Commission payments: always button down the contract terms

Last 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. When 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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Occasionally, 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.

International IP transactions: how best to manage the differences?

The 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. Disco-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.

 

 

 

Mr Pettifog goes to Budapest

There were mixed emotions at our recent management meeting.  On the one hand, Mr Pettifog has blown the annual training budget by going on several overseas trips. But in fairness, and as he pointed out, he hasn’t spent any of the firm’s money on training himself since 1973. Fortunately, no-one from the Law Society or SRA has ever asked to see his training log.

On a more positive note, his frequent travel has meant he hasn’t been in the office much recently, and when he has, he has been almost pleasant to several members of staff. During the management meeting he  made two constructive suggestions, which so astonished our minute-taker, Deirdre Sprockett, that she spilt her tea on the previous meeting’s minutes, which caused her great distress.

The speculation in the Silver Trough (the staff canteen for non-partners) is that he has a girlfriend or, as Stuart from accounts would have it, boyfriend. But that’s all wrong, as only the partners know. The only thing he is in love with is the possibility of becoming a UPC (Unified Patent Court) judge.

Mr Pettifog is doing everything he can think of to get himself appointed to this office. He has recently attended several meetings of the Metropolitan Grand Lodge, where he has been a dormant member for many years. There, he has pestered a number of fellow-members who are senior judges, asking them to support his application. Last week, he went on the BBC’s Today Programme, to comment on the UPC (and thereby raise his profile as an expert on international patent law), but unfortunately the editor cancelled his 8.54 am slot at the last minute, to make way for breaking news of a house fire in Weston-Super-Mare.

Someone has told him that he needs to demonstrate a proper judicial attitude, and to be receptive to formal training. He has taken this to heart by attending every meeting he comes across that might be relevant. Last month he attended a conference in Budapest, organised by the Hungarian Intellectual Property Office, with the impressive-sounding title Conference opening and press conference on the training of UPC judges and their new Training Centre. After the sixth welcoming speech by a European dignitary and the start of a question-and-answer session for the assembled press, it dawned on Mr Pettifog that perhaps this wasn’t the detailed training he had been hoping for.  Still, he enjoyed his stay in the presidential suite at the Budapest Hilton.

Our finance committee can’t make up its mind whether to chastise Mr Pettifog for wasting the firm’s money, or to encourage him in his endeavours to become a judge. If the latter could be achieved, he would have to resign from the firm, which would save us a small fortune and free up his room for conversion into an open-plan office for 6 junior solicitors.