Category Archives: Contract drafting

The perils of advising on contracts

perilA recent case in the English High Court illustrates several points: the need for care when advising on contracts; that proving negligence based on oral advice is difficult; that failing to meet the required standard of care doesn’t give the client a blank cheque for all commercial losses, some of which might have been incurred even if perfect advice had been given; and that people can be obstinate and spend far more on bringing a claim than is justified. Oh, and that coy references to a “former CEO” who is referred to repeatedly in the judgment but not named are fairly pointless in an era of online social media.

The case of Commodities Research Unit International (Holdings) Ltd & Or v King & Wood Mallesons LLP [2016] EWHC 727 (QB) (05 April 2016) was reported on BAILII last week. King & Wood Mallesons, formerly known as SJ Berwin LLP, had advised on the termination of the employment contract of an unnamed “former CEO”. (Hint: if you search on LinkedIn for CEO CRU Group, the identity quickly becomes clear: the individual in question has publicly stated his former employment at that company and the dates on which he was employed.)

Various allegations of negligence were made against Berwins, including allegations that advice was given in meetings. All of the allegations were dismissed except for one. CRU Group sent Berwins the employment terms of the CEO and asked for advice.

UK employment lawyers will be aware of the legal implications of including a clause in the employment contract that allows the employer to terminate immediately and make a payment in lieu of notice, sometimes known as a PILON clause. For reasons that need not concern us here, the omission of the clause potentially affects the enforceability of post-termination restrictive covenants as well as the tax treatment of severance payments. In the present case, the presence or absence of a PILON clause affected the date on which termination of the employment occurred, and whether certain rights under a long term incentive plan vested by that date.

no pylonesThe employment terms that were sent to Berwins did not include a PILON clause, and Berwins advised on that basis. However, the terms that they saw included a reference to “the company’s general terms of employment” which they failed to notice. At a later time, after the advice was given and used, the general terms of employment were identified, and they did include a PILON clause.

The court held that Berwins had been negligent in failing to pick up on this reference and ask for a copy of the general terms of employment at the time they advised.

The advice was used by CRU Group when negotiating an exit agreement with the CEO. In light of the commercial pressures of the negotiations, it might not have made any difference if CRU Group had received correct advice on this point. The court held that there was a 35% chance that, if correct advice had been given, the financial terms of settlement would have been more in CRU Group’s favour, to the tune of £337,500. On that basis, the court awarded 35% of £337,500 to CRU Group, or £118,125.

CRU Group had been claiming a much larger sum, well over £2,000,000, including the costs of litigation with the former CEO of nearly £1,000,000. IP Draughts wonders what the costs of the present case were, which involved 5 days of court hearings and the use of leading counsel on both sides, not to mention the professional witnesses who included leading counsel who had advised on the litigation with the CEO. He suspects that an award of £118,125 may be close to a Pyrrhic victory.

IP Draughts is left speculating why Berwins failed to pick up on the reference to general terms of employment. The responsible partner (Nicola Kerr) had, according to the judge, “a very high reputation as a solicitor providing advice on employment matters”. Was the omission caused by the partner relying on an advice memo from a junior associate, less than 2 years qualified (it appears, from another LinkedIn search) at the time? Was it because the client was apparently extremely difficult, and would not have reacted well to being asked to produce further documents? Was it because the employment terms were set out in various crappy documents, for which Berwins were not responsible, and which may not have been consistent with one another, so that a reference to other terms could well have been a drafting mistake?

Whatever the reason, this case shows the importance of “pushing back” to the client and either demanding further documents where they appear to be relevant, or making clear that advice has been given without the benefit of seeing them.

Leave a comment

Filed under Contract drafting, Employment

In praise of simple contracts

ramblersThis posting may seem to ramble. In IP Draughts’ head there is a theme, but (if you will indulge a pretentious analogy) like Einstein’s unified field theory, it may be difficult to find.

First, consider the desire of large organisations to reduce contracts with suppliers and customers to a standard process that requires the minimum of expensive human intervention. As part of this process, standard contracts are developed.

Each standard contract needs a one-size-fits-all set of contract terms. The terms should be suitable for a wide range of factual situations and be readily agreed with, or imposed upon, a supplier.

To focus the discussion, let’s take one type of contract that is often standardised: an agreement with a supplier of services. IP Draughts has seen this type of agreement used for diverse types of services including:

  • research services
  • specialist courier services
  • the development and supply of software

Standard services agreements have even been proposed to IP Draughts for the provision of legal services, as part of an aggressive, procurement-focussed strategy.

middle of the roadTo make the terms suitable for a variety of factual situations, and to minimise the need for negotiation, the terms should be clear, straightforward, middle-of-the-road, and reasonably protective, while recognising the other party’s legitimate interests. Terms that are based on these features are easier for a supplier to accept and easier for a purchaser to impose, using low-cost administrative staff. Deviate from any of these features and there will be an increase in transaction costs.

