Removing the crud from your contract templates

As we all know, lockdown isn’t much fun. Readers in the UK may be finding that the sudden change in weather has made it even less appealing.

Being in lockdown is no guide to how busy we are. IP Draughts was speaking to someone today, not in an “essential” role, whose job has become much busier as a direct result of the Covid-19 pandemic. Others are in a much worse position: their jobs have disappeared, or at risk of doing so.

If you have some spare time in the coming weeks, perhaps because you no longer have to spend hours each day commuting or going to meetings (and, probably, you don’t have young children to look after at home), you might give some thought to improving your organisation’s template agreements. Or, if that is a step too far, you might at least improve your understanding of the more obscure terms in the template agreements, and whether you think they have been drafted in a clear and useful way.

Many of IP Draughts’ books were born from a desire to understand better what particular terms meant, and what was their legal effect. There has been a steady readership for these books: some of them are now in their fourth editions.

Here are some areas where you might start:

  1. Owning the results. What does it mean to say that the customer “owns” the Results? From an English law perspective, it is probably meaningless, but this type of provision has become popular in US contracts.
  2. Orally-disclosed information must be confirmed in writing. Really? How often have you encountered parties doing this rigorously in the course of confidential discussions?
  3. Indemnities. There are far too many indemnities in contracts nowadays. Often they don’t make much sense, or are very difficult to understand. Do you think that requiring a party to indemnify against breach of contract removes the obligations of mitigation, causation and remoteness? Do you have any authority for this thought?
  4. Hold harmless and defend. What on earth do these words mean? They are a kind of shorthand, and the intended meaning would be much better spelt out in non-jargon, e.g. by stating who has control of any actions for which an indemnity is given.
  5. All commercially reasonable best efforts. Stop playing the theoretical drafting game that supposedly recognises separate and enforceable tiers to an efforts (or endeavours) obligation.
  6. Represents and warrants. So, you think this gives you the opportunity to sue for tortious misrepresentation, as well as breach of contract? Show me a case where this was part of the ratio decidendi. And while you are at it, explain why the recent case law on solicitors’ negligence can be distinguished. You know, the cases that say that where there is a theoretical right to sue your solicitor for tortious negligence and for breach of contract, you can only do so in contract. E.g. Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, and Wright v Lewis Silkin LLP [2016] EWCA Civ 1308. By the way, IP Draughts mentions this point in his one-day UCL course on Drafting Legal Clauses in Commercial Contracts.

If you have time, you could go on to explore some of the more obscure bits of boilerplate in your templates. For example, do you include a clause that states that the contract “inures to the benefit of the parties’ successors and assigns”? Why? And have you looked at the force majeure clauses recently? Should you be rethinking the approach of having a page of examples of force majeure events, only to find that pandemics are not mentioned? Might it be better to cut down on the examples?

Some of these clauses fester undisturbed because they are dealing with remote possibilities that never seem to arise. If so, why not cut them out entirely? No contract can hope to cover all eventualities, and you may find it is more efficient to focus on important issues that are likely to arise. This will shorten your (probably over-lengthy) contract and make it easer to negotiate and understand.

Go on, you know you want to…!



Filed under Contract drafting

15 responses to “Removing the crud from your contract templates

  1. Sasha Wagner-Ashford

    Talking about updating templates, I’m wondering if your readers have any thoughts on the logic of defining “Intellectual Property” as opposed to “Intellectual Property Rights” in research collaboration agreements. There is a divergence between usage of the term in the Brunswick template and the Lambert collaboration agreement templates. I wondered if this has any real implications?

  2. vrkoven

    I am pleased to report that “customer owns the results” is as meaningless under US (chiefly copyright) law as it is under English law.

    • Very good to know, Vance, thank you! Demanding ownership of the results seems to be one of those trends that is sweeping US contracts at present.

      • Thank you for the blog.
        Do you mean here that the client in a say software dev. contract cannot be the ab initio holder of the IP rights? If yes, is there a law behind this rule? Does the same imply for tangible assets, for instance ownership of a jar crafted by A for his client B?

      • The clause probably works for tangible assets. It doesn’t work well for IP because it doesn’t say customer will own the IP in the results. In my experience there is often a separate clause in th3 contract on IP ownership.
        Whether a customer can own IP ab initio depends on the IP type and the relevant country’s laws for that type. Generalisations are not useful.

      • vrkoven

        Under the US copyright law (which is what for the most part governs software IP), except for certain specified instances a copyrightable work is “work made for hire,” thus automatically vesting the copyright in the employer, only in the case of an employee who creates the work as an incident of employment. The law lists nine categories of work in which an otherwise independent contractor may, if the parties so agree in writing, designate the work as work made for hire. Generally these categories are not applicable to software development (there might sometimes be wiggle room in the category “contributions to a collective work”). Consequently, it is necessary for the contract between the creator and the client to specify that the creator assigns the copyright to the client. D. C. to the contrary notwithstanding, I don’t think “client owns the work product” suffices to create such an assignment.

        Incidentally, a corollary of the necessity to assign the copyright rather than vest it immediately in its commissioner is that, under current law, some 35 years later the assignor may “claw back” the copyright from the assignee. This was largely intended to benefit authors, composers and the like who sell their output for a pittance and then find themselves outside looking in if the work proves to be a great commercial success. As you might imagine, 35 years is a very long time indeed for any software product, so this is of limited significance in software, except for some rare bits of original code that might persist in very popular and long-lived products.

