be interested to hear readers’ views.
  4. The most ‘novel’ aspect of this indemnity clause is probably clause 1.4, which seeks to address questions of interpretation that have probably been the subject of reported cases, as can be seen from the case references in Contractual Indemnities by Wayne Courtney, an excellent book that was reviewed in last week’s blog posting.
  5. Clauses 1.5 and 1.6 address points that are sometimes covered in detailed indemnity clauses. IP Draughts is grateful to his friend and former colleague, Matthew Warren of Bristows, for sending him a very detailed indemnity clause after reading last week’s blog posting, which provided a convenient shortcut to drafting these terms. IP Draughts has filleted most of the ideas from Matthew’s clause but used simpler, and probably less watertight, language. Some points have been omitted, eg an obligation of confidentiality on the indemnifier with respect information learnt from the beneficiary. This point might be covered in a separate confidentiality clause of the agreement. Similarly, if it is intended to give officers and employees personal rights to enforce the indemnity, a separate ‘third party rights’ clause should make this point clear.

Clearly, there is a great deal of detail in the attached wording, even with the simplified wording that IP Draughts has used, and in several cases there are choices to be made by the drafter, eg whether to include an obligation to mitigate losses under clause 1.5(c). There are, no doubt, other points of interpretation and litigation practice that could be addressed.

What do you think of the clause?

 

 

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Indemnifying the damnified

contractual indemnitiesContractual Indemnities (by Wayne Courtney, Hart Publishing 2014) is an excellent book. It draws upon the PhD thesis of its author, who is a former practising lawyer and is now a Senior Lecturer and Associate Dean of the Law Faculty at the University of Sydney.

Regular readers of this blog will be familiar with the frustration that IP Draughts feels about the typical drafting of indemnities – a frustration that is shared by others whom IP Draughts respects, including contract drafting guru Ken Adams. See some of his commentaries on indemnities here.

Indemnities are often drafted with complex wording and long sentences, so that it is difficult to glean their precise meaning. The reasons for this complexity are various and include:

  1. Broad in scope. Indemnities are typically drafted so as to be broad in scope, and the lawyer sees their task as one of trying to be comprehensive and avoiding loopholes. In some market sectors, eg M&A, there are no prizes for simplifying indemnity wording, only potential claims against the lawyer’s professional indemnity policy if the lawyer’s original drafting fails to achieve the financial result desired by the client.
  2. Difficult issues. It is difficult, even for lawyers, to think through all the legal and practical implications of an indemnification obligation. In the heat of urgent negotiations, it is tempting to use wording that one has seen before, and that seems to cover all the bases.
  3. dryTheoretical. Indemnities are concerned with risk allocation, rather than operational issues such as price and performance obligations. The subject matter can seem very dry and theoretical and, frankly, boring. This combination of theoretical and legal subject-matter tends to make commercial clients run a mile, and leave the drafting and negotiation to their lawyers. As a result, there is less pressure to make the drafting straightforward and understandable.
  4. Case law. There is an extensive body of case law on the interpretation of indemnities. Unfortunately, the case law has not made the drafter’s job any easier; rather it has served to illustrate the many issues of interpretation that are thrown up by indemnity language and the different ways that judges can “jump” when presented with a set of facts about a commercial relationship.

In passing, IP Draughts considers that one of the problems with judges interpreting indemnities is that they often lack experience of drafting and negotiating them. In the UK and, one suspects, many other countries, judges are drawn from the ranks of courtroom advocates, who tend to be a different group from those who draft and negotiate commercial contracts. Increasingly, IP Draughts wonders whether the courts – even highly-respected commercial courts such as those in England and Wales – are the best place to decide matters of interpretation.

Be that as it may, Wayne Courtney has done a very good job of distilling centuries of English and Commonwealth case law on indemnities into a narrative that sets out the main principles of interpretation. His experiences as a practising lawyer and as an academic have undoubtedly contributed to making this a useful work.

aqua vitaeIP Draughts has only two significant criticisms of the text. First, that he would have liked even more distillation of the messy, impure fluid of authorities. He feels it should be possible to keep reducing the liquid down over time, into an aqua vitae of principles that are simple to apply when drafting indemnities. Perhaps this will be Wayne’s life’s work and, by the time of the third edition of this estimable book, the main text will be 150-200 pages, rather than the 302 pages it currently takes to cover the subject.