Competing with the desire for a simple, inexpensive process is another objective – to minimise legal risk. Some organisations take an aggressive approach to this subject, which is manifested in very ‘protective’ contract terms. These typically include one-sided warranties, liability clauses and indemnities. Often, those clauses are difficult to understand. Sometimes they are not understood by the representatives of the large organisation that is imposing them on a supplier. This becomes apparent during negotiations. Vast amounts of time are spent across the world negotiating these complex provisions,  except in those cases where the terms are just imposed.

Where inappropriate terms are agreed, they are often just ignored. For example, telling a contractor that it must impose identical terms on a subcontractor looks good on paper, but how often does it happen? If your services are couriering patient samples used in clinical trials, and your subcontractor is a major airline, how often will you even try to impose your customer’s standard terms on the airline?

Does the presence of these terms really protect the organisation against legal risk, or are they just a bad habit that is getting worse over time, providing a theoretical rather than practical mitigation of risk?

rpnWhen the standard contract was drafted, it was part of a standard process that was designed in a large organisation. Lawyers were probably involved, but there may have been strong input from process-designers (often accountants), procurement professionals and commercial executives. Some of those professionals may be more comfortable working with numbers than with words. Their skills may lie in managing uncertainty, or people, or commercial situations, rather than closely analysing complex language. It may not be a priority to think deeply about the words used in the standard contract and whether they are optimal for the range of situations in which the contract may be used.

In some cases, the standard terms may have been commissioned from a prestigious outside law firm who can be blamed for any imperfections. This attitude is not likely to result in a simple, straightforward set of terms.

wigWhen disputes get to court, the culture changes. At least in the English legal system, court proceedings are led by people who are good at language, and who may not have much experience of business. In the oral tradition of English barristers, what matters is words and arguments, applied to closely-analysed facts. Barristers and judges are unlikely to have much instinctive sympathy with the modus operandi of large organisations. Throughout their careers they have been self-employed individuals.

These factors may result in the court analysing contract terms in a way that may not have happened at any stage before the contract became the subject of litigation.

All of the above factors lead IP Draughts to the conclusion that standard contract terms should tend towards the simple rather than the complex, and to the reasonable rather than the very protective. This approach assists all constituencies to understand and apply the terms in a meaningful and consistent way, including procurement executives, process designers, contract managers, in-house lawyers and, ultimately, court room advocates and judges.

 

2 Comments

Filed under Contract drafting, Legal practice

When are IP licences implied?

implicitKoncise Drafter is on a roll. Not kontent with spearing the drafters of patent licence agreements (see previous article in this blog), he has turned his attention to patent-licence-deniers – the drafters of contracts for the sale of goods who include a term stating that no licence is to be implied. Ken Adams’ latest blog article dismisses as worthless ‘rote boilerplate’ any contract term along the following lines:

Except as expressly set forth in this Agreement, neither Party grants any license under its intellectual property rights to the other Party.

flavrKen says that he expects patent lawyers to hurl rotten tomatoes at him to express disapproval of his comments. This shows true ignorance. Patent lawyers don’t have rotten tomatoes. They have genetically-engineered tomatoes that stay at a perfect level of ripeness for an extended period, as in the case of the Flavr-Savr tomato.

Discussion of this subject can confuse two, distinct subjects:

  • Licence-denying terms in contracts for the sale of goods.
  • Licence-denying terms in licence agreements.

Clauses in licence agreements that limit the scope of the licence, eg by denying the existence of any licence other than the one explicitly granted, seem unobjectionable. In any event, they are a subject for another day. Ken’s article seems to be mostly or exclusively about the former subject. Within that subject, there are two themes:

  1. Not being sued by the seller of the goods for infringement of the seller’s patents. This theme might be addressed by the seller expressly or impliedly granting a licence to the buyer, or alternatively disclaiming such a licence. Ken’s comments focus on this theme.
  2. Not being sued by a third party for infringement of the third party’s patents, when using the goods that have been purchased from the seller. This theme might be addressed by the seller expressly or impliedly warranting that the buyer won’t be sued for infringement by a third party, or by indemnifying the buyer against third party claims, or alternatively by disclaiming such a warranty.

