Category Archives: Commercial negotiation

Insurance obligations in commercial contracts

lloydsTemplate agreements – particularly those designed for larger transactions such as manufacturing, product trials, distribution or licensing – often include obligations on a party to have insurance against commercial risks.

General approach

Typically, the insurance clause will appear after a clause dealing with liability and indemnities. Faced with such a clause in a contract that you are reviewing, some of the obvious alternative ways of dealing with the clause are:

  1. To say to your client “ask your insurers whether you comply with the clause”. Depending on the answer, and on the wording of the clause, it may be safe to leave the clause as drafted.
  2. To say to the other party in the negotiations “here are details of our current insurance; we are not going to change our insurance, nor are we going to promise that we have particular insurance” and modify the clause accordingly.
  3. To delete the insurance clause, eg on the grounds that the scale of the deal does not justify the inclusion of an insurance obligation.

Getting advice from the insurer

Sometimes, where advice is sought from the insurers, the lawyer is then asked to review the answer. Depending on the scale and risks of the deal, it may be more important to know the correct answer than just have someone to blame if they gave a wrong or misleading answer. Possible points to consider include:

  1. Is the answer from the insurance underwriter (ie the party to the insurance contract) rather than the insurance broker (a middle-man)? If it is from the broker, is he taking responsibility for the answer (ie you can sue him if he is wrong) or just giving an opinion?
  2. Does it directly answer the question?
  3. car insuranceDoes the answer give the impression that the person answering it understood the question? Sometimes, the individual you deal with at an insurer or broker is a liaison person. He may not have a deep understanding of commercial liability issues, which are at the complex end of the spectrum of insurance questions, compared with say questions about the costs of repair to the CEO’s company car.
  4. In some situations, insurance may be a regulatory requirement, or there may be a code of conduct within an industry that a particular form of insurance will be maintained. The contract may require a party’s insurance to comply with such a regulation or code of conduct. This may lead to supplementary insurance questions of the insurer.

Drafting issues

Insurance clauses sometimes raise drafting issues, including the following:

  1. Sometimes, the wording uses US insurance industry jargon, which doesn’t work when dealing with UK insurance policies and industry practice.
  2. An example of the above is that US contracts sometimes refer to the other contracting party being “named” on the policy of the party that is required to insure. This may not be acceptable to a UK insurer. At most, he may be willing to “note the interest” of the other party on the policy. The lawyer should probably not attempt to second-guess what the insurer will say on this issue, and instead should defer making changes (other than perhaps deleting the obligation to name) until the insurer has commented.
  3. The clause may state that insurance must be maintained for several years after the contract comes to an end. This is because some policies provide cover on what the insurers call a “claims made” [during the year of the policy] basis while others provide cover on a “claims arising” basis. If liability results, for example, from a party’s negligence or breach of contract, litigation to establish that liability may be started several years after the end of the contract. Typically, the time limit under English law is 6 years from the date of the breach of contract. If the policy only covers claims made during the year of the policy, it may be necessary to continue cover for 6 years after the contract comes to an end. The contract drafter may wish to establish with the insurer whether post-contract insurance is needed in respect of the types of liabilities that the insurance clause requires, and modify the clause accordingly.
  4. In very heavyweight insurance clauses, there is sometimes an obligation on a party to get its insurers to notify the other party if cover is ended or the terms of the policy are changed. There is likely to be a cost associated with such a service, if the insurer is even willing to do it. In many cases, if faced with such an obligation, a first response may be to seek to delete it from the contract.
  5. Sometimes, the clause will use wording requiring a party to have insurance against all risks arising from the contract. This is probably an impossible obligation to meet, as all insurance is limited in scope, subject to conditions and subject to a financial cap. At the very least the obligation should be reduced to one of obtaining insurance that is reasonably available at a reasonable cost, and ideally one would be more specific as to the types, amount, etc.

Standing back from the contractual obligation

no riskContracts impose obligations. If a contractual obligation is not met, a party may suffer loss and may seek to recover its loss from the party that breached the obligation. Some contracts specifically address the question of losses arising from breach, eg by including indemnities. Bringing a claim for breach of contract, or under an indemnity, will be pointless if the breaching party doesn’t have the resources to meet the liability. Those “resources” might include having insurance.

