Category Archives: Contract drafting

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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Unconscionably long judgments uphold penalty clause

expensiveCertain phrases in contracts are reassuringly familiar to English commercial lawyers, however weird they may appear to clients. One of these concerns what are known as ‘liquidated damages clauses’. Typically, the clause will say something along the following lines:


If the Supplier is late in delivering the Goods, it will pay the Buyer liquidated damages of 1% of the Price for each week of delay. The Parties acknowledge this is a genuine pre-estimate of the loss that the Buyer will suffer from late delivery, and is not a penalty.

By explicitly agreeing that the payment obligation is a ‘genuine pre-estimate of loss’, drafters have hoped to persuade the court (in a future dispute) that it is a liquidated damages clause and not a penalty. It has long been thought that the former are enforceable under English law, but the latter are not.

IP Draughts considers this form of words to be largely pointless and self-serving, but that it does no harm. What should matter to the court is the substance, and not the label. An interesting, if irritating, variant appeared in a publishing agreement that a publisher recently asked IP Draughts to sign:

In the event that the Publisher wishes to cancel or terminate this Agreement prior to the delivery of an acceptable manuscript or the publication of the Work without due cause, then the Publisher’s total liability to the Author shall be capped at £100 (one hundred pounds), such payment being made by the Publisher by way of liquidated damages. The parties confirm that these sums represent a genuine pre-estimate of the loss that the Author would suffer in the event that the Publisher terminated or cancelled this Agreement.

This clause is fundamentally misconceived, in that it is an attempt to limit liability masquerading as a liquidated damages clause. Thankfully, the editor at IP Draughts’ publisher has agreed to go back to the wording of the agreement used for the previous edition of the same work, which didn’t include this kind of lawyers’ nonsense.

The general assumption, that under English law penalties are unenforceable but liquidated damages clauses are enforceable, goes back at least 100 years. One of the leading cases on this subject was a House of Lords decision, Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. In that case, Lord Dunedin proposed 4 tests for whether a payment obligation was a penalty. One of those tests used the phrase ‘genuine pre-estimate of damage’, and this phrase seems to have been picked up by the courts in subsequent cases.

Last week the UK Supreme Court issued its decisions in two combined cases on the subject of penalties. The judgments and an abbreviated ‘press release’ can be found here. In effect, this is the first time that the Supreme Court (formerly the House of Lords) has looked in detail at this subject

£85? You've got to be codding!

£85? You’ve got to be codding!

in a century. The second of the two cases (Parking Eye Limited v Beavis) concerned the owner of a fish-and-chip shop, who refused to pay an £85 penalty charge for staying in a free, short-term car park connected to a shopping mall for more than the permitted 2 hours. Their lordships’ decision in this case, that the charge was enforceable, was reported in most of the national newspapers earlier this week.

The first of the two joined cases (Cavendish Square Holdings BV v Talal el Makdessi) was a large commercial dispute in respect of a contract to sell a majority shareholding in a major advertising agency in the Middle East. The contract included stage payments, and non-compete obligations on the sellers. If the sellers breached the non-compete obligations, there would be two consequences: (1) later stage payments would not become due, and (2) the sellers would have to sell their remaining shares to the buyers at a pre-determined price. The seller argued that both of these provisions were unenforceable penalty clauses. The Supreme Court disagreed.

7Usually, a panel of 5 justices decides Supreme Court cases. Occasionally, as in this case, where major issues are at stake, 7 are empanelled. Readers who think they could handle the pressure of having difficult legal questions fired at them continuously and for a long period by 7 extremely bright justices may wish to see the recordings of the proceedings, which can be viewed here.

In essence, the Supreme Court has introduced some new tests for whether a contractual penalty is enforceable. Exactly what those tests are needs to be unpicked from the various judgments, which in total run to a staggering 123 pages.

Probably, we should focus on the joint judgment of Lords Neuberger and Sumption, not least because (a) they are brainier than the others, (b) their judgment is clearer than the others (even if it does take up a whopping 49 pages), and (c) Lords Carnwath and Clarke agreed with their judgment, which means that a majority of the justices have agreed that the legal points made in this judgment form the basis of the decision.

numptyLords Neuberger and Sumption (hereinafter collectively referred to as Lord Numpter) considered the previous focus on pre-estimates of loss to have been unsatisfactory, and to have resulted in the law on penalties becoming ‘the prisoner of artificial categorisation’.

Nor is it helpful to consider whether a provision is a ‘deterrent’, as this is just the flip-side of an ‘inducement’ and not inherently bad. Instead, the test of whether something is a penalty should be whether it is ‘penal’. [Duh!]

Unconscionable or extravagent

To determine whether a provision is penal and therefore unenforceable, it is necessary to consider whether it seeks to influence a party’s conduct in an ‘unconscionable’ or ‘extravagent’ way (these words also appear in Lord  Dunedin’s 1915 judgment).