Within these themes there are two discussion points:

  • Are any such terms implied as a matter of applicable law?
  • Is the court that has jurisdiction to hear disputes over the contract likely to decide that those implied terms are effectively removed from the contractual relationship by a contract term that is expressed in general terms and denies that the contract contains any implied terms?

Ken’s blog article focuses on the position under US laws and he concludes that a general ‘no implied terms’ clause ‘isn’t worth the space it occupies in a contract’. Note that this isn’t saying that the clause is 100% worthless. Rather, it is saying that for most contracts, the clause should be omitted.

Patent lawyers are used to seeing research materials being sold with a limited use or ‘label’ licence that allows the purchaser to perform certain research activities with the materials, but does not allow commercialisation of the materials. For example, see this one. This is very much a special case and not particularly relevant to the vast majority of contracts for the sale of goods. Nevertheless it illustrates contract drafters, particularly but not only in the USA, attempting to sell goods without the unrestricted licence that might otherwise be implied as a matter of national law.

What terms are implied, in the absence of special contract terms, may vary from country to country, but there seems to be a common theme that the purchaser should not be sued for IP infringement.

Sale of goods legislation seems to focus more on point 2 above than on point 1; in other words, third party IP. For example, see article 2-312(3) of the Uniform Commercial Code,  article 42 of the United Nations Convention on Contracts for the International Sale of Goods, and section 12(2)(b) of the (English) Sale of Goods Act 1979 (and associated case law, eg the Nissly case).

exhaustedPoint 1 above seems to be less explicitly addressed in sale of  goods legislation. Perhaps the drafters of that legislation felt it went without saying that a seller should not able to prevent the buyer from using the goods by suing him for IP infringement. This gap has, in any event, been filled with case law, where courts have applied principles such as exhaustion of rights (as in the English case of BL v Armstrong, on the right of a buyer of a car to buy spare parts from someone other than the car’s manufacturer; or in an EU context, see here) or the first sale doctrine.

Some of the case law in this complex field focuses on implied licences as well as, or instead of, legal principles such as exhaustion of rights. See, for example, the US Supreme Court case of Quanta, discussed here.

In IP Draughts’ view, a generic clause denying the granting of any implied licences seems counter-intuitive. He can understand attempts to limit the licence that is granted to some specific use that is contemplated by the parties (eg in-house research use). But denying all licences indicates that, if the seller has any relevant IP, no rights are being granted under that IP to the buyer to use the product being sold, and the seller is reserving the right to sue the buyer for any use the buyer makes of the goods. How could this be sensible?

IP Draughts agrees with Ken’s objections to the use of rote boilerplate in this area, though he doesn’t recall seeing an all-encompassing disclaimer of licences of the kind quote above. The only way in which he can make sense of this type of clause, and the commentary that Ken quotes, is that it must be used in some other context than contracts for the sale of goods. If used in standard terms for the sale of goods, it seems to make no sense at all.

 

 

6 Comments

Filed under Contract drafting, Intellectual Property, Licensing

Agreeing injunctions is for teuchters

rangersIP Draughts won’t claim this as a full blog posting. The subject – clauses in which parties agree that an injunction may be obtained for breach of a confidentiality obligation – has been discussed in detail already in an earlier blog article. That earlier article is the most popular there has been on this blog, with over 26,000 viewings.

One of IP Draughts’ hobby horses (hmm… says Mr Pettifog, with unusual restraint) is that these clauses are largely pointless in the English courts, as the judge will not be interested in being told how to apply his discretion on the granting of an injunction.

What music it was, then, to IP Draughts’ eyes, to see the following statement by Mr Justice Peter Smith in a case reported last week. The case was partly about confidentiality undertakings given by the owner of Glasgow Rangers Football Club in favour of the owner of Newcastle United Football Club. A lot of balls, then. Although the judge was not being asked to interpret the undertakings, he couldn’t resist commenting as described them, pointing out that they were unilateral and that no consideration seemed to have been given for them. This stream-of-consciousness approach seems typical of Peter Smith J. What particularly caught IP Draughts’ eye was the following observation:

  • Paragraph 2 has an express statement that the Undertakers agree “that monetary damages may not be adequate compensation…. and accordingly any member of the SD Group shall be entitled to seek equitable relief including interdict, injunction and specific performance in the event of any actual or threatened breach to the provisions of this letter.”
  • I pause to observe that that self serving clause cannot in my view be used to override the principles which the courts apply when asked to grant such relief.

It is tempting to say, I told you so. But Mr Justice Peter Smith has a long record of shooting from the hip. It would have been better if a more mainstream judge had said this. But as the bard of Dartford said, you can’t always get what you want, but you get what you need.

13 Comments

Filed under Confidentiality, Contract drafting