Category Archives: Contract drafting

First thing we do: let’s kill all the indemnities

DICK
The first thing we do, let’s kill all the lawyers.
CADE
Nay, that I mean to do. Is not this a lamentable
thing, that of the skin of an innocent lamb should
be made parchment? that parchment, being scribbled
o’er, should undo a man? Some say the bee stings:
but I say, ’tis the bee’s wax; for I did but seal
once to a thing, and I was never mine own man
since.

One of IP Draughts’ former clients had a poster on the wall behind his desk. The poster was in IP Draughts’ sight-line whenever they met in the client’s office. He found it difficult to concentrate on the questions that the client asked, as the poster read “The first thing we do, let’s kill all the lawyers,” which is a quotation from Henry VI, Part 2, by William Shakespeare.

On reading the quotation again, IP Draughts finds the following paragraph (quoted above) more interesting. Four centuries after these lines were written, UK universities still have to seal their deeds, though the use of parchment and beeswax is rarely encountered.

Today, IP Draughts would like to offer a different call to arms: one that may cause fewer populist cheers than attornicide, but which will simplify the drafting and negotiation of many contracts. Let’s kill all the indemnities!

Indemnities have become so prevalent in English-law contracts that people seem scared to delete them. But the text of the indemnities has become so complex that it is sometimes difficult to work out what they mean. This may be the cause of the reluctance to delete them: if you don’t understand what they mean, it may be thought a risky business to remove them. There is safety in the familiar. Others include them, so they must have some value.

That is the argument, but it is one that IP Draughts rejects.

Another mistake that is sometimes made is to test the indemnity language against one fact-pattern, and conclude from this analysis that the indemnity is appropriate. But there may be other fact-patterns where the language is less in your interests. Consider the following wording:

Each party (“Indemnifying Party”) agrees to defend the other party, its Affiliates and their respective directors, officers, stockholders, employees and agents, and their respective successors, heirs and assigns (collectively, the “Indemnitees”), and will indemnify and hold harmless the Indemnitees, from and against any Losses arising out of Third Party Claims brought against any Indemnitee and resulting from or occurring as a result of:

(a) any activities conducted by an employee, consultant or (sub)contractor of the Indemnifying Party in the performance of the activities the Indemnifying Party agreed to perform under this Agreement;

(b) the research, development, manufacture, commercialization or other exploitation of any Product by the Indemnifying Party or its Affiliates, Sublicensees or contractors:

(c) any breach by the Indemnifying Party of any of its representations, warranties or covenants pursuant to this Agreement, or

(d) the negligence or willful misconduct of the Indemnifying Party in connection with this Agreement;

except in any such case to the extent such Losses result from: (i) the negligence or willful misconduct of any Indemnitee, (ii) any breach by the other party of any of its representations, warranties, covenants or obligations pursuant to this Agreement, or (iii) any breach of Applicable Law by any Indemnitee.

IP Draughts would summarise the above indemnity very loosely as:

  1. You indemnify us if the claim comes from something you did in the course of the research or commercialisation, irrespective of whether you did that thing correctly or not.
  2. In addition, you indemnify us if you did something wrong.
  3. But 1 and 2 don’t apply to the extent the loss arose from something we did wrong.
  4. We indemnify you if the claim comes from something we did in the course of the research or commercialisation, irrespective of whether we did that thing correctly or not.
  5. In addition, we indemnify you if we did something wrong.
  6. But 4 and 5 don’t apply to the extent the loss arose from something you did wrong.

IP Draughts finds the combination of these obligations mind-boggling. But versions of them appear in so many contracts nowadays.

It is easy to rationalise a clause of this kind by applying a simple set of facts to it. If I am a university collaborating with a company, and the company will be exploiting the fruits of the collaboration, won’t the most likely claims arise from the company’s commercialisation, so that item 1 will apply to make the company liable to indemnify?

Maybe. But what if the claim arose from a result obtained by the university in the research? Won’t item 4 apply then? Perhaps items 1 and 4 both apply, in which case who is indemnifying whom? And if the result obtained by the university was the result of negligence by the university, does that cancel out item 1, by virtue of item 3, and introduce item 5?

And what if the company was negligent for not spotting the error in the results generated by the university or doing further confirmatory research? Does that introduce item 6?

Eton Mess: a simple recipe: strawberries, cream, sugar, meringue

A general problem with this type of indemnity is its overall complexity. But when you drill down, a further problem, in IP Draughts’ view, is that it is mixing apples, pears and strawberries. To be more specific, it is combining indemnities based on who did the research (apples) with indemnities based on did the commercialisation (pears) with indemnities based on who did something wrong (strawberries).

This is too many cooks, and they spoil the dessert.

