Category Archives: Contract drafting

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.

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Ceremonial language in contracts: recitals of consideration

denningLast time IP Draughts looked, it was conventional in the English High Court for a barrister to begin speaking with the phrase “may it please your Lordship”. This phrase is little more than a signal to indicate the start of a presentation of a case. The actual words are fairly irrelevant.

Signalling phrases, where the words used are symbolic rather than to be taken literally, are encountered in other areas of the law, and in life generally. In a social setting, the phrase “see you later” (or “later!”) has become popular, to the immense irritation of people who take it literally. The insulting response “not if I see you first” has become equally formulaic, and is not usually meant to be taken seriously.

We seem to take comfort from the familiar. It has been suggested that the repetition of familiar phrases may stimulate a different part of the brain from the use of spontaneous language – see this discussion of the use of familiar phrases by stroke patients.

know allOften, the words used in formulaic phrases have a quaint, archaic quality about them, which reinforces the sense that they part of a ceremony. In a legal setting, “know all men by these presents” is a particularly silly one, sometimes found in deeds poll and other unilateral legal statements. Ken Adams comments on it here. IP Draughts commented on this and similar phrases here.

IP Draughts is unsure whether the use of familiar, but sometimes absurd, phrases in legal documents owes something to this tradition of using symbolic language. Perhaps we gloss over wording, particularly if it forms part of the “packaging” of the document (eg in introductory or closing wording in a contract) rather than its main substance. Perhaps we treat it as a signal of the type of document we are dealing with, rather than as a set of words that is to be read literally.

This is all highly speculative. It may explain the presence of obscure, irrational wording in contracts, but it doesn’t justify the wording. The drafter should aim for simplicity and clarity, and avoid rhetorical flourishes.

Recitals of consideration

An example of the type of wording that, in IP Draughts’ view, should be avoided, is the US-style recital of consideration which sometimes appears at the beginning of contracts. A typical example follows, which has been lifted from a recent article by Ken Adams (follow PDF link on this page):

NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows:

This wording seeks to ensure that the contract meets one of the requirements for a legally-binding contract. Under the laws of most US States, England and Wales and some other jurisdictions, there needs to be “consideration” for the promises made in the contract, if it is to be legally-binding.

If this wording has any value at all, it is only where there are doubts about whether consideration is being given. In the vast majority of contracts that IP Draughts is involved in, there is no doubt about the point. For example, in a two-party research funding agreement, typically one party will provide consideration in the form of payment, or a promise to pay, and the other party will provide consideration in the form of a promise to perform research work.

Occasionally, the issue surfaces. For example, consider the situation where a contract provides that research is to be performed within a 3 year term. After the contract is signed, the research provider negotiates an extension of time to 4 years, and records that extension in an amending agreement. If no consideration is given for the concession of an extra year, there may be doubts over whether the amending agreement is binding. This might be addressed, under English law, by including nominal consideration, eg £1, or by executing the agreement as a deed.

Does a recital of consideration, as in the example quoted above, avoid the need for such steps? Or is this wording, in Ken’s memorable phrase, merely “three lines of unspeakable crap”? Ken’s conclusion is that this type of wording should be avoided, despite a very few cases in US State courts that seem to suggest that the wording has some value where the consideration is unclear.

The above wording has come from US template agreements, and is designed (at least in part) to address US case law. Is there any need or benefit under English law to use wording of this kind? In IP Draughts’ view, there is no benefit, and therefore no excuse for using these unspeakable lines of legalese. In fact they illustrate the dangers of using wording designed for one jurisdiction when the agreement is made under the laws of another jurisdiction.

Several factors lead IP Draughts to this conclusion.

Premises and mutual covenants

premisesFirst, we need to strip away all the fusty wording and get to the core of what is being said. The “premises” here are any relevant statements in the recitals. As in the plural of premiss. Best practice is to keep the recitals brief and avoid including contractual statements. The wording also refers to mutual covenants. In this context, covenant is just an old-fashioned term for a contractual obligation. It is unclear why pointing to the recitals and to the main part of the agreement, as this wording does, helps to make anything in those parts of the agreement more likely to be consideration.

Good, valuable, received and sufficient

The wording goes on to refer vaguely to “other good and valuable consideration”, presumably items of consideration that are not stated in any part of the written agreement. There is then an acknowledgement that consideration has been received and is sufficient. Why are these four qualities of the consideration – good, valuable, received and sufficient – relevant to the question of whether the agreement is a binding contract? And why is it relevant to acknowledge these qualities?

