Category Archives: Contract drafting

Judging the quality of contract drafting

itamaeIt is said that Japanese sushi chefs undergo years of training, learning from a master the fine arts of cooking the rice to a house style, preparing the fish and other ingredients, shaping the nigirizushi, conducting oneself in front of the customers, and even making diplomatic mistakes in the calculation of the bill.

Such devotion to detail may be thought excessive for what is regarded, at least in the UK, as a mass-produced snack item that can be found in most supermarkets, its place now well-established in the chiller cabinet next to Cornish pasties and coronation-chicken sandwiches.

Similar thoughts are prompted by the subject of contract drafting. Should we treat contracts as a commodity to be bought from an online supermarket (such as PLC or PSL), or are they a bespoke item whose preparation requires the skills of a dedicated expert?

pizza-baseIn fact, they are often a hybrid. Typically, a drafter will use a template agreement as a starting point for preparing an individual contract. The quality of the end-product will depend on both the suitability and drafting quality of the template, and on the drafter’s ability to adapt the template to the individual transaction.

Sometimes, there is little choice in the starting document, either because it has been prepared by the other side in negotiations, or because the client’s policy is to use one of its standard agreements or a well-known, third-party template such as a Brunswick collaboration agreement. There may be limited client appetite for incurring time in making changes to a source document that are not specific to the deal, or of major importance. The fastidious drafter may need to avert their gaze. What cannot be cured must be endured.

When it comes to the drafting of individual clauses, the drafter’s skills are put to the test. The drafting should be good in itself, but it should also be made consistent, where appropriate, with the content and style of the template that is being used. Careful accuracy is required for both of these tasks.

Where a tailored clause is inserted into a template agreement, the clause will itself often be ‘cut and pasted’ from another template, with or without changes. This can and does result in drafting mistakes and inconsistencies, which the drafter should correct. When IP Draughts is reviewing a draft agreement, he focuses on both the substance and the detailed drafting. It is sometimes possible to gauge how careful the drafter has been from the smallest of details.

sushiFor example, if new definitions have been inserted in the definitions clause of a template agreement, do they follow the same drafting conventions? Do they start “shall mean” when the template uses “means” or, to be really picky, do they start “Means” when the template uses “means”? Does the definition end in a full stop when the template definitions end in a semi-colon? If a semi-colon is used in the template, and the penultimate definition ends with an “and”, has the position of the “and” been moved when a new definition is added to the end of the list of definitions?

There are dozens of points similar to the above, where different templates follow different conventions, but it is appropriate to stick with the approach taken in the source document.

Spotting and correcting these points may not result in any significant improvement in the legal effect or commercial clarity of the document, but they are an indicator of how careful the drafter has been. If she can spot points like this one, she is likely also to spot more significant drafting defects.

After years of practice, the apprentice will become a true itamae, who can spot even the tiniest flaw. Examples of tiny flaws in contracts include:

  • the automated clause numbers that are in a slightly different typeface or font to the text that follows
  • the spacing between clause number and text that changes by a millimetre or two, half-way through the contract

stampSome flaws are so tiny that, even if we spot them, we may not always bother to correct them; for example, the comma that is in italic text when all the others are in normal text.

Readers, do you have pet stylistic peeves that you like to correct in contracts, or those that you regard as too trivial to correct? IP Draughts would like to hear from you.

By the way, and just getting his defence in first, IP Draughts often makes typing mistakes in this blog, which tend to be corrected after the blog has been published, rather than before. Some of his readers are good enough to point these out!

 

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Filed under Contract drafting

CDAs and liquidated damages

panicConsider the following clause, which is taken from a template confidentiality agreement that can be found quickly on the internet.

Liquidated Damages. In case of unauthorized use or disclosure of the Confidential Information, the Disclosing Party shall be entitled to liquidated damages in the amount of €10 000 (ten thousand Euro) for each such use or disclosure.

Notwithstanding the right to liquidated damages, the Disclosing Party has the right to take any measures available and to claim and receive a higher amount of compensation if the Disclosing Party can prove that the actual damage sustained will exceed the amount of liquidated damages.

IP Draughts has seen variants of this wording in a significant minority of CDAs over the last decade. Typically, the CDA has been drafted by a lawyer in a civil law jurisdiction, rather than a common law jurisdiction. The above example appears in an agreement used by a Dutch company.

To a common lawyer’s eyes (well, certainly to this English common lawyer’s eyes), the clause appears strange and inappropriate for several reasons, and would often be resisted. In IP Draughts’ experience, when the clause is resisted, the party that proposed it is, in a fair number of cases, willing to remove it from the CDA. It doesn’t seem to be a “must have” clause.

Why does the clause seem inappropriate to an English common lawyer?

