Let’s get rid of the ratchet men

two wayLast week, IP Draughts co-presented a two-day course on clinical trial agreements. With practice-based courses, the discussion becomes interesting, at least for the presenter, when the people attending provide their own insights on the topics being discussed. This happened in abundance last week, and IP Draughts is grateful to all who contributed.

A theme that emerged in this course was whether a company’s template agreements should focus solely on providing maximum protection for the company, or instead should try to provide a balanced set of reasonable obligations on both parties.

What prompted the discussion was IP Draughts taking the class through the terms of a US biotech company’s template clinical trials agreement. The terms were excessively one-sided, giving the company maximum flexibility to tell the investigator what to do or not do.  They seemed to ignore the fact that the investigator has certain responsibilities under EU regulations to be responsible for its own actions and to seek consent from regulatory bodies (eg ethics committees), rather than just dance to the sponsoring company’s tune. It was interesting to compare these terms with the terms that are generally used in the UK, as issued by the Department of Health and negotiated between interested parties. The latter terms are much more pro-investigator, but they also try to address issues of concern to both parties including their regulatory obligations.

The wider issue is whether a company should have standard contract terms that seek to provide maximum protection to the company and largely ignore the interests of the other party. This type of approach is common in some market sectors. In M&A and some financial transactions, it seems that a buyer/investor will often wish to include in the agreement as many provisions as possible to protect its interests and minimise its risks. Or at least, they won’t tell their lawyers to minimise the use of legalistic contract terms, which may amount to the same thing.

This seems to have led to the proliferation of practices that, in other market sectors, can seem ludicrously aggressive and one-sided, eg demanding indemnities in respect of all breaches of warranty, having a party “represent and warrant” (supposedly to give additional remedies in tort as well as contract), and so on. It seems that lawyers in those sectors rarely stand up to their clients and tell them to stop being extreme and to stick to some simple, balanced terms. That just isn’t “done”. A forratchetmer colleague of IP Draughts, a corporate lawyer, called the lawyers who indulged in this type of competitive negotiation “ratchet men”, because they would squeeze out a concession, bank it, then move on to demand another, moving only in one direction like a ratchet mechanism.

In IP Draughts’ world, lawyers are usually “on tap” rather than “on top”. In other words, they are there as a resource but do not usually dictate the structure and agenda of negotiations. In this world, there is pressure to keep contract terms as simple as possible, and not to take extreme positions, because it is not efficient and does not lead to harmonious negotiations. A factor that possibly influences the negotiations is that these contract relationships tend to be long-term and require cooperation between the parties, rather than being a one-off in the way that an M&A deal tends to be.

IP Draughts suspects that some in-house lawyers, influenced perhaps by their training in large law firms, consider it to be their job simply to draft terms that protect their organisation, and that including terms to protect the other party is not part of their brief.

IP Draughts would like to encourage all lawyers to draft balanced documents, and all clients to give clear instructions that this is what they expect. By all means weight them to some extent in favour of your client or your employer, but not at the expense of seeing the other party’s point of view or addressing their legitimate concerns.

 

3 Comments

Filed under Commercial negotiation, Contract drafting

3 responses to “Let’s get rid of the ratchet men

  1. vrkoven

    Mark, you might be unaware that in the US, the source of your anguish over this aspect of competitive unreasonableness, lawyers’ ethical codes (no, really!) require that an attorney “zealously represent” the interests of his/her client. Whether this universally adopted standard is cause or effect of the ratchet-man mentality you abhor I will leave to the historians and psychologists. The only exception is when the lawyer is retained, à la the Continental notary, to represent “the situation,” in which case both parties must explicitly agree to it and the lawyer must disclose to both parties that the representation will not be as zealous as it would were (s)he representing just one of them.

    • Hmmm…
      When I read your comment I wondered whether this was a litigation-focussed obligation. I also wondered whether there was a religious-fervour element. This article doesn’t change my initial views: https://www.osbar.org/publications/bulletin/05jul/barcounsel.html

      It would be very sad if this formulaic phrase were interpreted as an obligation to beat up the other side in template drafting and negotiations. I think I can be “intensely enthusiastic” (a synonym for zealous) about acting in my client’s best interests without taking a heavy-handed approach.

  2. Excellent article…. I totally agree!

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