For example, there is a discussion (at section 7-7) of whether the indemnifier has an obligation to defend an action that is brought against the indemnified party, and is within the scope of the indemnity. It seems to IP Draughts that this question is intimately linked to the questions of whether the indemnity is preventive, and whether it covers claims as well as ultimately liability. These questions are discussed in other chapters. It seems to IP Draughts that these various points, which are each discussed in a useful and authoritative way but in isolation from one another, could be combined and distilled into a master-scheme of analysis.

IP Draughts’ second criticism is that Wayne doesn’t offer any indemnity language to address the main points that he has discussed in the text.

Highlighting a few of those points:

  1. damnifyIndemnities can be interpreted as “preventive” (requiring the indemnifier to ensure that the indemnified person does not suffer a loss) or “compensatory” (requiring the indemnifier to make good any loss that the indemnified person has suffered – referred to in the text as “damnification” – a wonderful word). Often, the courts will adopt a preventive interpretation. This does not seem to depend on using words such as “hold harmless” although, having read the book, IP Draughts suspects that the lawyers’ practice of using this phrase may have its roots in a desire to make the indemnity preventive in scope. There are better ways, in IP Draughts’ view, of making this point clear, than using a formulaic and unclear phrase such as “hold harmless”. (Incidentally, Wayne discusses and dismisses the idea that a preventive interpretation was to be found in the courts of equity, while a compensatory interpretation was to be found in the courts of law, prior to the merger of those courts under the Judicature Acts of 1875.)
  2. It is not always clear, from the wording of the indemnity, whether it applies to all or just some of the following: (a) third party claims against the indemnified party, (b) losses suffered by the indemnified party as a result of the indemnifier’s breach of contract, and (c) claims that might otherwise by brought by the indemnifer against the indemnified party, eg for breach of contract – this type of indemnity is effectively an exclusion clause.
  3. Whether the wrongdoing of the indemnified party cancels or qualifies the indemnity, eg if they are negligent.
  4. Whether claims that have not yet resulted in a liabilty are in some way covered by the indemnity.
  5. Whether costs are recoverable.
  6. Whether an indemnity that covers the same ground as a liability for breach of contract (eg where the contract includes an indemnity against breach of a warranty) can be broader in scope than the underlying breach of contract claim, or is subject to the same limitations and qualifications (eg as to causation, remoteness and mitigation). Wayne discusses the different viewpoints on this subject, eg that an indemnity provides an “agreed damages” mechanism that overrides the usual contract law rules (similar in effect to liquidated damages), but concludes that there are relatively few clear cases that support this analysis of the effect of indemnities, and that each clause must be construed individually. IP Draughts is reassured to hear this conclusion. He has encountered this “agreed damages” approach in the world of M&A and has long wondered where it came from.  More generally, IP Draughts has encountered commonly-held assumptions about the legal effect of contract terms in the world of M&A that are not always obvious to those whose contract experience has been in another market sector, and he wonders whether an element of “group think” has developed in that closed world.

IP Draughts may attempt some drafting of indemnities from first principles and with these points in mind, in a later blog posting. Most of these points are familiar, but some of them, eg the distinction between preventive and compensatory indemnities, have been brought into sharper relief by the book’s analysis.

 

 

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Get up, stand up, stand up for your IP rights

marleyEarlier this week, in the English High Court, a decision was handed down about whether copyright in various Bob Marley songs, including No Woman No Cry, transferred under a 1992 agreement. See BSI Enterprises Limited v Blue Mountain Music Limited [2014] EWHC 1690 (Ch), issued on 4 June 2014. The case involves the interpretation of a definition in an IP agreement, but there is nothing very remarkable about the judge’s decision. The case is mainly interesting for its facts.