At this point in Lord Numpter’s judgment, and in the equivalent parts of the judgments of the other justices, a selection of words and phrases is used to elaborate on the threshold of unconscionableness. IP Draughts noted the following:

  • out of all proportion to a legitimate interest of the innocent party
  • exorbitant
  • in terrorem

And in the different context of a claim in the Parking Eye case based on the Unfair Terms in Consumer Contract Regulations:

  • significant imbalance in the parties’ rights
  • disportionately high sum in compensation

Several of their lordships referred to the fact that penalty rules also existed in certain civil-code countries, where provisions might be unenforceable if they were:

  • manifestly excessive
  • disproportionately high

Lord Hodge also referred to certain ‘soft law’ principles established by international bodies such as UNCITRAL, which would limit the right to damages that are:

  • grossly excessive
  • substantially disproportionate

He also referred to the tests of exorbitance and unconsionableness as preventing the enforcement of ‘egregious’ contractual provisions.

So much for the adjectives. Lord Numpter’s judgment also focussed on the following points:

Primary or secondary?

Is the financial obligation a primary obligation or merely the (secondary) consequence of failing to comply with a primary obligation? In the words of Lord Numpter:

The penalty rule regulates only the remedies available for breach of a party’s primary obligations, not the primary obligations themselves…

This means that in some cases the application of the penalty rule may depend on how the relevant obligation is framed in the instrument, ie whether as a conditional primary obligation or a secondary obligation providing a contractual alternative to damages at law…

This topic is discussed at greater length in the judgment. In other words, the question of whether a provision is unconscionable and extravagent, and therefore unenforceable, is only relevant if the obligation is a secondary one. If the obligation is a primary one, the penalty rule doesn’t apply.

IP Draughts’ reaction is that this distinction is ‘too clever by half’ and that manoeuvring around the penalty rule on the basis of primary and secondary obligations will be fraught with difficulty for us mere mortals who actually draft contracts.

parking eyeLater in the judgment Lord Numpter concluded that both of the financial provisions at issue in the commercial case – the loss of future stage payments and the obligation to sell the remaining shares at a pre-determined price – were primary obligations and therefore not subject to the penalty rule. In the consumer case, Lord Numpter concluded that the £85 charge was a secondary obligation and therefore the penalty rule was engaged, but on the facts it was justified and not an unlawful penalty.

In their judgments, Lords Mance and Hodge seemed unconvinced that the obligations in the commercial case were primary obligations. But this ultimately didn’t matter, as they found them not to be unconscionable or extravagent in the circumstances of the case. Lord Toulson seemed to agree with this analysis.

If we take the Mance/Hodge/Toulson line, it may be risky to make any assumption about a clause being a primary obligation. If we take the Neuberger/Sumption line, it should be possible to draft many penalty-like clauses so that they fall outside the penalty rule altogether. Which line represents the current state of English law?

agreeYour guess is as good as mine. In his short judgment, Lord Clarke “agree[d] with the reasoning of Lord Neuberger and Lord Sumption, Lord Mance and Lord Hodge.” With respect, you can’t agree with all of them on this point, as they had different views. Rather oddly, Lord Carnwath says nothing in the official judgment; there is simply a laconic statement, in parenthesis and as part of the heading, before Lord Numpter’s judgment, that Lord Clarke and Lord Carnwath ‘agree’ with that judgment.

Relief against forfeiture

Lord Numpter spends some time discussing the differences between (a) the law on relief against penalties and (b) the law on relief from forfeiture, but declines to reach any conclusions on whether relief from forfeiture might be available in a contract case, even if the penalty rule doesn’t apply. Lords Mance and Hodge expressed the view that relief from forfeiture could be available in these circumstances, and Lord Clarke’s single paragraph of judgment is mainly devoted to saying that his “present inclination” is to agree with them. In other words, an obligation might not be so bad as to amount to an unlawful penalty, but might avoided under the rule on relief against forfeiture. However, this was not the basis of the decisions in the present, joined cases.


Their lordships declined counsels’ invitations to abolish or significantly expand the rule on penalties. Instead they sought to ‘explain’ the rule, which had been misunderstood by an undue emphasis, over the previous century, on Lord Dunedin’s 4 tests, including the phrase ‘genuine pre-estimate of damage’.

Where the penalty rule is engaged (and it may well not be engaged if the obligation is a ‘primary’ one), the test for whether an obligation should be struck down as a penalty is, in the words of the press release that accompanied the judgment, the following:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation

Following this judgment it will be easier, in IP Draughts’ view, to enforce what the world knows as penalty clauses . In English law agreements, there will be less emphasis on formulaic drafting of clauses that refer to genuine pre-estimates of loss.

allenFinally, congratulations to the lawyers at Allen & Overy who advised Cavendish Square Holdings in 2008 and presumably drafted the clauses that the Supreme Court upheld in the commercial case. Job well done. Does anyone know who the individuals were who drafted these clauses?

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Should we replace judges with computers in contract cases?

book-professionsThe recent publication of another visionary book from Professor Richard Susskind has stimulated debate in the legal world on whether automation is going to put us all out of a job. One of the jobs that lawyers do is interpreting contracts.

IP Draughts remembers being challenged by scientist colleagues, over 30 years ago, on whether a computer would interpret contracts more accurately and consistently than human judges and lawyers. Instinctively, IP Draughts felt it would be too difficult to program a computer to address all of the issues that a judge needs to consider when deciding a contract case.

