Interpreting IP contract terms

boxerIt is difficult to be objective when interpreting a contract in which we have an interest. No matter how forensic and dispassionate we think we are being, there is likely to be an element of wishful thinking.

The English legal system has an excellent way of dealing with this problem, which is to take advice from an independent barrister. Aloof from the client’s day-to-day concerns, and steeped in a tradition of giving objective advice, a good commercial barrister will tell it to you straight, however unpalatable the message. Advice from a senior barrister, known as a Queen’s Counsel, is as close as you will get (outside court) to hearing how a High Court judge is likely to decide the matter on which the advice is sought.

A man hears what he wants to hear
And disregards the rest.

Simon and Garfunkel, The Boxer

Overseas clients and their lawyers sometimes express puzzlement (or worse) about the split legal professions of solicitors and barristers (and, in IP cases, also patent and trade mark attorneys) in England and Wales. There is a legitimate debate to be had about this split, particularly in smaller cases where legal costs are an issue. Over time, the distinctions between the professions have become less rigid, with increased rights of audience in the courts for non-barristers, and direct client access to barristers. These changes have mitigated the inherent inefficiencies in having a split system.

Yet there are situations where the split is valuable, and should be used in the client’s interests. Contractual interpretation is one of those situations.

Some of IP Draughts’ experiences illustrate how difficult it can be to take an objective view of contracts in which one is personally involved.

(1) A software services agreement included a clause (let us call it Clause 1) that stated “… [Service Provider] hereby assigns to the Customer the Intellectual Property Rights in the Software.” A separate clause in the agreement (Clause 2) stated “Neither Party may assign …any of its rights or obligations under this Agreement without the prior written consent of the other Party.” The Service Provider considered that Clause 2 qualified Clause 1, such that the Customer could not assign the Intellectual Property Rights to anyone else.

a signThis interpretation confused two issues: contractual rights, and ownership of property. The confusion is understandable, given the misleading use of the word “assign” in both cases. IP Draughts had not been involved in negotiating the agreement, but was asked to advise on whether the Service Provider’s interpretation was correct. His view, and in the context of the agreement as a whole, was that the Service Provider’s interpretation was clearly wrong. Once ownership of the IPR had been transferred, it was owned outright by the Customer, and was not affected by Clause 2.

(2) A franchise agreement provided that, on termination, the franchisor had an option to purchase from the franchisee certain equipment that the franchisee used in the business. The agreement stated that the option had to be exercised within 14 days of termination. Following termination of the agreement, there was correspondence between the parties, and the franshisor eventually exercised its option but not within the 14 day period. IP Draughts, who was acting for the franchisee, argued in correspondence that this exercise was invalid. This was only one of several issues in dispute between the parties and resulted in litigation. He obtained advice from independent counsel, who advised that the court was unlikely to say that the exercise of the option was invalid, despite being made outside the 14 day period.

Interpreting contracts can be more art than science. Words can be interpreted in different ways. The parties may have acted in such a way as to modify the strict terms of the contract. The judge may decide that doing justice in the case requires a particular interpretation of the words used. Getting an independent, skilled view of how the contract will be interpreted can be very useful.


Filed under Contract drafting, Intellectual Property

3 responses to “Interpreting IP contract terms

  1. Mark, the first example is useful, but the second one seems unclear; was the second opinion effectively that the franchisee had through its conduct somehow waived or varied the 14 day limit? Cheers, Chris

    • I think that was the implication, although it was not articulated. This was low-grade, knockabout litigation in the County Court. Counsel’s reaction to my suggestion that the franchisor was out of time was that this argument might work with a few Chancery judges in the High Court, but wouldn’t fly in the rough and tumble of the County Court.

      • Ah. Disappointing. I think it’s very frustrating for clients when they hear that their contract says one thing but they’ll still get shafted. 🙂

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