Category Archives: Commercial negotiation

10 points to look for in a draft agreement

once overYou are sent a draft agreement and asked to review it. No other instructions are given. You are expected to know what the client wants, without asking. In the case of technology-related agreements, perhaps they think you don’t need to know the subject-matter, or that you wouldn’t understand it.

Some people are willing to go along with this, and to advise as a ‘paper exercise’ without knowing anything about the subject-matter of the deal, what commercial discussions have already taken place, what are the client’s objectives and priorities, and so on.

IP Draughts is very reluctant to advise on this basis.

In IP Draughts’ experience, digging into the details and discussing the project with the client’s representative is usually essential, and is always efficient, if the agreement is to be well-drafted and protect the client’s interests. Persistence is sometimes required to coax useful instructions out of a client who may be wary of lawyers and legal documents, or who may simply not appreciate what information his legal adviser needs in order to conduct a useful review.

tenWhether or not such a discussion takes place, there are points that come up time and again in contracts drafted by others, which an experienced lawyer or commercial manager is likely to consider during a review of the draft. They are not necessarily the most important points to consider for an individual transaction, but if the terms proposed in these areas are not appropriate, they will probably need to be changed. IP Draughts’ list of the top ten follows. Some of these points may overlap, eg a term may be both odd and anti-competitive.

  1. Which contract law applies and is it a binding contract? Some readers may be surprised that this point is placed first in the list. After all, isn’t the law of the contract a deal point that gets traded during negotiations? Perhaps, but in order to give legal advice on a contract, it is first necessary to establish which law applies. If the adviser is not qualified to advise on that law, he should point this out to the client and suggest that he takes advice from a suitably-qualified lawyer, unless he already has an understanding with the client that these points are to be taken as read and that advice is being given on the assumption that the law of the contract is one that the adviser is familiar with. If the agreement does not appear to meet the requirements for a binding contract, eg because it is an ‘agreement to agree’, this should be pointed out to the client.
  2. Has the right type of template been used? Most contracts nowadays are prepared using a template. Very few agreements, in IP Draughts’ experience, are written entirely ‘freehand’. A useful point for the adviser to consider is whether an appropriate template has been used. Sometimes the drafter picks the wrong template, and it may speed negotiations to suggest a different template before the detailed wording is reviewed. Linked to this point is whether the template has been prepared to be suitable for a different system of laws. For example, US templates are sometimes seen, even when neither party to the proposed contract is based in the USA. While it may not be possible to change the template, recognising its origins may flag up to the adviser some general points that will need to be considered. For example, do terms such as “represents” and “indemnifies” have meaning under the law of the contract, particularly in civil code countries? Generally, liability-related clauses may require additional scrutiny to ensure that they are effective under the law of the contract.
  3. Do the terms seem to be generally well-drafted? An initial, high-level review of the draft agreement may reveal whether it seems to be generally well-drafted and how much work might be required to bring the drafting up to an acceptable standard. The client may wish to know the adviser’s views on this point before time is spent in extensive redrafting. There are many reasons why the drafting may be sub-standard. For example, the drafter may not be a specialist in contract drafting, and may have bolted poor-quality wording into a well-drafted template. Or the drafter may have used the text of a previous agreement, and have failed to modify it appropriately to reflect the different circumstances of the present transaction.
  4. Have the right entities been named as parties? Has the client considered which legal entities should be the parties to the contract? In the case of a group of companies, does the contracting party own the relevant IP and other assets that are needed for the contract, and does it have sufficient financial and other assets to meet any liabilities that it may incur under the contract, or should a parent company guarantee be sought? In too many cases, IP Draughts finds that the name of the party at the top of the agreement is different from the name above the signature blocks. Or that the name is incomplete, eg missing “Ltd” or “Inc”, the place of incorporation, or some other identifier. Who the parties are is of critical importance to any contract.
  5. Do the definitions make sense? Many of the contracts on which IP Draughts is asked to advise have detailed definitions of terms such as intellectual property, products, field, and so on. These definitions are key to interpreting the parties’ rights and obligations under the contract. Sometimes, definitions don’t make sense or are circular, eg because two definitions cross-refer to one another in a logic loop. In some cases, definitions are not used in the contract, or terms are capitalised but not defined. These points may be overlooked by a careless drafter, but they may be critical to the interpretation of the contract.
  6. Are the main terms of the contract – work, payment, etc – clear and sufficiently precise? If the client has not provided detailed instructions, any review of these terms may have to be limited to a general sense check.
  7. Are there ‘odd’ terms: very onerous, one-sided, unusual or missing? An experienced contract drafter will recognise terms that stick out like a sore thumb, and which a client will probably expect you to point out. For example, in a licence agreement, if the licensor is being asked to license improvements without any limits on the scope of the improvements or the duration of the obligation, this would be something that IP Draughts would wish to point out to a licensor client. missMissing terms, such as an absence of a limitation of liability clause, may be more difficult to spot on a quick review, but the reviewer will generally want to stand back from the draft and consider whether any obvious terms are missing.
  8. Are there anti-competitive terms? A legal review of a draft agreement will usually include spotting whether there are any obviously anti-competitive terms in the agreement, which might fall foul of competition (antitrust) laws. Common examples might include exclusivity provisions in a research collaboration agreement, or obligations on a licensee or distributor to charge a particular price for products, which would amount to price-fixing. There are many other examples of terms which should ring alarm bells in the mind of the legal adviser, when reviewing a draft agreement.
  9. Are the liability terms (warranties, indemnities, limits of liability) acceptable? There are several issues here, including (a) are there appropriate warranties or disclaimers for each party, (b) should the client be limiting liability for breach of contract, etc, (c) is it acceptable for the other party to limit liability, (d) are the liability clauses clear and legally effective, (e) are there indemnities, and do they make sense, and are they acceptable and have suitable conditions been included, eg as to conduct of claims, and (f) are the indemnities subject to the clauses that limit liability? Unfortunately, some liability terms, particularly indemnities, are drafted in a dense, legalistic manner, and their meaning is not always as clear as it should be.
  10. How can the agreement be terminated, and what happens after termination? In some contracts, this topic is far more important than its placing in this list would suggest. For example, a sponsor of research work may need to be able to stop the work on short notice if poor results are obtained from the research or if its priorities or budgets change. The consequences of any early termination, including financial consequences, should be spelt out in the contract. Don’t accept a clause that simply says that clauses that are meant to survive termination will survive. This is very lazy drafting. The clauses in question should be identified.