      • Interesting. So it’s assigned automatically when some sort of software “work” is completed. Example: a new component of iOS developed by XYZ for Apple; the moment this component becomes subject to copyright protection the rights are assigned to Apple. Correct?

      • vrkoven

        As a general rule, wrong. In the case of a component of a larger software package, there *might* be an argument that the component is a “contribution to a collective work,” but remember that this category was created with newspapers, magazines and encyclopedias in mind. I admit I haven’t done an exhaustive search of the case law, and suspect in these cases, with large companies, the contracts have been worded to cover both work for hire and assignment, belts and suspenders [braces to the cousins] as it were. In any case, the contract would have to state specifically that the developed software was intended to be work made for hire.

    • I’d have to disagree with Vance: “Customer owns the results” could easily be argued to be clearly an implied agreement to assign. On your side of the pond, see, e.g., the dictum in ¶ 54 of the High Court’s Fresh Trading case,

      On the patent side in the U.S., there’s definitely precedent for implied-in-fact invention-assignment agreements, viz., for employer ownership of employee inventions when the employee either was hired to invent or was “set to experimenting.” See, e.g., Teets v. Chromalloy Gas Turbine Corp., 83 F.3d 403, 408-09 (Fed. Cir. 1996); see also, e.g., Miller v. GTE Corp., 923 F.2d 868 (Fed. Cir. 1990), later proceeding, 788 F. Supp. 312 (S.D. Tex. 1991) (disclosure: I represented GTE, which later became Verizon).

      So if I were representing Customer (and assuming that the game was worth the candle), I’d certainly argue that the contract term “Customer owns the results” was an all-but-express agreement to assign, however inartfully drafted.

      That said: Customers frequently do overreach in insisting on owning all rights in the results that they hire service providers to produce. In negotiating a contract, my typical response to such overreaching is that Customer will be getting the benefit of Supplier’s ownership of its work for previous customers, and that as part of the agreed pricing, Customer must agree that Supplier will likewise own its work for possible use for future customers — if Customer insists on ownership, then the price will have to be renegotiated. (That often solves the problem.)

      Another possible compromise is to specify that Supplier will own “any concept, idea, invention, strategy, procedure, architecture, or other work, that: (1) is, in whole or in part, created by Supplier in the course of providing services under this Agreement, but (2) is not specific, and/or is not unique, to Customer and its business, and (3) does not include Customer’s Confidential Information [separately defined].”

      • Well, DC, I have looked again at the English case you cite, and I don’t think it adds to the debate over the phrase “Customer shall own the Results.
        In my experience, this phrase appears in contracts that have a separate clause on IP ownership. With respect, I think the phrase is meaningless commercial bullshit, and commercial parties should be told that the emperor has no clothes. But the phrase has spread like wildfire. My experience is that US lawyers fall back on “this is an academic argument” to dismiss the logic that the phrase is inappropriate.

      • More citations, from both sides of the pond, in this book; I don’t know how current the treatment is. (FWIW, the author criticizes courts that have found an implied agreement to assign.)

        As far as being “meaningless commercial bullshit”: I submit that a useful test for a contract term’s efficacy is whether: 1) the term resonates with the business people as satisfactorily expressing what they mean; 2) as written, the parties’ intent is sufficiently clear that the business risk of judicial misinterpretation is acceptably low — of course, that’s a case-by-case judgment call for counsel; and 3) only small benefit would be had by delaying signature to try to revise and renegotiate the term. From the perspective of clients who simply want to get business done and move on, any contract term that passes those three tests can hardly be said to be meaningless commercial BS.

    • Vance, the work-made-for-hire rule applies when the hiring party wants to be considered the author, which would trigger a different copyright term (and also would not trigger section 203’s 35-year recapture rule). As to creating an implied obligation to assign, see the Kozinski dictum in Effects Assoc. v. Cohen, 908 F.2d 555, 557 (9th Cir. 1990) (affirming summary judgment): “Section 204’s writing requirement [17 U.S.C. § 204] is not unduly burdensome; it necessitates neither protracted negotiations nor substantial expense. The rule is really quite simple: If the copyright holder agrees to transfer ownership to another party, that party must get the copyright holder to sign a piece of paper saying so. It doesn’t have to be the Magna Charta; a one-line pro forma statement will do.” (Emphasis added.) Again, if I were representing Customer on the hypothetical facts here, I’m pretty confident I could get past a motion to dismiss on a claim that Supplier had expressly agreed to assign the copyright, and maybe even expressly assigned the copyright.

  3. Having worked at various times and in various capacities for the major water companies, the UK Ministry of Defence and a large US company, I have seen all of the types of extraneous, largely incomprehensible and probably unenforceable types of “contract templates” that you refer to.

    I am probably being naive, but now working for my own tiny company (just me) often with individuals who have never been bothered to wade through all “the small print”, I try to use the minimum ‘verbage’ and impress upon my clients that it is important for any contracts between us to be “simple” and able to be understood by both us and any future party that ‘takes over’ the obligations and responsibilities of either of us.

    • Debra, agreed. In many of our clients’ contracts, once you have dealt with work, payment, IP, confidentiality, publications, duration and termination, and limiting liability, there isn’t much of importance left.

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