Insurance can, therefore, be a useful way of mitigating contractual risk, and contractual obligations to insure can part of a package of risk management measures. Sometimes, though, contractual obligations to insure are excessive for the scale and risk of the contract. IP Draughts has an impression that sometimes insurance clauses are included in a contract because they were in the template that the drafter used when preparing the contract, rather than because the commercial manager who is responsible for the deal really thinks the obligation is important.  In such cases, it may not take much effort in negotiations to agree to remove the insurance clause from the draft contract.

 

 

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You say tomato, I say long-term industrial strategy

dameIP Draughts has come rather late to the news that the UK Government has commissioned another study on how universities and businesses can work better together. It is called the Dowling Review, after its leader, Professor Dame Ann Dowling, who (among many other illustrious positions) is both President of the Royal Academy of Engineering and Professor of Mechanical Engineering at the University of Cambridge. It is due to report soon.

According to her letter of appointment, “the objective is to help researchers to understand better the interests of industry”. The letter goes on to describe other things that Dame Ann should do, but this quoted sentence comes first. It seems to IP Draughts a poor start to a brief. It assumes that the reason why industry and academia are not working better together is a lack of understanding on the part of researchers, rather than a mutual incomprehension, and that researchers need the help rather than industry. It seems to reflect a view that, if only academia could be more focussed on the needs of British industry, the economy would improve. It fails to address the possibility that British academia is thriving and doing what it is supposed to do, and that the fault lies with British industry, for being too small, risk-averse and lacking in financial resources to make proper use of the output of universities, unlike industry in other countries, such as the USA or Germany. Some would say that British academia is has a much higher, international reputation than British industry.

IP Draughts has advised on many “strategic relationships” between universities and industry over the last 30 years. Some have followed a conventional path, governed by a research funding agreement. Others have tried to find a new way of working, through joint ventures, centres of excellence, high-level consultancies, embedding industrial staff in university departments, and many other models. Often, a rationale for these fancy structures has been to create an environment in which academic researchers and industry can work closely together.

half bakedWhichever model is used – and IP Draughts has wasted too many hours of his life trying to reduce half-baked, strategic visions into a meaningful, contractual form – the tension between academic objectives and business objectives remains. It may be mitigated by creative ways of working, but it cannot be removed entirely. Industry and academia have different, underlying objectives. The differences are not rough edges to be smoothed into a more efficient shape through the good offices of a junior minister at the Department for Business Innovation and Skills. They are meant to be different.

For some light relief from these thoughts, IP Draughts rewrote Dame Ann’s letter of engagement, focussing it on the legal disciplines rather than industry. It came out like this:

Dear Ann
You have kindly agreed to develop advice and recommendations for BIS on how Government can support relationships between practising lawyers and legal academics.
The objective is to help academics to understand better the interests of practising lawyers. Increased collaboration linking the long-term strategic needs of UK legal practice with our outstanding legal research capabilities can deliver broad based benefits. Researchers will be engaged in world-class research on identifying what is really needed by legal practitioners. UK legal practitioners gain a competitive edge in bringing innovative products and services quickly to market.
We recognise that for law firms to share their long-term commercial strategies with academic researchers requires the foundation of a trusting relationship at the level of individuals and their immediate teams.
We would like you to consider how Government can help initiate and support such relationships for a broad range of law firms of different sizes and types, and the implications of the varying characteristics of different sectors.

profitSome would say this is exactly what law professors should be doing. However, even IP Draughts in his most irritable moments would admit that there is a role for legal academics that is not focussed on making greater profits for the partners of Freshfields and other law firms. Even if this helps the UK economy as a whole: legal services are a small but steady contributor to the UK’s balance of payments.

Coming back to the needs of industry, IP Draughts would like to suggest that all parties engaging in large collaborations between academia and industry, including their business and legal advisers, should be required to attend an induction course in which they learn about the priorities of the other party in the collaboration. The course should take at least a couple of hours for each side of the collaboration, and should cover such topics as:

  • legal purpose of the organisation and associated constraints (eg charity laws, or Companies Act duties)
  • organisational and individual objectives and priorities
  • how this project fits within the larger objectives of the organisation
  • what individuals are judged on (eg peer-reviewed publications, helping make a profit)
  • management structures, including decision-making authority

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Managing the negotiation of multi-party research agreements

herding catsIP Draughts was recently instructed to assist a university client with the drafting and negotiation of a research collaboration agreement between 33 parties. He offers the following suggestions for managing a process of this kind, based on this and earlier experiences. The suggestions assume that you or your client are responsible for leading and managing the negotiations.