Those facts are messy and complex and involve:

  1. Bob Marley writing songs but claiming that others wrote them, apparently to get around contractual obligations to a publisher. This is referred to in the case as the Misattribution Ploy.
  2. Chris Blackwell of Island Records giving evidence in a 2006 court case that certain songs were excluded from a 1992 agreement under which the Marley oeuvre was sold to Island Records. By implication, if he was correct, copyright in those songs remained with the seller. In the present case, Mr Blackwell again gave evidence, and said that he was mistaken on this point in his earlier evidence.
  3. As a result of that statement in 2006, the first claimant entered into an agreement to acquire the copyright in these and some other Bob Marley songs from the seller, and then licensed them to the second claimant.
  4. In the present case, the claimants sought a declaration that they were the owner and licensee respectively, of the copyright in the songs in question.

The outcome of this case depended on interpreting the definition of Composition and Catalogue in the 1992 agreement. More on that below.  But first, Chris Blackwell’s evidence in the earlier case, that certain songs were excluded from the 1992 agreement.  He now considered that he had been mistaken on this point, and explained that he had been tired after giving evidence for a couple of days.  The judge in the present case accepted that explanation and in any event thought Mr Blackwell’s opinion on the interpretation of the 1992 agreement was not relevant. This was a matter for the judge to decide.

The definition of Composition and Catalogue read as follows. I have highlighted some of the key passages in bold text:

1.8 ‘Composition’ and ‘Catalogue.’ The term ‘Catalogue’ shall mean all presently-existing musical compositions, or portions thereof, including cues, domestic or foreign, whether originally claimed or registered as a musical composition or as a part of a dramatic-musical work, consisting of lyrics and/or music whether or not registered in the United States Copyright Office or elsewhere, whether published or unpublished, written recorded by Robert N. Marley, Winston Peter McIntosh and/or Neville Livingstone, and/or certain musical compositions written or composed by Alfonso Pyfrom and/or Jimmy Norman (which were recorded by any of Robert N. Marley, Winston Peter McIntosh and/or Neville Livingstone), under their own names or under any pseudonyms, individually or as part of any collaboration between or among any of them or others (individually a ‘Composition’ and collectively the ‘Compositions’) and all right, title and interest in and to such Compositions, including all copyrights and renewals and extensions of copyrights thereto in all jurisdictions throughout the Universe, to the extent such compositions, copyrights, renewals and extensions are owned, controlled or administered, in whole or in part, by any member of Seller or by Seller’s Music Publishing Business as of the Closing Date, or from which any member of Seller or Seller’s Music Publishing Business receives income, including, but not by way of limitation, the Catalogue listed on Schedule 2 attached hereto. In furtherance of the foregoing, and not by way of limitation, the Compositions also include all musical compositions owned by Seller which were recorded by Robert N Marley (whether alone or in combination with any other artists).

The claimants argued that, because the songs in question had not been listed in Schedule 2, and because this was (they said) a deliberate omission, they were not subject to the 1992 agreement. The claimants’ counsel tried to argue that it was clear that there had been a deliberate omission, and that this was part of the factual matrix that should be taken into account when interpreting the wording of the 1992 agreement.

The judge preferred to find the meaning from the wording of the 1992 agreement itself. The definition did not limit itself to the songs listed in Schedule 2.  The above-quoted wording made clear “almost to the point of redundant repetition” that all Bob Marley songs were included in the definition, whether or not they were listed in Schedule 2. IP Draughts takes issue with the judge’s use of the word “almost”. The above wording goes well beyond the point of redundant repetition.

If any point of general legal interest arises from this case it is simply the following, well-known point: the English courts are very reluctant to allow evidence of what the parties might or might not have intended to influence their interpretation of a contract.  What matters is what a third party would understand the words used in the contract to mean.

simon saysRegrettably, the judge did not opine on whether a contract drafter who uses the term “including” needs to add words such as “without limitation” or, as in this case, the words “but not by way of limitation” in order to avoid an argument that the list that follows the word “including” could narrow the general sense of what goes before the word “including”. It is very common for contract drafters to use additional words of this kind, though leading contract drafting expert Ken Adams considers that such additions are unnecessary. As with many things that Simon Ken says, IP Draughts is coming round to his view, but has not quite got there yet, and still sometimes includes an interpretation provision in his contracts, stating that “including”, when used in the contract, means “including without limitation”.

 

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