Who wins in IP contract disputes? Actions may speak louder than words

IP Draughts likes to see clear and unambiguous contract terms.  He also likes to see clients  succeeding in contract disputes, including disputes over the performance of contractual obligations.

If a contractual obligation is clearly stated, shouldn’t it be easy to determine whether a party has met that obligation?  You might think so.  IP Draughts has had many conversations over the years with non-lawyers who view contracts as a kind of machine or computer program.  If the machine has been debugged and properly calibrated, then it should work time and time again, giving the correct answer in cases of dispute.  Human judges, with their intellectual  weaknesses and emotional prejudices, may get in the way of finding the correct answer.  It should be left to the machine to decide.

Unfortunately, this “scientific” approach to deciding contract disputes doesn’t work in the real world.  Some contractual obligations, particularly those that involve an ongoing activity, are difficult to reduce to a binary yes/no assessment.  Has the licensee used his “best efforts” in developing and commercialising licensed products?  Only a human judge can decide, by weighing up the evidence and interpreting the obligation in light of all the circumstances.

Other obligations are easier to reduce to a mechanical pass/fail test.  For example, if the obligation is to pay a sum by a set date, and the sum is not paid by that date, it may be easy to show a breach of contract.

A further complication is that commercial parties don’t always interact with one another in accordance with the contract that their lawyers have carefully drafted.  A pattern of behaviour emerges that may indicate an agreed variation of the strict terms of the contract.  This may make it difficult or impossible to enforce those terms.  For example, we have been involved in advising on a term that stated that, after termination of the contract, a party had a right to repurchase certain equipment that he had previously sold to the other party.  The term stated that, in order for this right to be exercised, notice had to be given within 14 days of the date of termination of the contract.  Notice was given but not within this time period.  The Court held that the parties had, through their post-termination discussions, effectively agreed to waive the 14-day condition, and the notice had been validly given.

On this type of issue, analysis of contractual wording can only take you so far.  A literal reading of the contract might lead you to draw the wrong legal conclusion.  You also need the advice of a seasoned litigator who can predict how the facts are likely to be assessed by the judge.

How the court decides such a case may also depend on the type of court.  You may get a more considered, analytical approach to contractual interpretation in a specialist commercial or mercantile court, or in the Chancery Division of the High Court, than in a non-specialist County Court.

With all of these uncertainties, one could be forgiven for saying that there is little point spending a lot of time focussing on detailed contract wording.  Yet there are plenty of reported cases which show parties being prejudiced by poor contract wording.  The best way of looking at it may be to think of increasing the probability of success in court by clear and accurate contract drafting.

There are plenty of other reasons for taking care with contract drafting.  Most disputes don’t reach court, and well-drafted contractual language may help to persuade the other party that it is not worth litigating over an obligation that is clearly stated.

All litigation is, to some extent, a gamble.  The legal team may be able to predict what the odds are in an individual case, and clients usually avoid litigation where the probability of success is low.  But in most cases no-one can say with certainty what the outcome will be.  This unpalatable truth can make lawyers unpopular, and lead to jibes about the legal profession making difficult what should be simple.  The reality, though, is that there is complexity in how people, including commercial parties, interact with one another.  The courts have the task of reducing this complexity to a simple decision in favour of one party or another.  A well-drafted contract can help the court in this process, but it may not address all aspects of the dispute.

1 Comment

Filed under Contract drafting

One response to “Who wins in IP contract disputes? Actions may speak louder than words

  1. ct

    The uncertainty increases when one ventures beyond the legal heritage of western Europe. As someone told me 15 years ago when I began doing business in the PRC, “the contract is the starting point of what will actually happen”. I’ll never forget that.

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