Legal requirement as a negotiating position

The forward-defensive shot

Most experienced contract negotiators have encountered it.  The deadbat response to a request to change a contract term: we can’t change that, it’s a legal requirement.  The responder usually then goes on to explain that the term (or sometimes, the deal structure) is required by competition laws, tax, statutory warranties, industry regulation, or some other aspect of commercial law.

Sometimes, the response is legitimate.

For example, a licensor of intellectual property may want to own any improvements to the licensed IP that are generated by his licensee while working the licence.  This may be perfectly understandable from a commercial perspective.  However, if the licence agreement is subject to European competition laws – in particular Article 101 of the Treaty on the Functioning of the European Union – such a provision is likely to be problematic.  Assignment-back clauses are outside the scope of the EU Technology Transfer Block Exemption Regulation (TTBER).  The European Commission seems to be tightening up this area of law, rather than relaxing it, if one considers their proposed revisions to the TTBER, the current version of which is due to expire next year.

Even with this example, it might be argued that an assignment-back clause is not per se illegal, as evidenced by the fact that it is not a hardcore or black-listed provision under the TTBER and instead is grey-listed (under Article 5).  But most well-advised parties are likely to avoid such a provision in light of Article 5 of the TTBER.  So a cry of it’s a legal requirement to justify a non-exclusive licence back of licensee improvements, rather than an assignment back, has some legal merit.

On other occasions, the response has some basis in law, but there is more than one way of addressing the issue.  For example, it might be argued in negotiations that a contract clause excluding all liability would be unenforceable under the Unfair Contract Terms Act 1977.  This might well be true, depending on the detailed facts of the case.  But a slightly different clause with ‘safety valve’ wording, making clear that the clause does not attempt to exclude liability for death or personal injury caused by negligence, might be acceptable.  In this case, an objection to a clause based on it’s a legal requirement might be true but not provide the complete picture, and a skilled negotiator might find a satisfactory way around the objection.

A variant on this type of response is where a party has a company policy of including a clause to address a real legal issue, but it is not strictly necessary to have that clause.  For example, US parties often include template clauses addressing issues such as export controls and corrupt practices.  Within Europe, large organisations sometimes include lengthy clauses in contracts dealing with data protection issues.  These clauses are often designed to demonstrate to legal authorities that the party who drafted the clause is doing its best to comply with the laws in question, and putting an onus on the other party to comply with those  laws and cooperate with the drafting party.  In practice, these clauses tend to be a ‘one-size-fits-all’ approach to addressing the legal issues and they are not always appropriate  for the facts of the individual contract.  Ultimately, though there may be a legal requirement, it is not necessary to address it in the way proposed.  However, the drafting party’s company (commercial) policy may make it very reluctant to change the wording.

On yet other occasions, the response is merely an attempt to bamboozle the other party and win a negotiating point, knowing that the other party’s negotiator is not a lawyer and not involving one in the negotiations.  One way of calling the responder’s bluff in this situation is to ask them for a full citation of the law – most laws can readily be found on the internet nowadays.  If the point seems to be a valid one, legal advice can be sought on how to address it.