Filed under Commercial negotiation, Contract drafting

Lengthy contracts will cause the heat death of commerce

heat deathThere is a theory, partly attributed to the nineteenth-century scientist Lord Kelvin, that the increasing entropy of the universe will eventually lead to its heat death.

IP Draughts is currently conducting experiments that may lead to a new theory of commerce: that the increasing length of contracts will eventually lead to the heat death of the business world. A time will come when all available energy for business activities is diverted into the negotiation of overly-complex contracts; when the underlying business activities must inevitably cease, modern civilisation will freeze, and we will revert to an agrarian economy in which concepts such as intellectual property become meaningless.

On IP Draughts’ desk is a draft publishing agreement that he has been asked to sign. It is for the fourth edition of one of his books. His contact at the publishing house has helpfully highlighted the changes that are proposed over the contract that was signed for the third edition. According to a word count, the new contract will comprise 5,645 words, compared with 2,613 words for the previous version.

IP Draughts wonders how often there is litigation in relation to publishing contracts for legal texts. He has not heard of any, and the small sums of money at stake make litigation seem unlikely as a cost-effective strategy. So why does a publisher feel the need to more than double the length of the contract, and in the process incorporate aggressively one-sided terms?

Could it be that the publisher is now employing in-house lawyers, who are asked to review the company’s existing contracts? And that many lawyers, if not given clear direction and instructions, will tend to add clauses to protect their client’s interests, leaving it to others to decide on whether the overall balance of the document is commercially appropriate? And that many clients are not that interested in contracts, and will tend to follow their lawyer’s recommendations?

IP Draughts has no information on whether this has happened in the present case. He does, however, recall that another legal publisher who presented a contract to him recently had also revised their standard contract, but had clearly taken a policy decision to simplify their template and make it more even-handed. IP Draughts knows which publisher he is more inclined to offer new projects to.

Someone once said that to understand all is to forgive all. (The internet is divided as to whether the first author of this piece of wisdom was Voltaire, Madame de Staël or Evelyn Waugh.)

Viewed as a paper exercise, and from the perspective of protecting the publisher, one can understand the motivation behind many of the revisions in the current draft contract. But do the revisions result in a better contract? Consider the following example. First, the previous wording, and then the new version.