Go back to first principles.

  1. Why do we need indemnities at all? In IP Draughts view they make more sense if they are allocating risk for third party claims. In its favour, the above example is doing that, rather than trying to bolster liability for breach of contract. For the purpose of this post, let’s not spend more time on this aspect, but assume that a third party indemnity is desirable.
  2. Where are the third party claims most likely to arise? During the research or during exploitation of the research? Focus on the primary concern before considering others.
  3. What is the high-level principle that the indemnities should follow? It might be that whoever does something wrong should indemnify the other. That is a respectable approach.
  4. Or it might be that whoever engages in an activity that leads to a claim should deal with that claim, irrespective of “fault”. For example, the exploiting party should deal with claims from its customers, irrespective of who did something wrong. Fair enough.

But mixing these principles up can lead to confusion. If in doubt, leave it out. Sometimes, it would be better to omit the indemnity entirely than retain a confused mess. Sometimes, IP Draughts tries to persuade the other to simplify the indemnity, to improve its chances of being enforceable.

But in the heat and urgency of negotiations, who is willing to sit down and consider these issues in detail, plotting different fact-patterns and considering whether the  indemnity is a thing of beauty or a nasty mess?

Sermon (and mixed metaphors) over.

 

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Do you have to pay the one dollar/pound consideration?

Today’s special is a lightly-grilled patent assignment. It only costs a dollar.

A recent case in London’s Intellectual Property Enterprise Court (a specialist IP court for smaller disputes) reminds us of some legal points concerning patent assignments.

The case is Dichand v Hydraredox Technologies Holdings Ltd [2018] EWHC 1142, and the judge was HHJ Hacon.

Most of the judgment is about who said what to whom – a typical, messy dispute over facts. Those facts relate to the signature of a patent assignment and whether the signature was procured by fraud. The judge said no – the assignment was legally binding.

But the facts remind us of some larger truths, under English law. Tongue slightly in cheek, IP Draughts summarises them as follows:

  1. If you are a sophisticated investor/businessman and are presented with a one-page patent assignment during dinner at the Four Seasons Hotel, Bangkok, the assignment clearly identifies the patent applications that are being assigned, and you spend a few minutes reading it before signing it, you can’t get out of it later on the grounds that you didn’t understand what you were signing. You didn’t have to sign it there and then, and you could have taken it away and sought advice from your lawyers.
  2. If the assignment provides for payment of one dollar in consideration, you can’t get out of the assignment on the grounds that the dollar was never paid. You have a separate action in debt.

The judgment mentions that other legal arguments were raised, or perhaps flung around in desparation might be more accurate. If you can’t persuade the judge on your fraud point, or on failure of consideration, try unilateral mistake, breach of trust, and unjust enrichment. One of them might stick. Or not, in this case.

On the consideration point, there is a respectable argument that, under English patent law, consideration is not required to make an assignment legally binding. See our earlier blog article here.

But sometimes the assignment document goes further than just a formal assignment, and includes contractual obligations, eg of “further assurances”. In many common law jurisdictions, for a contract to be binding, there must be consideration. English law accepts that consideration can be a nominal amount such as a pound, which may not be the case in some other jurisdictions – see Ken Adams’ article on the position under US laws here. And as HHJ Hacon briefly points out in the case cited above, under English law if it is not paid this is just a debt, and does not invalidate the transaction.

Of course, if it is paid, it may be subject to VAT, and should be recorded in the parties’ accounts – points that are also, often, overlooked. Some people take the view that paying the nominal amount is more trouble than it is worth. Others make a joke of it, and demand their pound.

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Whose job is it to check the contract schedules?

It is late at night. You are a lawyer, preparing the final versions of a large and complex set of contract documentation. You have asked a business colleague for the final version of a schedule to the contract, and she has provided a version. But you are not satisfied that this is the final version. You ask her to check again, and she provides another version in an email timed at 23:31 hours. You attach this version and prepare a final set of contract documents. The contract is signed. Everyone is happy.

But the schedule was not the final version that had been agreed in negotiations. The schedule attached to the contract that was signed provided for annual payments to your client of £500,000, over a 15 year period, with no provision for indexation of these payments. But the final version of that schedule, which by mistake had not beeen attached to the signed contract, provided for annual indexation of those payments, to allow for price inflation.

Is your client entitled to increase the amount of the payments each year to allow for inflation? And if not, who bears the loss?

Here are some further facts, to make the question more interesting.