The scientists were disappointed that it wasn’t possible to have certainty on how words used in a contract would be interpreted. This desire for certainty seemed to assume that the task of interpretation was simply one of applying linguistic analysis to the words used.

Nowadays, IP Draughts is becoming increasingly frustrated with how courts sometimes seem to ignore the linguistic meaning of contract terms and instead interpret the contract in a forced way, in order to do justice in the case. He put this point to a Court of Appeal judge recently at a UCL dinner. The judge commented that judges were always going to try to do justice in the case, as it was their job to do so, and if IP Draughts didn’t like that he should provide for arbitration in his agreements. Later, IP Draughts reflected that he wasn’t sure that arbitrators as a class would be any better at disciplined linguistic interpretation than judges.

Meanwhile, Ken Adams has recently raised the question of how often a case turns on the interpretation of the words used. He hopes to arrange for some empirical research to be done on this topic.

These varied thoughts are prompted by reading the judgment of the Court of Appeal in the case of Mortgage Express v Countrywide Surveyors Ltd [2015] EWCA Civ 1110, which was issued last week. The case turns on a small point of contractual interpretation.

bitThe case concerned claims by a mortgage company (lender) against a surveyor in respect of the latter’s valuation of properties. The parties had entered into a standstill agreement, under which they had agreed that the clock would be stopped in relation to time limits for bringing an action. The present action was over the interpretation of the standstill clause. The key part of the clause read as follows:

2.1. For all purposes of any defence or argument based on limitation, time bar, laches, delay or related issue in connection with the Dispute (a ‘Limitation Defence’), time will be suspended from the date of this Agreement until 30 days after the service by any Party of a notice which is compliant with Clause 3 below stating that the running of time is to recommence (the ‘Standstill Period’).

A recital to the agreement defined Dispute as follows:

4. In this Agreement, ‘Dispute’ means any claim or claims directly or indirectly arising out of or in any way connected with the matters referred to in paragraphs 1, 2 and 3 above.

Paragraphs 1 to 3 summarised that the defendant had been hired to conduct valuations and that the claimant had alleged (in 2010) that the valuations had been performed negligently.

A dispute arose as to whether a later claim, in 2013, was covered by the standstill agreement or was time-barred. The later claim, which was concerned with the same valuations, alleged “fraudulent misrepresentation and/or deceit and/or breach of contract and breach of duty of care”. The defendant argued that a claim in deceit was not contemplated by the earlier settlement agreement and was time-barred.

The recitals to the standstill agreement mentioned negligence but not deceit.The question of interpretation was therefore whether an allegation of deceit was , in the words of the fourth recital, “directly or indirectly arising out of or in any way connected with the matters referred to in [the recitals]”.

At first instance in the Technology and Construction Court, HH Judge Raeside QC agreed with the defendant. He commented:

I do not see how a claim in deceit can either directly or indirectly arise out of (1) and (2) and (3) of [the recitals]. The deceit claim is a case of systematic, opportunistic and deceitful overpricing from the outset and over the full period of time by these surveyors of each and every one of the 50 properties …

HH Judge Raeside QC (not to be confused with HH Judge Raeside)

HH Judge Raeside QC (not to be confused with HH Judge Raeside)

It seems to IP Draughts that this interpretation chooses to ignore the broad wording of the fourth recital, quoted above. The judge’s reasoning could be viewed as saying that deceit is much worse conduct than negligence, and the language used by the parties should be subject to an implied term that limits the words “directly or indirectly connected” to claims based on the same types of causes of action. It seems to IP Draughts unlikely that any computer would be programmed to come up with an interpretation of this kind.

The Court of Appeal overruled Judge Raeside. In the words of Lord Justice Simon, who gave the lead judgment:

…in my judgment the wide definition of ‘Dispute’ plainly extends beyond what had been alleged by the First Claimant at that stage. It would, for example, plainly cover a claim for breach of fiduciary duty based on the payment of a bribe. The difficulty with Mr Lawrence’s reading down of the paragraph 4 is that it could have been achieved by a much shorter paragraph 4: ‘In this Agreement, ‘Dispute’ means any claim or claims directly or indirectly referred to in paragraphs 1, 2 and 3.’ His answer, that the Claimant might have wanted flexibility in relation to particular valuations does not, in my view, give sufficient weight to the words ‘in any way connected with.’

In my judgment the proper construction of the Standstill Agreement is that if the claims arise ‘indirectly’ from the matters referred to in paragraphs 1-2 of the Background Preamble, or if they were in some way connected to those matters, they fall within the suspension provisions. The claims based on dishonesty fall within this very broad category of claims since they were at least in some way connected with the factual matters set out in paragraphs 1 and 2 of the Background Preamble and with the specific allegations described in paragraph 3.

Good. But this small case illustrates how much scope there is for a judge to come up with his or her own interpretation of the words used in a contract. Does this mean we should apply a simpler set of criteria to interpreting the words, based purely on linguistic analysis, which a computer might be able to replicate? IP Draughts is still undecided.


Filed under Contract drafting

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