First, because the traditional view of liquidated damages clauses was that they were supposed to be a “genuine pre-estimate” of the loss that the non-breaching would suffer as a result of the breach. They were specifically not supposed to be a penalty, or disincentive for breach, as this would render the clause unenforceable.

illiquidPutting the figure of €10 000 in a template agreement does not suggest that the drafter has related the amount to a pre-estimate of loss in an individual case. Rather, it appears that the figure has been included as a disincentive to breach. IP Draughts’ view was (and still is, subject to comments at the end of this article) that, if you are going to include a liquidated damages clause, some thought is required as to why the figure is appropriate in the individual case, and that it would be prudent to record the reasons for coming up with the figure in a file note. If the clause is later challenged in court, one could produce the file note to demonstrate that it was intended to be a pre-estimate of the loss and that the amount was thought to be reasonable rather than a penalty or “stick” to beat up the other party.

Secondly, because it is inherently difficult to pre-estimate loss in the case of many CDAs, particularly those which concern early-stage technology. The confidential information might be used to develop a product, and the product might be highly successful. Or it might not. The range of possible values for the information will sometimes range from zero to millions. Even if the information stands a reasonable chance of being developed into a blockbuster product, a court would typically be likely, when assessing damages, to heavily discount the amount to take account of the uncertainties, risks and time involved in taking information through to a successful product.

In the case of many CDAs, the most useful remedy for breach or anticipated breach may be to obtain an urgent injunction to stop any disclosure or further disclosure.  The likely cost of obtaining such an injunction may be several times €10 000, at least in the English legal system.

Thus, the figure of €10 000 seems to be plucked out of the air, unrelated to any measurable loss, and unrelated to the costs of enforcement of contractual rights under the CDA.

Thirdly, because the whole idea of a liquidated damages clause in the English system (and, IP Draughts suspects, in other common law jurisdictions) is to avoid the need to calculate losses at trial. The parties are agreeing in advance what the damages will be. This is what the term “liquidated damages” is supposed to mean. It is therefore misconceived to say, as the above clause does, that you can claim more than the agreed amount. It turns the clause into a “minimum damages” clause rather than a “liquidated damages” clause.

IP Draughts suspects that wording such as that quoted above reflects a misguided mish-mash of common law and civil law concepts. IP Draughts has commented before on the pervasive use of US templates in agreements that are made under non-US laws, and where the template uses US legal concepts that may not be appropriate in the jurisdiction in which the agreement is made.

penaltyIP Draughts doesn’t know what the correct Dutch law term (ie in the Dutch language) is for a damages provision such as that quoted above, nor what its English language equivalent would be. He suspects that the term might be “penalty” or its Dutch language equivalent, but that the drafter of the English language version was concerned about including this word in view of its negative connotations under common laws, and preferred the more benign, but inaccurate term, “liquidated damages”.

For most of IP Draughts’ career, English lawyers have focussed on trying to ensure that a clause providing in advance for a financial payment of this kind was a liquidated damages clause rather than an unlawful penalty. Many lawyers have even thought it desirable to include in such a clause a statement such as “The parties acknowledge that this amount is a genuine pre-estimate of the anticipated loss that will result from a breach of clause X.” This statement was designed to echo the words used by one of the judges in the leading English case on liquidated damages clauses, the 1915 House of Lords case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. IP Draughts has always found this wording rather self-serving, and likely to be ignored by the court in the event of dispute.

English lawyers’ certainties about liquidated damages clauses were shaken last year, with the decision of the UK Supreme Court in a pair of cases that, in the interests of brevity, IP Draughts will call the ParkingEye case [2015] UKSC 67.

The Supreme Court decided that the Dunlop case had been misunderstood. The justices in the Supreme Court each gave slightly different reasons for their decision, but a common thread was that a penalty could be enforced if:

  1. it protects a legitimate business interest; and
  2. the amount is not extravagent, exorbitant or unconscionable.

parkingeyeMoreover, in commercial contracts between parties  of comparable bargaining power, there was a presumption that the parties were the best judges of what is legitimate, and the court should not strive to find an unlawful penalty.

In light of this important decision, IP Draughts is less concerned about the enforceability of a pre-determined damages clause of €10 000, as this is not a huge amount in the context of commercial litigation or for most business clients. However:

  • He will probably continue to use the term liquidated damages rather than penalty, if that is what the clause is.
  • He will be less concerned about demonstrating that the amount is a genuine pre-estimate of loss, and more concerned with whether there is a good reason for the clause, whether the parties are of comparably bargaining power, and whether the amount seems proportionate.
  • He will continue to recommend that clauses of the kind quoted above are resisted, as being unnecessary and inappropriate in many cases.

 

 

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Filed under Confidentiality, Contract drafting

Should clients prefer a non-specialist lawyer?

screenwritingVia Ken Adams and the wonderful world of Twitter, IP Draughts was alerted to this article:
The Business of Screenwriter: Get a damn good lawyer!

The article discusses the lack of foresight of a lawyer who drafted a screenwriting contract for the author in the 1980s. The contract provided for bonus payments for sequels in specified formats, but had failed to include generic language that would cover “direct to DVD” sequels – a format that didn’t exist when the contract was made. As a result of this omission, when a sequel was made in the 2000s, the author failed to secure two bonus payments, each of $150,000, to which he thought he was entitled.

The punchline (punch-paragraph?) of the article was as follows:

So when you sell your script and you get an agent and/or manager, and they talk to you about how you need to get a good entertainment attorney, you smile, and gently correct them:

“No, I want a damn good lawyer.”