  1. The contract was negotiated as part of a tender process in compliance with public procurement regulations. Your client is a local government body. Arguably a contract was formed by acceptance of a tender and before the formal contract was signed.
  2. But the signed contract included an “entire agreement” clause stating that the parties have not relied on any other documents in entering into the contract.
  3. Commercial management of the negotiations was handled, on your client’s behalf, by a management consultant, PriceWaterhouseCooper (PWC). It was a PWC representative who provided you with the version of the schedule that you attached to the signed contract.
  4. The schedule that was attached to the contract had some missing details that were still to be completed, which arguably made the schedule “inoperable”. But neither party spotted these defects before the contract was signed.

You have one hour to answer this question. No conferring.

Ah, but we have an answer, in the form of a High Court decision from last year. IP Draughts has just stumbled across the case of Borough of Milton Keynes v Viridor (Community Recycling MK) Ltd (No 2) [2017] EWHC 239 (TCC), decided by Coulson J. With some simplification, the description above summarises one of the main issues facing the judge in this case.

A recent tweet by @jamessflee alerted IP Draughts to the case. The tweet paraphrased a comment from the judgment, at paragraph 67, which reads as follows:

There is no doubt that it was sloppy work by PwC, the management consultants and, to a lesser extent, by Ms Brittlebank [of Dentons], the solicitor. PwC’s error is perhaps a sad reflection of the fact that modern day contracts of this kind are so complicated that nobody (not even the consultants) bothers to check the actual documentation being signed.

So there was sloppy work. But has there been negligence? Has any negligence caused recoverable loss? And by whom should the loss be borne – PWC or Dentons (or both), or more likely their insurers?

Fortunately for them, but unfortunately for the curious observer, Mr Justice Coulson didn’t need to answer these questions, because he was prepared to accept that the contract should be “rectified”, ie that the final version of the payment schedule should be substituted for the one that was actually attached to the signed contract.

Interestingly, on the issue of the entire-agreement clause, the judge, quoting an earlier authority, comments:

where there is a strong case for rectification, the agreement which constitutes “the entire agreement” is to be found in the contract as rectified and not in the contract which, ex hypothesi, does not reflect the true intention or agreement of the parties. I consider that that is the position here. Thus the entire agreement clause is immaterial.

But don’t take away the message that in cases of this kind, the judge will sort it all out, applying common sense. It is difficult to win cases based on rectification, and it only happened here after a very close scrutiny of the facts and the underlying law, and in the face of sustained and forceful arguments to the contrary by the other side’s QC. It will be interesting to see if the case is appealed.

Coming back to the practice point, what is the solicitor who is managing the contract documentation supposed to do? In this case, she twice asked the client’s representative to provide the correct schedule, perhaps annoying them in the process, and the representative should have been aware of the need to carefully check that she was supplying the right version. But she didn’t. And nobody noticed, from either side, before the contract was signed. Is it fair to blame the solicitor in these circumstances? Mr Justice Coulson clearly thought that the primary responsibility lay with the client representative, in this case PWC. But that doesn’t necessarily let the solicitor off the hook.

Many of us who advise on contracts are familiar with the situation where you are the only person attending to the details, in the face of pressure from commercial colleagues to “get the deal done”. Perhaps those colleagues wouldn’t even blame you if things go wrong, as they would accept that everyone wanted to close the deal and not spend further time obsessing about the documents.

Perhaps. But if losses are incurred as a result of a mistake, how likely is it that senior management will take this view?

Are you willing to make yourself unpopular to get the documents right, or do you “go with the flow”? Perhaps the answer depends in part on the scale of the deal and its risk profile. For a contract involving payments of 15 x £500,000, IP Draughts hopes he would always fall on the side of accuracy rather than expediency, unless clearly instructed to do otherwise.

 

 

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Drafting ‘hush’ agreements for Donald Trump

Readers may have seen the news of litigation between Stormy Daniels and Donald Trump that relates to a ‘hush agreement’ that Trump’s lawyer prepared by way of settlement of allegations in 2016. Apparently, that same lawyer paid Ms Daniels $130,000 from his own funds, so keen was he to protect his client’s interests. (IP Draughts’ clients take note: much as he loves them, this ain’t going to happen.)

A copy of the Complaint for Declaratory Relief, to which is attached a copy of the hush agreement, can be found here.

Although Ms Daniels’ lawyer, using colourful language, refers to it as a hush agreement, the document itself has a more conventional and long-winded title: Confidential Settlement Agreement and Mutual Release; Assignment of Copyright and Mutual Non-Disparagment [sic] Agreement. (For more on the subject of non-disparagement clauses in NDAs, see this recent IP Draughts article.)

