Category Archives: General Commercial

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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International IP transactions: how best to manage the differences?

shapesThe legal aspects of international IP transactions can be challenging. Do you ignore the differences in approach to drafting and interpreting contracts, treating every deal as if it were a domestic transaction between parties in your home territory? As a variant on this, do you run a late draft of the agreement by a local lawyer in the jurisdiction where the agreement is to be performed or (if it comes to that) litigated, for a ‘quick and dirty’ legal review? Or do you try to grapple with the issues yourself, and draft the agreement with one eye out for the approach that it likely to be taken by the foreign court or arbitrator? In most cases, employing an international team of lawyers to be fully involved in the drafting and negotiation of the agreement is unlikely to be acceptable to the client on cost grounds.

The third of these alternatives – keeping an eye out for the overseas laws while you draft – may be the most cost-effective, and in your client’s best interests, but you are only qualified to advise on the law in your home jurisdiction, and dabbling in another country’s laws is frowned upon by regulators and professional indemnity insurers. You also need to know your client – are they employing you to reduce their risk (as some in the banking sector may do), or are you part of their team, so that they will they appreciate whatever insights you can bring, irrespective of whether they are 100% accurate, complete or up-to-date? For obvious reasons, IP Draughts prefers to deal with the latter type of client, who will see the benefits of imperfect knowledge about overseas legal systems, rather than blame you for what you don’t know.

Those insights are learnt throughout one’s career – each international deal that you work on can bring a few snippets of useful information that can be used on later transactions. Reading up on the subject can also help – the comments of the 6 overseas contributors to our book on biotech transactions have been immensely helpful to IP Draughts’ understanding of the approach taken in civil codes jurisdictions.

In IP Draughts’ experience, these hard-won snippets of information can fall into several categories, including the following:

  1. Rummaging in the bottom of the IP cupboard. Only a small part of national IP laws tends to be concerned with transactional issues.  Those issues typically include: first ownership; problems with employees and consultants; co-ownership and associated problems; recognised types of transaction, particularly assignment, licensing and charge; quasi-IP rights, including Government walk-in rights, compulsory licences, rights for developing countries, and incentives such as orphan drug status; and implied terms in licences and assignments.
  2. Pushing a square peg into a well-worn, roundish hole. Applying long-established, national contract law principles to the facts of IP transactions, in circumstances where there may be little case law that is specific to IP transactions to guide the drafter. Examples include interpreting terminology (eg “exclusive”), implied terms (eg IP warranties, duties to exploit, reasonable royalties and rights of termination), and generally the willingness of judges in civil code countries to ‘fill in the gaps’ of the parties’ contract drafting.
  3. Escaping the deathly clutches of US legal drafting. Recognising that many ‘international’ transactions incorporate US-style contract wording. Some of that wording is sub-optimal yet rarely challenged in the US, eg the use of the terms ‘indemnify and hold harmless’, ‘successors and assigns’, or ‘sole and exclusive’. Outside the US, there is even less justification for using imperfect wording that is cosily familiar and therefore often accepted in a US context.
  4. Talking Euro-babble with confidence. Drafting IP agreements to take account of the peculiar and detailed concerns of the European Commission’s Competitition Directorate, as set out in documents such as the Technology Transfer Block Exemption Regulation and the Guidelines on Technology Transfer Agreements.
  5. discoDisco-dancing dad. Knowing enough of the moves to get by, in quirky areas of national law that affect the terms of IP agreements, including employment, insolvency, tax, and security interests, and generally having a view on which laws to choose or avoid for an international contract, if your home territory’s laws cannot be negotiated.

 

 

 

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Confidentiality obligations in the parallel universe of M&A

familiarFor many technology-based companies, confidentiality agreements (CDAs) are routine documents that present few surprises.  Some of IP Draughts’ clients sign dozens, or even hundreds, of the things each year.  Often, they are signed as a first step in business discussions that may or may not lead to the parties signing a commercial agreement, such as a services agreement, research collaboration agreement, or IP licence agreement. A few issues tend to be negotiated, including duration, and law and jurisdiction, but most of the CDAs that one encounters are mostly on the right lines.

The conventions that are followed in relation to confidentiality in general business discussions do not always seem to flow through into the world of corporate mergers and investment transactions.  As an IP lawyer, IP Draughts has been surprised by some of the differences that he has seen.  They have included:

  1. Disclosure of a company’s trading contracts to potential purchasers or investors, despite the presence of provisions in those contracts that forbid the disclosure of the contracts’ terms.  Sometimes this issue is mitigated by limiting the disclosure to access in a data room, without the right to copy the agreements, but this doesn’t affect the fundamental issue  that the documents are being disclosed in breach of a confidentiality obligation.  If the transaction is consummated, perhaps the issue goes away, but in other cases …
  2. brokerBrokers and other finance professionals who refuse to sign CDAs, arguing that they must be free to do business with multiple companies in the same market sector, and CDAs would prevent them from doing this. Instead, clients should trust them to behave honourably.  Of course, this doesn’t protect the client, and sometimes highly sensitive, technical information about a client’s products in development is disclosed to these organisations.
  3. Other finance professionals who are not willing to sign CDAs whose obligations last longer than a year or two.  This may be okay if only financial information is provided but, again, technology-based companies sometimes find themselves disclosing technical information that is valuable as a secret for much longer periods.  Sometimes, those professionals can be persuaded to agree to a longer period in respect of “trade secrets” but in IP Draughts’ experience this cannot be assumed.
  4. Finance professionals who insist (as do some major companies, particularly those headquartered in the US) that if information is disclosed orally, it will only be treated as confidential if it is confirmed in writing within a period such as 28 days.  Yet in practice most of the subsequent discussions are held in meetings and by phone, and no confirmatory record is prepared.  Admittedly this problem is not unique to the financial sector.

secretsLawyers who work with the financial sector on a regular basis will no doubt be very familiar with its practices, which seem remote from the business world.  IP Draughts wonders whether these practices (of which the terms of CDAs form a very small part) will change in light of the recent upheaval in the world of finance.