Good or bad?

chitty chittyIt is true that there are restrictions on what counts as consideration. For example, IP Draughts was taught that “past consideration is no consideration”. In other words, promising to do something you have already done or promised to do doesn’t count as valid consideration. This is a brief summary of one small aspect of consideration. The leading English tome on contract law, Chitty on Contracts (IP Draughts has the 30th edition, published in 2008; a new edition is now available) devotes an entire chapter (124 pages) to the subject of consideration. Centuries of case law are discussed in this chapter. Compliance with all of the requirements set out in this chapter might be said to make the consideration “good”, although this word is not commonly used nowadays in the English law analysis.

Valuable, adequate and nominal

The chapter does, however, include a section that discusses the need for consideration to be  “valuable”. However, under English law the consideration does not need to be “adequate” and purely “nominal” consideration is generally acceptable. This may be different to the position under some US States’ laws.

Sufficient

Judging from the index to Chitty, the “sufficiency” of consideration does not seem to be a general requirement under English law. This term is, however, used by Chitty in relation to one particular reqsufficientuirement. A traditional maxim of English contract law is that “consideration must move from the promisor” (Chitty 3-036). Later sections of Chitty discuss whether a benefit to the promisee is “sufficient” even if the promisor has suffered no detriment. This seems too narrow a point to justify being highlighted in the recital of consideration.

Receipt

It is not clear to IP Draughts why an acknowledgement of “receipt” of consideration is relevant. He speculates that one of the following points may be what the original drafter had in mind.

First, this may be referring to receipt of money, ie financial consideration. It seems that, sometimes, consideration can consist of the actual payment of money, as distinct from a promise to pay money or perform other obligations. If payment is to occur simultaneously with the signature of the contract, this could be a receipt for money, making it more difficult for the other party to argue that consideration has not passed.

receivedBut surely this cannot be the reason for including the reference to “receipt” in the recital? Payment of money on signature is only one of a large number of types of consideration, and surely the recital of consideration is not intended to be limited to this one type?

If we dismiss that line of thinking, then is the word “receipt” referring to receipt of a promise to perform an obligation? That doesn’t sound right either. The promise is given by one party, but in what sense is it “received” by the other party? As discussed earlier, Chitty discusses the situation where a party receives a benefit even though the promisor suffers no detriment. Could this be the type of “receipt” being referred to? It seems unlikely that the recital is dealing with this fairly rare situation. But perhaps the analysis of consideration is different under US laws.

Or perhaps the acknowledgement of receipt is trying to forestall an argument that there has been a “total failure of consideration”, which might bring the contract to an end. Separate chapters of Chitty discuss when a failure of performance (as distinct from the promise to perform) entitles the other party to treat the contract as discharged or recover money already paid. At the time of signing the agreement, performance may be due to happen in the future, and an acknowledgement of that performance in the agreement itself may be premature. Looking at these areas of law again reminds IP Draughts how mind-boggling he found them as a university student; the subtle and piecemeal distinctions found in the case law and legislation are difficult to reduce to a simple set of guiding principles. It is certainly difficult to relate those subtleties to a brief acknowledgement of receipt.

Discussion

Thus, while some of the four qualities mentioned above – good, valuable, receipt and sufficiency – may have some significance in English contract law, it is not clear to IP Draughts why these qualities, over other necessary qualities for an English law contract, are being highlighted in the recital of consideration.

Standing back from the typical wording of the recital, a party who wishes to include such a recital presumably wants to prevent the other party from arguing that there was no valid consideration and therefore there was no binding contract. If such an acknowledgement is felt to be useful, wouldn’t words such as the following be clearer?

Each party acknowledges that valid consideration has been given under this Agreement for all of the promises made under this Agreement and that any payments due on signature of this Agreement have been paid and received.

The larger question is why one would want to highlight this issue, as distinct from the other requirements for a valid contract. If such a recital is useful, might one want to include in it references to the other requirements for a valid contract, as in the following example:

Each party acknowledges that all of the requirements for a legally-binding contract have been met in this Agreement, including that:

  1. The parties have the legal capacity to enter into this Agreement.
  2. Offer and acceptance has been made.
  3. Valid consideration has been given for all promises.
  4. The terms of this Agreement are complete and certain.
  5. The subject-matter of the Agreement is lawful.

But why would one want to acknowledge these things? Under English law, these are questions for the judge to decide, and parties cannot turn an invalid contract into a valid one by saying it is valid.

IP Draughts has the impression that US judges may take a slightly different approach. Perhaps he has been too influenced by an extraordinary comment of Chancellor Strine about the “contractarian nature” of Delaware law (reported by IP Draughts here), and by discussion on blogs that suggest that the law of estoppel is more advanced in US laws than in English law.

Looking at the last set of acknowledgements above, they look a little like another characteristic feature of US contracts – the standard warranties that the contract is valid and binding on the parties. The slightly absurd nature of some of those warranties is a discussion for another day.

poundlandIn conclusion, IP Draughts thinks that the typical US-style recital of consideration is drivel: misconceived, badly-worded, incomplete, and pointless, at least under English law. Or, to put it more pithily, three lines of unspeakable crap (© Ken Adams, 2015).