These suggestions could be relevant to many kinds of multi-party agreement. It so happens that, in the present case, the research is funded by the European Commission under the Horizon 2020 funding programme. Under the funding rules, the parties are required to enter into a consortium agreement (another name for a research collaboration agreement) before the funding agreement is signed. IP Draughts’ client, as Coordinator of the project, has the responsibility to ensure that this happens.

horizon 2020None of the suggestions is revolutionary. What is important, in IP Draughts’ view, is following a negotiation process that is adapted for negotiating with large numbers of parties, communicating well with the parties, having a clear timetable for the different stages of the negotiations, and allocating sufficient time and resources to ensure that the process is followed through to a conclusion.

  1. Establish a timetable and process. Work backward from the date when the agreement must be signed. Split the available time into blocks that give a sufficient period for each round of negotiations. Make sure enough time is allowed to prepare the first draft and to prepare comments on that first draft. It may be possible to reduce the time allowed for later rounds. Produce a written timetable and try to get it agreed by the parties.This will have two desirable effects: (1) it will inspire confidence that you are managing the process properly; and (2) it will enable you to keep the negotiations “on track”, and make it easier for you to disregard comments that are not made on time.
  2. Use a well-regarded template agreement. If possible, and if the client agrees that it is appropriate, base your draft agreement on a template that is commonly-used in the industry sector. Doing this, and telling the parties that you are doing this, should help to reassure them that they don’t need to “reinvent the wheel” by makingdesca lots of comments on the draft. You are trying to minimise a negotiation process that has the potential to be very unwieldy with large numbers of parties. In the present case, the parties have agreed to base the consortium agreement on an industry template known as the DESCA agreement. It is not perfect (and IP Draughts spent time cleaning up some of its style and content) but using it is likely to be more productive, in the present case, than producing a better but unfamiliar document.
  3. Spend time on the first draft. Don’t be rushed by colleagues who have no idea what goes into an agreement of this kind, into sending out a first draft that has not been carefully thought through (eg a template agreement that has not been adapted to the circumstances of the project). Be willing to use some of the precious negotiation timetable to get the first draft right. You are trying to manage a negotiation process that could easily get out of hand with numerous parties from different countries. Sending out a good first draft should reduce the volume of comments. Developing a good draft depends on taking detailed instructions from the client, eg on issues such as project content, governance, and IP issues.
  4. Communicate. Explain the drafting and negotiation process to the parties, and keep explaining as you go along. Make it seem reasonable (which of course it will be). Tell them what to expect, and deliver against those expectations. Try to make sure that you are communicating with the right people – ask each party to provide the name and contact details of the person who will be leading the contractual negotiations, eg a lawyer or contracts manager.
  5. Establish a workable review process. In the present case, getting back 32 marked-up drafts of the agreement would be a logistical nightmare. Consider sending out a comments table, on which you summarise each clause of the draft agreement (perhaps identifying any deviations from the template on which it is based) and have a blank column of the table on which you invite parties to insert their comments, instead of producing a new draft. Confirm that you will do your best to address comments, as long as they are consistent with the objectives of the consortium. This approach should have two desirable effects: (1) limiting the number of comments, eg on drafting points (it is very tempting to make drafting comments when you are marking up a draft), and (2) giving you greater flexibility to draft wording to reflect the principles, rather than feeling obliged to accept specific drafting, which will sometimes be sub-optimal or inconsistent with the drafting style of the rest of the document.
  6. Try to set expectations for later rounds of comments. After the first set of comments has been received and assessed, and second draft of the agreement is issued, ask people to limit their further comments to essential points, with a view to reducing the volume of comments at each round. This won’t always work, as some parties may just keep plugging away for all of their points to be accepted, but at least you can try. It may help to set this expectation by explaining it to the parties at the outset of the negotiation process.
  7. Build in time at the end. No matter how strictly you try to enforce a timetable, there will always be someone who doesn’t follow it, or who insists on points even if you think they are not workable or consistent with the larger picture (eg if other parties have made comments that contradicts those points). You may need a few days leeway before the hard deadline, to resolve any last minute issues. On a different point, you need to build in time for getting the agreement signed. Some parties may say things like “our only authorised signatory is on holiday and won’t be back for a week”.
  8. sign hereAgree the signing process in advance. It is good to explain to people what they must do to sign and return the agreement, so that there are no misunderstandings or disagreements over whether a party has formally entered into the agreement. A common method is to get each party to apply an ink signature to a copy of the final agreement (which has probably been circulated by the lead party in an uneditable pdf version), scan the signature page into the computer, and email an electronic copy of that signature page to the lead party. It might be intended, for example, that an organision makes an unconditional offer to enter into the agreement when it sends that electronic copy to the coordinating party’s representative by email, and that the agreement as a whole comes into effect when the coordinator’s representative sends out an email to all parties, confirming that he has received signed copies from all of them. At least under English law, the key point is to agree (expressly or by implication) what the process will be. See this Law Society practice note on signing agreements by virtual means. English law is usually flexible (at least in the case of agreements under hand) as to how the parties formally enter into a contract. In some cases it may also be desirable to agree with the other parties, at the start of the negotiations, what will happen if some but not all of them sign. Can the agreement go ahead if a few people don’t sign? Should a  mechanism for this be written into the collaboration agreement? That won’t work in the present case, as all parties must enter into the consortium agreement before the funding agreement is signed.

