Why do people have a problem with deeds?

Two incidents this week prompt IP Draughts to reflect on why deeds are sometimes not correctly executed – a niche subject, perhaps, but one that affects the validity of contracts that parties may wish to enforce.

First, a quick reminder: what is a deed? Under English law it is a more formal way of executing a contract than simply signing it. An older name for this is “contracts under seal”, as until 1989 it was necessary to apply a seal to a contract made as a deed. English legislation in 1989 abolished the requirement for most corporations (those incorporated under the Companies Acts) and individuals to apply their seal to a deed. There is still a degree of formality about who must sign and witness deeds, even though the requirement for applying a seal has been abolished. If you need to know more about this subject, read our book, Execution of Documents.

Peculiar types of corporation such as bodies incorporated by Royal Charter (most UK universities) or by special statute (eg NHS Trusts, ie most UK hospitals) or government bodies, still have to apply their seal. Typically the constitution of the corporation will specify what authority is required for the use of the seal, eg it must be done in the presence of two board members who must sign the document next to the applied seal.

Why would one execute a contract as a deed? Two possibilities:

  1. No alternative. Because that is the only way to make the contract (or other instrument) legally effective. This only applies to a few types of contract, including conveyances of land, powers of attorney and financial guarantees.
  2. Nice to have. Because, though executing the contract as a deed is not compulsory (which is true of most contracts), there may be legal advantages of doing so. The two main, potential advantages are (a) there is no need for “consideration” in a contract made as a deed, and (b) the limitation period – the time limit for bringing an action for breach of contract – is 12 years for deeds and only 6 years for ordinary contracts.

So, why do these rules cause people problems in practice?

Two examples that IP Draughts encountered this week illustrate the point.

In the first, a client was seeking to enter into a contract executed as a deed, where one of the other parties was an NHS Trust. The signature blocks showed clearly that the Trust’s seal should be applied. The document comes back, apparently signed as a deed by all parties. But there is no impression of a seal on the document. (Corporate seals are typically small steel devices which clamp together to squash the paper and impress it with an image of the corporate seal.)

The client reports that he has spoken to the Trust’s representative who assures him that they don’t have a seal. IP Draughts is puzzled. He searches for and finds on the internet:

  1. Model constitutions for this type of Trust, which include reference to them having a seal.
  2. A copy of what appears to be the actual constitution of this particular Trust, which also refers to it having a seal.

He suggests to his client that he go back to his counterparty and get them to check the point, preferably involving their legal department. Some time later, the document comes back, now bearing a seal.

The second example that IP Draughts encountered this week was on Twitter. He saw this report, by a US law firm, of a recent case in the Virginia Supreme Court, where the court invalidated a lease that wasn’t executed as a deed (with the application of a seal), as state law required. Thanks to @profrobanderson (no relation) for drawing this to IP Draughts’ attention.

IP Draughts is not an expert in US state laws, but his impression/guess has been:

  1. Centuries ago, US laws had rules on deeds (contracts under seal) that were similar to English law.
  2. But perhaps the rules were originally or later limited to conveyances and long leases of land.
  3. And perhaps in the 21st century the practice of using seals has largely been abandoned, but without legislation directly equivalent to the English laws that were passed in 1989.
  4. So that the subject is seen as something of a formality whose importance has gradually been eroded, and it takes people by surprise when, as in the Virginia Supreme Court case mentioned above, the rules are actually applied and seen to have a significant legal effect.

As IP Draughts has mentioned before on this blog, he was once involved in a licensing transaction with a Massachusetts corporation, where the other party had prepared the drafts, and they included a signature block that referred to the parties applying their seals. When IP Draughts indicated that his client, a UK company, didn’t intend to apply its seal, this point seemed to take the US party by surprise. The surprise didn’t seem to be that we weren’t intending to apply our seal, but rather that we were taking literally the wording of the signature block. The other party revised the signature block so that it no longer referred to sealing.

The lessons that IP Draughts draws from these examples are that those of us who are responsible for contracts need to be ever-vigilant for wrongly-executed contracts, even if in doing so we make ourselves unpopular with clients who “just want to get the deal done”.

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Unitary Patent – the UK removes the first veil

For the last year or more, talking to the UK government about Brexit and IP has been a one-way conversation. The UK IP professions have worked hard to agree common positions on what they would like the UK IP system to look like, after Brexit. An important part of the debate has been how far the UK will continue to participate in, or be aligned with, European IP systems. Papers have been written on this subject and supplied to government officials, and meetings have been held with those officials.