What are you seeing?

 

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Government procurement in IP contracts: a dreadful waste of money?

fit for purposeWhat is the purpose of a Government procurement office?  Silly question – to save money, of course.  According to the home page of the UK Government Procurement Service, its mission is simple:

Savings for the Nation

Our role is to provide procurement savings for Government and the UK public sector, including Health, Local Government, Devolved Administration, Education and Not for Profit organisations.

Note the repetition of the word “savings” in both the title and the text above.  The focus of procurement offices, in IP Draughts’ experience, is monetary.  Yet as all good commercial managers and commercial lawyers know, the price is only one part of a negotiation.  Value for money can mean getting a high-quality product or service at a higher price than for a comparable, medium-quality or low-quality product.  Other factors such as brand reputation, user-friendliness, product reliability, service levels, and compatibility with other products, may also affect the market price.

Ah, but procurement is about much more than price, the procurement manager may cry.  It is also about defining responsibilities and allocating risk, through suitable contract terms.  And it is certainly true that the contracts prepared by Government and other procurement procurement serviceorganisations tend to be weighty affairs with detailed provisions about performance, warranties, indemnities, financial penalties (however dressed up to make them legally enforceable), insurance obligations, termination rights, and so on.  IP Draughts recalls negotiating a 350-page contract produced by the UK Ministry of Defence, which was full of these kinds of terms. This approach is not confined to the public sector.  Some large commercial companies have procurement departments that produce lengthy and one-sided contractual documents.

circumlocutionYet for all their training and professionalism (and some are very skilled at negotiating contracts), procurement managers have a limited perspective on the supply of goods and services.  They cannot guarantee that, through their efforts, a supplier will provide the desired product or service.  All they can do, ultimately, is point to a contract that requires the supplier to do so.

For some types of supply, this approach may be sufficient.  If a supplier of bulk products – office chairs, say – doesn’t perform its obligations, the contract can be cancelled, penalties enforced, and a new contract placed with another, eager supplier at a price that reflects the size of the order.  The consequences of failure are usually limited.  In the worst case, some personal injury claims may be made for back injury due to faulty chair design, but this risk may be low and the liability contained.

With other types of supply, including some IP-related supplies, this kind of procurement approach is deeply flawed.  In all procurements, before a supplier can be selected and contract terms negotiated, someone needs to decide upon a specification for the products or services, and on selection criteria for potential suppliers.  In practice, the way these criteria are framed tends to favour large suppliers over small suppliers, but that is another story.

use your noodleWith complex procurements, these preliminary stages take on a much greater significance than they do for routine supplies.  Defining clearly in advance what is required, finding a supplier whose capability and commitment you trust, setting a price mechanism that enables them to make a reasonable profit, and working closely with them to ensure that the project is managed and completed successfully: these factors may be critical, and the detailed contract terms irrelevant.

If any of these critical factors is absent, the contract is likely to collapse.  This may result in adverse consequences that cannot be compensated by the application of financial penalties or other onerous contract terms, even assuming that the fault can be laid at the door of the supplier.  Familiar examples from newspaper reports include:

  • NHS Direct withdrawing from supplying the “111” non-emergency health telephone service because the price was too low for the work involved;
  • The provision of language interpreters in the English courts, where Government switched to a single procurement contract with a large supplier and promptly lost more money than they saved, because interpreters didn’t turn up for trials and court hearings had to be rescheduled; a House of Commons committee concluded that the Government had not been an intelligent purchaser of services and the result was “chaos” in the court system
  • numerous examples of expensive IT procurement contracts that failed, sometimes due to changing (or ill-thought-out) specifications or requirements

partnershipIn IP Draughts’ experience, many IP-related contracts fall into this category, i.e. what is required is intelligent purchasing, and collaboration between purchaser and supplier, not onerous contract terms.  Government departments sometimes pay lip service to this idea.  IP Draughts recalls, during the negotiation of the 350-page contract referred to above, a civil servant telling him that the MOD took a “partnership approach” in its dealings with suppliers.  IP Draughts bit his tongue to avoid saying what he really thought, which was that this was complete bollocks, as evidenced by the ridiculously one-sided, antagonistic, and patronising contract terms that they were discussing.

If an intelligent and collaborative approach to purchasing is followed, it is unlikely to be accompanied by aggressive contract terms that assume a kind of master-and-servant relationship.  Examples of contracts in which intelligent purchasing is required, in IP Draughts’ experience, include:
  • Contracts to run academic training courses, eg for medical students
  • Contracts for the provision of specialist technical services, eg research and consultancy, or the development of “state of the art” products
  • Contracts for the provision of legal services

IP Draughts is not sure why Government procurement departments seem, increasingly, to be proposing very one-sided contract terms for these types of project.  But they do seem to be doing so.  Some recent contracts with the UK Department of Health have been particularly one-sided.  He suspects it is a mixture of factors, including:

  • increasing use of procurement departments, and political pressure to reduce costs
  • a lack of discrimination between projects that suit onerous terms and those that don’t, combined with a general trend towards longer and more one-sided contracts
  • it is easier for Government departments to manage the contract negotiation process than it is to manage the earlier stages of defining requirements, choosing good suppliers, etc.  The former is a process that can be reduced to a measurable system; the latter is sometimes a very complex task that requires skills that are not always present in Government departments

Is this your experience or is IP Draughts being unfair on procurement departments?

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