The article seems to be suggesting that the lawyer who drafted the contract was too close to the entertainment industry as it existed in the 1980s, and followed convention rather than thinking carefully about what the contract should say, and future-proofing it against new technologies.

It should, of course, be possible to be a damn good lawyer and a good entertainment attorney. Any entertainment attorney who keeps abreast of case law will be aware of a steady stream of cases where the court was asked to apply contract language to new technologies that didn’t exist when the contract was made. See, for example, this article, which provides a short overview of the subject.

specialist2But perhaps in some market sectors, the lawyers who specialise in that sector aren’t very good lawyers. If you have to choose between good and specialist, which should you go for? It is difficult for a lay client to know whether she is choosing a damn good lawyer (a qualitative assessment). It is easier to find evidence of prior experience of the industry sector (a quantitative assessment). In IP Draughts’ experience, many clients prioritise prior experience, sometimes to an excessive extent. He has encountered clients who prefer a lawyer who has done exactly the same type of deal before (eg the development of a particular type of medical device), rather than one who has advised on many other types of development contract in the medical sector. Viewed from afar, the latter category may be thought already very specialist, and perhaps sufficiently specialist for the contract in question.

About 25 years ago, a former senior partner of a leading IP law firm discussed with IP Draughts the choice of barristers (advocates) for a major case. His view was that, if he couldn’t get one of the very top barristers at the intellectual property bar, he would not go down to the second tier, but would instead instruct a high-quality barrister at the commercial bar, and instruct them in the technology and IP issues, with assistance from junior IP counsel. His priority was a damn good lawyer rather than a specialist.

goodenoughComing back to contract drafting, rather than IP litigation, in an ideal world one would choose a lawyer who is both good and specialist (as well as having other qualities like fitting in with the client’s approach, being a good negotiator, etc etc). For a major transaction, it may be worth a client’s time to research carefully who might fulfil all of these criteria. For more routine matters, if you have a lawyer whose abilities and integrity you trust, and they tell you that they are comfortable with the task, then you may prefer to stick with them than find someone more specialist.

Sometimes, you should be reassured when your lawyer tells you “I’m not a specialist in this field (but I think I can help you).”

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Filed under Contract drafting, Legal practice

Use restrictions in contracts of sale

pink or black for court?

pink or black for court?

Long-term readers of this blog may recall earlier articles about whether a seller of a product may restrict the use that the purchaser can make of that product, and whether such restrictions are binding on subsequent owners of the product. For example, may the original seller exercise its IP rights against a subsequent owner to enforce any such restrictions? This subject raises questions of public policy that, in different jurisdictions, are channelled into legal principles such as exhaustion of rights, non-derogation from grant, and the first sale doctrine. See, for example, the EU UsedSoft case, discussed here in 2012.

This subject was forced back into IP Draughts’ mind by the recent spat between two artists, Sir Anish Kapoor and Mr Stuart Semple, reported here.

Apparently, Sir Anish has acquired an exclusive licence, in the field of art, to use Vantablack, the “blackest black” in existence, which is a technology based on carbon nanotubes. According to an FAQ on the website of Surrey Nanosystems, the creator of Vantablack, it seems that what Sir Anish has a licence to is a variant of Vantablack, known as Vantablack S-VIS:

Vantablack is generally not suitable for use in art due to the way in-which it’s made. Vantablack S-VIS also requires specialist application to achieve its aesthetic effect. In addition, the coating’s performance beyond the visible spectrum results in it being classified as a dual-use material that is subject to UK Export Control. We have therefore chosen to license Vantablack S-VIS exclusively to Kapoor Studios UK to explore its use in works of art. This exclusive licence limits the coating’s use in the field of art, but does not extend to any other sectors.

Let’s leave the interesting export-controls point to another day. It is not entirely clear what IP is being licensed, though presumably there is at least some know-how involved. Another FAQ indicates that:

Vantablack is a globally registered trademark and recognised brand owned by Surrey NanoSystems Limited. Companies would need written permission from SNS to use the Vantablack name in their products.

Incensed by Sir Anish’s actions in taking this exclusive licence, and the consequent restraint on artistic freedom, fellow artist Mr Stuart Semple has created the “pinkest pink” and is selling pots of the stuff, subject to the following condition:

Note: By adding this product to your cart you onfirm [sic] that you are not Anish Kapoor, you are in no way affiliated to Anish Kapoor, you are not purchasing this item on behalf of Anish Kapoor or an associate of Anish Kapoor. To the best of your knowledge, information and belief this paint will not make it’s [sic] way into that [sic] hands of Anish Kapoor.

Sir Anish has apparently responded to this provocation with a photograph of (inter alia) his hand:

pink

According to Surrey Nanosystems, one of the stated benefits of Vantablack is “its ability to absorb light energy and convert it to heat”. Mmm…

Readers are invited to comment on whether they think the contractual restriction on supply to Anish Kapoor is enforceable, and what the measure of damages for breach of contract might be.

 

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Filed under Contract drafting, Humour, Intellectual Property, Licensing