But – and IP Draughts doesn’t blame the officials for this, it reflects the political situation they have been in – the meetings have largely consisted of the professions explaining their positions, and government officials nodding wisely and refraining from making any comment whatsoever about how closely the UK wishes to be aligned with the EU. To do so has risked making political statements. For example, many models of alignment would involve the UK accepting the jurisdiction of the CJEU, and avoiding such jurisdiction has been one of Theresa May’s red lines.

Now, at last, with the publication of its White Paper, we are seeing some tantalising glimpses of the UK’s negotiating position on IP and other subjects, as the government starts its dance of the seven veils.

An area that is of particular interest to IP Draughts is the unitary patent, the unified patent court (UPC) and the UPC Agreement. The UK has ratified the UPC Agreement, and has taken out a lease on some rooms in an office block in central London, which will be the UK court. The UK government’s position has been that as long as the UK remains in the EU, it will continue to participate fully in the UPC. But the UK government has previously refused to state whether it wishes to continue as a participant in the system after Brexit or how this might be achieved. “That is a matter for future negotations” was about as much as anyone in government was prepared to say.

Last Autumn, IP Draughts coordinated a joint note from the IP professions to government on Brexit and IP. It was eventually sent to the IP minister and others in government in late December 2017. The note was brief and high-level, targetted at people outside the UK Intellectual Property Office. More detailed papers on IP topics had already been submitted to the UK IPO.

On the UPC, the note included the following recommendations:

…the Government should provide legal certainty regarding the UPC, and now do the following:
(a) confirm that it is the UK’s intention to stay in the UPC, and that the UK is prepared to abide by the terms of the UPC Agreement, following Brexit;
(b) work towards the coming into effect of the UPC as soon as reasonably practicable in collaboration with other UPC Member States; and
(c) work with other UPC Member States and EU institutions to ensure there are no legal or practical obstacles to UK participation in the UPC and the Unitary Patent, following Brexit, on equal terms with other Member States.

The objectives should be (i) continuation of the Court in London; (ii) continued involvement of UK national judges; and (iii) continued rights of participation of legal professionals qualified and based in the UK in all parts of the Court’s procedures on the same terms.

The part of the White Paper dealing with the UPC seems to be consistent with the above position, and this is to be welcomed. Paragraph 151 of the White Paper includes the following statements (colour added):

The UK has ratified the Unified Patent Court Agreement and intends to explore staying in the Court and unitary patent system after the UK leaves the EU. The Unified Patent Court has a unique structure as an international court that is a dispute forum for the EU’s unitary patent and for European patents, both of which will be administered by the European Patent Office. The UK will therefore work with other contracting states to make sure the Unified Patent Court Agreement can continue on a firm legal basis.

The bit in red is perhaps more tentative than one might wish to see (“intends to explore”), but at least it shows a good direction of travel.

The bit in blue we can ignore – it is directed to Eurosceptics who may be concerned about the residual jurisdiction of the CJEU, and seeks to divert attention from this point by making the legitimate point that for most practical purposes it will be the UPC court that decides matters.

The bit in green adds little to the bit in red, other than to say that the UK will be talking to other EU states about how the UPC Agreement can lawfully continue – in practice, an amendment to the text will be required if the UK is to continue to participate.

So, there is not much meat on how this miracle will be achieved, but at least the government is finally saying that it wants to achieve it. IP Draughts hopes that the UK IPO will now have a mandate to start, and actively pursue, negotiations with other member states and with the European Commission on these points.

According to IPKat, the a spokesman for the UK IPO has clarified what the IPO will be doing in light of the White Paper:

The UK intends to stay in the Unified Patent Court and unitary patent system after we leave the EU. The UPC and unitary patent project are an important means of simplifying the protection of innovative products throughout Europe. This Agreement sets the bar for the level of constructive cooperation that the UK seeks with European partners in the future.

UK participation in the UPC and Unitary Patent will extend the benefits of these systems to businesses operating in the UK.

The UK will work with our European Partners to ensure the Unitary Patent and Unified Patent Court continue on a firm legal basis. This will need to reflect the change in the UK’s status as we cease to be an EU Member State, which will require negotiations with our European Partners. We look forward to beginning those negotiations with our European Partners so as to ensure the continuing success of this new system.

So, things are moving at last. Let’s hope the IPO is able to negotiate a solution that enables the UK to participate fully after Brexit, and retain the life sciences part of the central division of the court in London.

 

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Interpreting trade mark agreements

The authority of Court of Appeal decisions is sometimes said to be greater if a “strong court” decides the case. For a decision on the interpretation of an IP licence agreement, it would be difficult to think of a stronger court than:

  1. Lady Justice Arden – the first female judge to be appointed to the Chancery Division, who has decided many contract and company law cases. She is shortly to become a Supreme Court judge.
  2. Lord Justice Kitchin – a senior IP judge in the Court of Appeal. He is also shortly to become a Supreme Court judge.
  3. Mr Justice Birss – an IP judge in the Chancery Division who revitalised what is now the Intellectual Property Enterprise Court, and is surely due for promotion to the Court of Appeal before too long.