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10 tips for dealing with non-performing licensees

performanceTypically in exclusive licence agreements, and sometimes in non-exclusive licence agreements, the licensee has obligations to “perform” – to bring licensed products to market and to maximise sales. One of the reasons for including such obligations is that the licensor wants to avoid the  licensee “sitting on” the licensed IP, failing to exploit it yet preventing the licensor from doing so.

Below are 10 tips for dealing with the situation where a licensor considers that its licensee (under an existing licence agreement) is not performing its obligations to exploit the licensed IP, and is unable to get satisfactory information from the licensee that provides reassurance that the licensee is in compliance with its contractual obligations. In IP Draughts’ experience, this situation is not uncommon. Sometimes, it happens because the licensee is undergoing a corporate reorganisation and the project in which the licensed IP is used has been put “on ice” for many months while a new strategy is developed; the licensee may be unwilling to admit this has happened. Other times, the licensee is just very poor at communicating, or doesn’t wish to spend the time and effort necessary to keep the licensor fully informed of progress. On a few occasions IP Draughts has encountered a licensee who has stopped developing the licensed technology altogether, but is unwilling to admit this or negotiate a termination agreement, or sees no pressing need to do so. Meanwhile the licensor’s patent life is ticking away.

treborIn all of these situations, the licensor’s attempts to communicate meaningfully with the licensee have failed, and something a little stronger is required. It may not be necessary to go as far as starting litigation, or formally terminating the licence agreement (though sometimes it will), but the licensee needs to see a determined course of action on the part of the licensor that is likely to lead to these outcomes if the licensee fails to respond appropriately.

Having said that, IP Draughts is not in favour of bluffing as, once the bluff is called, it is difficult to get the licensee to take the licensor seriously thereafter. Steady, unflashy, unexaggerated, clear, patient, determined, timely and above all believable action, with consistent follow-through, is the order of the day.

These are general tips, and different actions may be required in individual situations. The most important point to make is that you should consult at an early stage with your legal adviser and together work up a strategy for dealing with the non-performing licensee.

prejudiceThe tips are set out in order of activity, but some of them should be happening at roughly the same time. For example, it is conventional to assert rights in an “open” letter at the same time as making proposals for settlement in a “without prejudice” letter. Your legal adviser should be familiar with all of these steps and advising you on them.