If in the Publisher’s view the Work as delivered requires amendment to become acceptable they shall give the Author the opportunity to make such amendments. If the Author is unable or unwilling to do the work him/herself …

If in the Publisher’s sole view the Work as delivered is not professionally competent and/or does not conform in nature, scope, length, format and style to the specifications agreed with the Publisher and/or with any synopsis or proposal or other material upon which the Work was commissioned or acquired and/or does not comply with the warranties given to the Publisher hereunder the Publisher shall give the Author the opportunity to make such amendments or to make arrangements for this to be done at the Author’s sole expense. If the Author is unable or unwilling to do the work him/herself …

There seems to be a blizzard of new words in the second version that don’t add much to the basic obligations of the clause. Leaving aside general drafting issues such as the sentence length and complexity, a few points jump out:

  • IP Draughts is not sure what the difference is between a “view” and a “sole view”.
  • Surely the Work either complies with the specifications or it doesn’t. Why is it useful to pick out “nature, scope, length, format and style”?
  • The drafter has not covered himself in glory by leaving in the words “such amendments”. Here, “such” links back to the word “amendment” in the first line of the old version – a word that doesn’t appear in the new version.
  • If IP Draughts were being really picky, he might change the word “view” to “opinion”, and “amendment” to “revision”.

Usually, IP Draughts is a hired hand, reviewing contract terms for someone else who takes the commercial decision on what is acceptable. In this case, he is the principal, and he strongly dislikes being asked to sign a contract that is more than twice the length of the previous version, contains many provisions that worsen his contractual rights and obligations, and contains indigestible prose.



Filed under Commercial negotiation, Contract drafting

Negotiating techniques in Shakespeare

henry vIP Draughts and the Draughtatrix have just returned from a visit to Stratford Upon Avon, to see a production of Henry V.

It was well worth seeing even if, like IP Draughts, you don’t find Shakespeare’s history plays as engaging as some of the tragedies and comedies.

IP Draughts was pleased to hear a greater focus on articulating the meaning of the words than in some other productions that he has seen at Stratford. The excellent Oliver Ford Davies, as the Chorus, was particularly good at communicating his lines.

Olver Ford Davies in an earlier role as a Queen's Counsel

Oliver Ford Davies in an earlier role as a Queen’s Counsel

Just as IP Draughts’ attention was flagging, part-way through the second half, Shakespeare has the representatives of England and France enter into negotiations for a merger of the French and English thrones. As part of this corporate transaction, Henry V acquires the French king’s daughter in marriage. (Like many M&A deals that are fuelled by personal ambition and ego, this turns out to be an unworkable vanity project, and is reversed a generation later.)

Shakespeare reminds us of some core elements of successful negotiations:

1. Read the documents carefully and discuss their meaning.

King of France: I have but with a cursorary eye
O’erglanced the articles: pleaseth your grace
To appoint some of your council presently
To sit with us once more, with better heed
To re-survey them…

2. Assemble a good negotiating team, give them clear instructions and authority to negotiate; leave the CEO out of the detailed negotiations.

King Henry V: Go, uncle Exeter,
And brother Clarence, and you, brother Gloucester,
Warwick and Huntingdon, go with the king;
And take with you free power to ratify,
Augment, or alter, as your wisdoms best
Shall see advantageable for our dignity,
Any thing in or out of our demands,
And we’ll consign thereto.

3. Involve people who can mediate solutions.

Queen Isabel: Our gracious brother, I will go with them:
Haply a woman’s voice may do some good,
When articles too nicely urged be stood on.

4. Don’t concede too early.

French King: We have consented to all terms of reason.

Exeter: Only he hath not yet subscribed this:
Where your majesty demands, that the King of France,
having any occasion to write for matter of grant,
shall name your highness in this form and with this
addition in French, Notre trescher fils Henri, Roi
d’Angleterre, Heritier de France…

5. Don’t claim it is a deal-breaker if it isn’t. Secure something of benefit in return for an unattractive concession.

French King: Nor this I have not, brother, so denied,
But your request shall make me let it pass.

King Henry V: I pray you then, in love and dear alliance,
Let that one article rank with the rest;
And thereupon give me your daughter.

French King: Take her, fair son, and from her blood raise up
Issue to me; that the contending kingdoms
Of France and England, whose very shores look pale
With envy of each other’s happiness,
May cease their hatred, and this dear conjunction
Plant neighbourhood and Christian-like accord
In their sweet bosoms, that never war advance
His bleeding sword ‘twixt England and fair France.

The last lines of the French King, above, could be used for the press release.

When this French King, Charles VI, died in 1422, King Henry V’s son (Henry VI of England) did reign as King of France for 7 years. But then there was a hostile takeover by some French investors who installed Charles VII. Eventually, a white knight in the form of Joan of Arc helped Charles VII to complete the demerger of France and England.


Filed under 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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Filed under Commercial negotiation, Contract drafting