This was the panel in the recently-reported case of Holland And Barrett International Ltd & Anor v General Nutrition Investment Company [2018] EWCA Civ 1586 (04 July 2018). IP Draughts reported on the decision at first instance, here.

On appeal, the points at issue have crystallised into a point that was not discussed in IP Draughts’ summary of the first instance decision. He would summarise the point this way.

  1. GNIC sells a business in nutritional supplements to Holland & Barrett (HB), whose shops are familiar in UK high streets. As part of the deal, GNIC grants HB an exclusive licence under certain GNIC trade marks, including the “GNC” word mark and several ancillary marks that include the word GNC, eg one consisting of a device and the words “GNC Herbal Plus”.
  2. Clause 5.6 allows GNIC to terminate the licence in respect of one or more of the licensed marks if HB fails to use the relevant marks for a period of 5 years.
  3. GNIC purports to terminate the licence for 5 unused, ancillary marks. The licence remains in force for the main GNC word mark.
  4. GNIC contends that the implication of terminating the licence to these marks is that it may use them in the HB territory, even though such use may infringe the main GNC word mark.
  5. HB contends that such use would be a breach of the grant of exclusive rights to the GNC word mark.
  6. The judge at first instance agrees with GNIC.
  7. The Court of Appeal agrees with HB, and overturns the first instance decision on this point.

The Court of Appeal focused on the exclusivity granted to HB with respect to the main GNC mark, and found it would be breached if, for example, GNIC sold products under a mark that included the GNC word and other elements, as in the GNC Herbal Plus mark mentioned above. This analysis was not affected by:

(a) the fact that a separate licence had been granted to, for example, the GNC Herbal Plus mark; nor

(b) the fact that the latter licence had been terminated. It was not necessary to imply a term that on termination of the latter licence, the exclusive licence to the GNC word mark was qualified or reduced in scope.

And as the Court of Appeal stated, paragraph 53 of their judgment:

Putting the matter in a different way, if when the licence was being drafted, someone had suggested to the parties that clause 5.6 might have the consequence which GNIC contend for today, then taking into account the parties’ intention construed objectively from the document as a whole, the parties would have agreed that that is not what they intended to achieve.

In IP Draughts’ view, the Court of Appeal’s forensic analysis of law and facts is persuasive, and overcomes a first thought that such an interpretation fails to give GNIC an effective remedy for failure to use the marks.

It is also interesting to note that the judgment is described as “the judgment of the court” rather than being ascribed to one of the court members and then agreed to by the others. This technique should be used more often, in IP Draughts’ view, and is a further sign of the quality of the judgment.

 

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When is a total exclusion of liability enforceable?

The recently-reported, Court of Appeal case of Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 provides a tutorial in how to make an exclusion clause, in standard contract terms, legally enforceable. Drafters of standard terms will find the lead judgment, by Coulson LJ, a good refresher.

This area of law is, in IP Draughts’ view, far too complex. It is easy to gloss over subtleties and jump to conclusions that seem intuitively right, but may be legally wrong. You need to know this stuff if you are drafting standard terms of business and want them to be legally enforceable in the English courts. This is an area where law graduates can be at an advantage compared with science graduates who qualify as lawyers via the one-year graduate diploma in law. The more intense examination of cases that you get in a three-year law degree helps you not to make mistakes.

This article attempts a brief, and incomplete, summary.

The facts of the case

  1. Goodlife produces frozen foods from a factory in Warrington, a town in the north-west of England. Before freezing, the foods are cooked, using a fryer.
  2. In 2002, they contract with Hall Fire, who install a fire suppression system over the fryer. The contract price is £7,490. The contract is made on Hall Fire’s standard terms of business, discussed below.
  3. In 2012, there is a fire at Goodlife’s factory, said to have originated in the fryer. The fire suppression system fails to suppress the fire. The fire is said to have caused loss and damage in the region of £6.6 million.
  4. Both parties are insured. Goodlife’s insurers exercise rights of subrogation under the contract and sue Hall Fire for the loss and damage incurred.

Procedural issues

  1. A claim for breach of contract is time-barred as the contract was performed more than 6 years before the fire. But there may still be a claim for negligence under the law of tort.
  2. The judgment being appealed was a preliminary decision on whether the exclusion clause was (a) incorporated into the contract between the parties, and (b) enforceable in light of the Unfair Contract Terms Act 1977 (UCTA).