The solution under English law, if the drafter has concerns about whether consideration is being given, is to include nominal consideration or execute the contract as a deed.

 

 

 

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Adams v Anderson on Contract Drafting

gazetteIn case you missed it, here is a link to an article in last week’s Law Society Gazette, the journal of the Law Society of England and Wales.

The article is titled Adams v Anderson on Contract Drafting. It takes the form of a discussion between IP Draughts and Ken Adams, the author of the leading work A Manual of Style on Contract Drafting (American Bar Association, 3rd edition, 2013). Ken also runs a popular blog.

terry and juneThe article covers such diverse issues as the horrors of US-drafted contracts, the madness of English judges, the personal qualities of the famous UK sitcom couple, Terry and June, and our hopes for the future of contract drafting.

Although the article may suggest otherwise, Mr Adams and IP Draughts actually agree on most aspects of contract drafting. IP Draughts was very pleased to be able to facilitate him runnng his one-day seminar, Drafting Clearer Contracts, through the Faculty of Laws of University College London. The seminar has run for the last two years, has been very well received, and shows every sign of being a long-term, annual fixture.

Ken Adams, Master of Style

Ken Adams, Master of Style

Correspondence on the content of the article may be addressed to Mr Adams.

 

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Bob Marley: dud case lost again in Court of Appeal

blue mountainIP Draughts has previously reported on a case in the English High Court, over the ownership of copyright in some Bob Marley songs, including No Woman No Cry.

The claimant lost that case and appealed. Last week, the Court of Appeal’s decision in the same case was handed down. In BSI Enterprises Ltd and another v Blue Mountain Music Ltd [2015] EWCA Civ 1151, the claimant lost again.

The central issue in the case was whether copyright in a set of Bob Marley compositions had transferred under an agreement made in 1992.  The songs were not mentioned by name in this agreement, unlike many other of Bob Marley’s songs. But the agreement included wording that broadened its scope beyond the named songs.

If the answer to that question was “no”, then copyright remained with the seller, and a later assignment from the seller to the claimant was effective. If the answer was “yes”, then the later assignment couldn’t transfer what the seller didn’t own. Thus, the case turned on an interpretation of the 1992 agreement.

The claimant’s counsel in the High Court, Hugo Cuddigan, had argued that the parties to the 1992 agreement had deliberately omitted the songs in question from a schedule to the 1992 agreement, and that this was part of the factual matrix in light of which the agreement should be interpreted. The judge at first instance rejected this argument, preferring to rely on the words of the agreement. These words made clear “almost to the point of redundant repetition” that all Bob Marley songs were included, whether or not they were listed in the schedule.

On appeal, the claimant had a new counsel, Madeleine Heal. She obtained permission from the court to base her case on a different argument. Her line was that a close analysis of the words of the agreement led to the conclusion that the songs in question were not covered by the assignment.

The agreement provided for the assignment of copyright in the Compositions, a term that was capitalised in the agreement. But what did this term mean? Clause 1 of the agreement set out a list of definitions. Clause 1.8 was headed “Composition” and “Catalogue”. The text of clause 1.8 included, at the end of a lengthy sentence, the words individually a “Composition” and collectively the “Compositions”. Admittedly the definition slightly muddled up the two terms, Composition and Catalogue, but the wording was broad in scope, and included the phrase including, but not by way of limitation, the Catalogue listed on Schedule 2 hereto. There is no suggestion in clause 1.8 that the definition of Composition is limited to the songs listed in Schedule 2.

no noAccording to Ms Heal, one shouldn’t look at the definitions clause to find the definition of Composition. Oh no, no, no, no. Instead, one should look at the warranty clause, which included, at clause 5.10, a warranty by the seller that “Schedule 2 contains a complete and accurate list of all the Compositions.”

Moreover, continued Ms Heal, a recital to the agreement stated that the seller wished to sell “certain” music publishing rights and interests, which proved that only some, and not all, of the seller’s interests were to be transferred.

Oh dear. Kitchen LJ’s mild response to these and similar arguments was that he was “unable to accept” them, they were “unsustainable”, he was “wholly unpersuaded”, and there was “nothing in this criticism”.

Thank goodness for small mercies.

To IP Draughts’ mind, the court at first instance and the Court of Appeal had a relatively straightforward task to interpret the 1992 agreement, and they performed it well. No new point of law arises from the case. There is no guidance that needs to be given to drafters in light of the case. It is an illustration of how far a party is prepared to go to try to protect its business interests, by pursuing a dud case all the way to the Court of Appeal.

 

 

 

 

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