  1. Take legal advice. This point goes before all others. Don’t think in terms of legal advice meaning that you have to escalate the problem into something larger than it needs to be, or spend a huge amount on legal fees. A good lawyer will help you to take appropriate action, which may be a very light hand on the tiller in the early stages, to make sure you don’t steer into the rocks. At some stage, it may be appropriate to obtain a formal opinion on your rights and remedies, eg before you decide to give formal notice of breach or terminate the agreement.
  2. Read the contract. What, exactly, are the licensee’s obligations under the contract, and what are the consequences of failure to perform the obligations? Sometimes, people make assumptions on these points without checking the contract carefully.
  3. Marshall your facts. Put together a file of all relevant documents, including the agreement, correspondence, and reports. Make sure that people in your organisation who have had dealings with the licensee have made file notes of those dealings, particularly if they are relevant to the question of performance, eg if the licensee made statements on the subject in conversations. But do all of this in a disciplined way, based on advice from your lawyer (see above). Too often, a situation of this kind causes clients to send internal emails to one another that comment on the rights and wrongs of the situation. Those emails and other documents may be disclosable to the other side in litigation, and they may say things that don’t help your case. Your lawyer will be able to advise you on whether such communications and documents (a) should be avoided altogether, or (b) should be conducted in a managed way. For example, sometimes it may be appropriate to send such emails to the lawyer and thereby take advantage of “legal privilege” exceptions to disclosure. Other times, discussions should happen face-to-face, and not be recorded.
  4. Reserve your rights. If you have evidence that suggests that the licensee is not performing, don’t wait for weeks before communicating with the licensee. Sometimes, it is important to send a holding letter in which you indicate that you have concerns and are investigating them, and in the meantime you “reserve all your rights”. This should help to avoid an argument that you have waived your legal rights by delay.
  5. Follow a clear strategy. Develop a clear strategy for dealing with the dispute, and don’t fall into the trap of just reacting to communications from the licensee. Follow through on your strategy in a steady way. Make sure that senior management has bought into the strategy and is not deflected by noise emanating from the licensee (or from doom-merchants within your organisation). At the same time, keep re-assessing your options in light of any further information received from the licensee.
  6. Give notice of breach. Once you know your facts, have taken legal advice and are clear that a breach of contract has occurred, you may wish to give formal notice of that breach to the licensee. Think ahead a few steps as to what you want to happen. Are you intending to go through with termination or just try to shock the licensee into action. How will they react to a formal notice? How will your organisation react if the licensee escalates hostilities in light of the formal notice? Is your organisation prepared to follow through?
  7. Try to keep talking. In parallel to any formal legal action, such as giving notice of breach, it is usually desirable to try to engage in a dialogue with the licensee, with a view to resolving what has now become a dispute. A conventional way of doing this is to send the licensee communications that are marked “without prejudice” and which are intended to be part of negotiations to settle the dispute. These communications are run in parallel to the “open” communications that set out your organisation’s legal position. An advantage of without prejudice communications is that they shouldn’t be seen by the judge and therefore it is easier to be a little freer in what you say. As with all of these tips, individual jurisdictions may have different rules on these matters, so it is important to take advice from a local lawyer.
  8. Don’t lose focus. Dealing with a non-performing licensee may not seem the most valuable or inspiring use of your time, particularly if you think the reason for non-performance is that the market for the licensed products is not good. It may be tempting to try to deal with the matter during lulls in your workload, when you are not busy doing deals that look likely to generate greater income. Unfortunately, this attitude can result in a patchy and inconsistent approach to resolving the dispute. This often looks weak, and results in delays. In IP Draughts’ experience, the best way of working to resolve disputes is to be steady and consistent. If the licensee doesn’t respond to your letter, don’t wait 6 weeks before following up. Make a note in the diary to follow up in, say, 16 or 17 days (2 weeks plus a couple of days for postal delays). Keep acting in a timely way. Plan ahead as to how and when you will escalate if the licensee ignores you. Don’t act precipitately, but also don’t fail to act. The best credit controllers take a similar approach and so should you.
  9. Be prepared to compromise. Even if you think you have a cast-iron case, it is usually worthwhile to bend a little to achieve an agreed outcome. And most cases are not cast-iron, in which case it becomes even more attractive to try to settle the dispute.
  10. Try to enter into a written settlement agreement. Even if the outcome is to terminate the agreement, it is generally desirable to have an agreed basis of termination, recorded in a termination and settlement agreement.

 

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