Ken Adams has beaten IP Draughts to it in demolishing the general drafting of the document. This article will focus on the IP assignment clause. In the following paragraph, PP is a code for Ms Daniels, and DD a code for Donald Trump:

3.2 Transfer of Property Rights to DD. In further consideration for the promises, covenants and consideration herein, PP hereby transfers and conveys to DD all of PP’s respective rights, title and interest in and to the Property, and any and all physical and intellectual property rights related thereto. Without limiting the generality of the foregoing, PP does hereby sell, assign, and transfer to DD, his successors and assigns, throughout the universe in perpetuity, all of PP’s entire right, title, and interest (including, without limitation, all copyrights and all extensions and renewals of copyrights), of whatever kind or nature in and to the Property, without reservation, condition or limitation, whether or not such rights are now known, recognized or contemplated, and the complete, unconditional and unencumbered ownership and all possessory interest and rights in and to the Property, which includes, but is not limited to the originals, copies, negatives, prints, positive, proof sheets, CD-roms, DVD-roms, duplicates, outtake and the results of any other means of exhibiting, reproducing, storing, recording and/or archiving any of the Property or related material, together with all rights of action and claims for damages and benefits arising because of any infringement of the copyright to the Property, and assigns and releases to DD any and all other proprietary rights and usage rights PP may own or hold in the copyright and/or Property, or any other right in or to the Property. PP assigns and transfers to DD all of the rights herein granted, without reservation, condition or limitation and agrees that PP reserves no right of any kind, nature or description related to the Property and contents therein. Notwithstanding the foregoing, if any of the rights herein granted are subject to termination under section 203 of the Copyright Act, or any similar provisions of the Act or subsequent amendments thereof, PP hereby agrees to re-grant such rights to DD immediately upon such termination. All rights granted herein or agreed to be granted hereunder shall vest in DD immediately and shall remain vested in perpetuity. DD shall have the to freely assign, sell, transfer or destroy the Property as he desires. DD shall have the to register sole copyright in and to any of the Property with the US Copyright Office. DD shall also have the right, in respect to the Property, to add to, subtract from, change, arrange, revise, adapt, into any and all form of expression or tangible communication, and the right to combine any of the Property with any other works of any kind and/or to create derivative works with any of the Property, and to do with it as she so deems. To the fullest extent allowable under the applicable law, PP shall irrevocably waive and assign to DD any of PP’s so-called “moral rights” or “droit moral” (laws for the protection of copyrights outside of the United States), if any, or any similar rights under any principles of law which PP may now have or later have in the Property. With respect to and in furtherance of the above, PP agrees to and shall execute and deliver to DD an “Assignment & Transfer of Copyright” in the form attached hereto as Exhibit “B”. For greater certainty the foregoing assignment shall be applicable worldwide.

As if the above assignment language is not detailed enough, the penultimate sentence contemplates the execution of a formal assignment of copyright in the form attached as Exhibit B. Exhibit B is not attached to the complaint.

What, you might wonder, is the “Property” to which this Sisyphean assignment clause relates? According to another clause of the 15-page hush agreement, it seems to be mainly some “still images and/or text messages which were authored by or relate to [Donald Trump]”.

IP Draughts is left wondering how much of the above clause is taken from standard template agreements for US copyright assignments, perhaps those used in the entertainment industry, and how much is down to the idiosyncracies of lawyers who advise complainants and defendants in disputes of this kind. Whatever the reason, this assignment is a long stream of garbage.

There are glimmers of sense in some of the sentences. For instance, there is reference to an assignor’s rights to recover copyright after a term of years under section 203 of the Copyright Act 1976. This right was the subject-matter of an English court case before Arnold J, that was brought by members of Duran Duran, which IP Draughts discussed here. Whether the drafter’s solution to this issue (“PP hereby agrees to re-grant such rights to DD immediately upon such termination”) is legally effective, IP Draughts will leave for US copyright lawyers to comment on.

There are also glimmers of partial sense, where the text refers to moral rights as “laws for the protection of copyrights outside of the United States”. Moral rights are not copyright laws as such, but separate rights that exist in certain copyright works. Contrary to the above wording, moral rights are not capable of being assigned, but they can be waived.

But much of the rest is an incontinent word-stream. What is wrong with a (relatively) simple statement, such as the following, to replace most of the above text?

PP hereby assigns and transfers to DD absolutely, all of PP’s right, title and interest in and to:

(a) the Property; and

(b) all intellectual property in the Property.

PP irevocably and unconditionally waives all moral rights in the Property.

Ideally, we would also have a definition of intellectual property, that listed the various types of IP and made clear that the definition applied to IP existing in any country of the world. If intended, we might add a right to sue for past infringements, which doesn’t seem to be covered by the Trump lawyer’s text. We might also want to broaden the definition of Property in the agreement to include all copies that have been made of the Property, in any medium.

If IP Draughts’ version doesn’t adequately cover all the bases, please could readers enlighten him as to where his version is deficient?

 

 

 

 

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