The relevant contract clauses (emphasis added)

We draw your particular attention to the following specific conditions and assumptions on which the tender is based, unless qualified in our covering letter. Any contract would be based on our tender and these supplementary conditions sections 4 – 12 which do not provide for the imposition of any form of damages whatsoever and are based on English Law…
11) We exclude all liability, loss, damages or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFS for whatever reason.
In the case of faulty components, we include only for the replacement, free of charge, of those defected parts.
As an alternative to our basic tender, we can provide insurance to cover the above risks. Please ask for the extra cost of the provision of this cover if required.

Legal issues and the court’s conclusions

The following paragraphs attempt a very brief summary of the outcome of the Court of Appeal’s analysis; unlike Coulson LJ’s judgment they do not discuss the earlier cases. Essentially the Court of Appeal agreed with the judge at first instance.

  1. Was the clause particularly onerous or unusual (“POU”)? This is a separate issue to whether the clause is reasonable under UCTA. There is a strand of case law that says that POU standard terms have to be brought to the other party’s attention, rather than being buried in small print, if they are to be effective. So the first question is whether the total exclusion of liability highlighted in red above is POU. The court said no. It was more extreme than clauses that limited liability to price paid, and excluded indirect losses. The latter clauses were commonly seen in contracts, and in several cited cases were held to be not POU. But for practical purposes, in the context of a fire causing millions of pounds of damage, it made little difference whether the clause excluded all liability or limited liability to £7,490.
  2. Was the clause fairly and reasonably brought to Goodlife’s attention? In light of the long-established case law in this field, IP Draughts typically puts some warning wording at the top of standard terms, when he is asked to draft them, drawing attention to the strict limits and exclusions of liability that appear later in the terms. The drafter in this case included the text coloured blue above. Coulson LJ agreed with the judge that, if the exclusion clause was POU, this wording was sufficient to bring the clause to the customer’s attention.
  3. Was the exclusion unreasonable: (a) bargaining power. Even if the clause is enforceable at common law, in light of the points discussed at items 1 and 2 above, it will not be enforceable under UCTA if it forms part of written standard terms of business and if the exclusion is not “reasonable”. The tests for reasonableness are set out in detail in section 11 and Schedule 2 of UCTA. Coulson LJ emphasised the importance of giving effect to contracts entered into between parties of broadly equal size and status (a point that Gross LJ felt so strongly about that, even though he agreed with Coulson LJ’s judgment, he added some remarks of his own on the point, after Coulson LJ’s judgement).
  4. Was the exclusion unreasonable: (b) insurance. Coulson LJ also considered the question of insurance. In light of earlier case law, it is a common technique used by drafters of standard terms to strictly limit liability but make clear to the customer that, for an additional price, insurance to cover potential losses can be arranged. The wording coloured orange, above, does this. There was also some wording, not quoted above, about Hall Fire providing details of current insurance on request. In reality, these seemed to be clauses that no-one followed up on. And the judge felt that it was probably easier for Goodlife to arrange insurance for its factory. Overall, the insurance issues did not result in the clause being unreasonable.
  5. Was the exclusion unreasonable: (c) total exclusion of remedies. Several submissions by Goodlife’s counsel (as summarised by Coulson LJ) seemed to skirt around the theme that the wording coloured in red above was a blanket exclusion clause and avoided a core obligation. IP Draughts is reminded of advice he received from senior lawyers when he was a junior, that standard terms should offer something positive (eg a repair or replace warranty), rather than totally excluding liability and removing any remedies. In the present case, however counsel formulated the argument, Coulson LJ came to the same conclusion: the clause was not unreasonable.

Lessons for the future

The more that IP Draughts reads Coulson LJ’s judgment, the more he feels that Coulson LJ was determined to find the exclusion clause enforceable. Perhaps he was influenced by the fact that this was really a dispute between insurers on who should pick up the bill.

IP Draughts has detected a different approach by the English courts to exclusion clauses in recent years. When he first started in practice, the view of expert contract lawyers seemed to be that limiting liability to the contract price was a high-risk strategy, and that a limit linked to the contractor’s reasonable level of insurance cover was more likely to be effective.

With all the usual caveats that cases are decided on their facts, different judges have different views, etc, the current view of the courts seems to include the following themes:

  1. Parties of roughly equal size or bargaining power should be allowed to agree whatever contract terms they wish, without interference from the courts.
  2. Courts should not interpret wording in an unintended way, eg by saying that a clause could cover fraud, and in that situation the clause would be unenforceable, so the clause is unenforceable in all situations.
  3. Limiting liability to the contract price and excluding indirect losses are conventional terms in contracts, and should not be regarded as particularly unusual or onerous.
  4. It may still be necessary to draw attention to onerous terms in standard contracts. Lord Denning favoured a big red hand in the margin, but this technique seems to have fallen out of fashion.

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