Category Archives: Contract drafting

Telling the court how to interpret a contract

For the last two days, IP Draughts has been attending a very interesting conference, organised by the UCL Faculty of Laws and titled The Contents of Commercial Contracts: Terms Affecting Freedoms.

The conference mostly consisted of academic lawyers at UCL and elsewhere giving 15-minute summaries of papers that they had written, on topics relevant to the overall theme of the conference. After each summary, another person, often a practitioner, gave a 5-minute response, and then the subject was opened to questions and comments from the audience. In this way, 18 diverse topics were discussed, ranging from implied terms of good faith under English law, to negative covenants in loan agreements.

Two discussions particularly engaged with IP Draughts and prompted him to ask questions. The first was a paper from Richard Calnan of Norton Rose Fulbright, on the subject Controlling Contract Interpretation. He circulated a one-page set of interpretation clauses of a kind that is rarely seen, some of which instructed the court to ignore some of the general principles of interpretation that they usually apply. For example, one of his clauses stated that where party was given a discretion, he could exercise that discretion in his own unfettered interests.

IP Draughts’ question to Richard was why he had selected some of the principles of interpretation but not others. Could there not be a 20-page set of terms that more thoroughly overrode or confirmed the general principles of interpretation that the English courts apply? Richard’s slightly unsatisfactory response was that this set of terms was a ‘teaser’.

The second talk that caused IP Draughts to raise his hand was given by Professor Sarah Green of the University of Bristol, on the subject Distance and Discretion: The Implications of Smart Contracting for Freedom of Contract. IP Draughts was keen to know the panellists views on whether the (future) rise in smart contracts was likely to affect how contracts generally were interpreted. Might the courts follow the lead of smart contracts, where terms were rigidly applied, rather than find ways around the strict adherence to contract terms, using long-established principles of interpretation?

IP Draughts gave the example of a contract that provided that, on termination of the contract, one party (the principal) could require the other (the distributor) to sell him certain equipment that had been used by the distributor in the course of performing the contract, but only if notice to buy was delivered to the seller within 28 days of termination. IP Draughts had been involved in a case with similar facts to these, where it was suggested that, in practice, the court would ignore the 28 day condition. Surely this was a situation where the time limit would be strictly enforced if it formed part of a smart contract?

The speakers for this session agreed with IP Draughts’ premise that there would be a general move towards a stricter enforcement of contract terms by the courts, even where the contract was not ‘smart’.

IP Draughts is grateful to the speakers for delivering such thought-provoking material, and to Professor Paul Davies and Dr Magda Raczynska at the UCL Centre for Commercial Law for organising the conference. It seems that the organisers hope to run similar conferences in future and that they would like suggestions on topics.

IP Draughts would like to put in a plea for a conference that focuses mainly on high-tech contracts and those where IP is important. Much as he enjoyed this conference, at times he found its focus on traditional ‘City’ subjects such as insurance, shipping and banking rather remote and, dare he say it, slightly old-fashioned.

 

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Contract drafting wars: the rise of the rhetoricians

A recent discussion on LinkedIn with representatives of IACCM – The International Association for Contract & Commercial Management – has prompted several thoughts.

First, if we are trying to improve contract drafting, who is our target audience? When preparing a talk, book or article, IP Draughts’ tries to fix in his mind a typical audience member, and to tailor his material as a kind of conversation with that person.

For example, in our annual course on IP Transactions at UCL, the target audience is English solicitors who are starting a career in IP law. People in other categories are very welcome to attend, and many do – we have patent attorneys, non-IP lawyers, overseas lawyers and licensing managers in each year’s cohort. But we try to focus our material on the needs of our target group, and mainly in the context of English law. We try to avoid having generic, international content for people of different levels of experience, that satisfies no-one.

On the subject of improving the drafting of commercial contracts, a similar question arises. If you are writing about or teaching how to make contract drafting better, or are responsible for drafting contracts, whose needs are you focused on: commercial lawyers, business managers, consumers or someone else?

Perhaps there is no single audience, and contracts need to work for multiple audiences. It can be argued that a practising lawyer has to balance several interests, including:

  • winning in court, if the contract wording comes before a judge for interpretation;
  • making the contract clear for the business managers who have to use it;
  • in negotiations, working within the prevailing idiom and respecting one’s counter-parties. This may involve not making radical changes to someone else’s draft unless there is a pressing commercial case for doing so, and sometimes living with imperfection.

Another factor that will sometimes be relevant is the legal framework for the type of contract in question. In the UK, one of the biggest issues is whether one is dealing with a business-to-business contract or a contract with consumers. In the latter case, EU laws may severely constrain both the type of contract terms that are enforceable and the way those terms are drafted. The requirement for plain, intelligible language in consumer contracts may push the drafter away from legalese and sophisticated legal concepts like indemnities and entire-agreement clauses.

Increasingly, IP Draughts thinks there is a case for treating contracts with unsophisticated small businesses in a similar way to consumer contracts. The people who run such businesses will often not have the experience to understand and cope with detailed written contracts. Some countries, eg Australia, have laws that govern franchise agreements. Franchises are an example of contracts that are sometimes entered into with small-scale, unsophisticated business people. Let’s call these people quasi-consumers, as they share many of the characteristics of consumers and there may be policy grounds for protecting them in their business dealings.

In IP Draughts’ mind, if one leaves aside contracts with consumers and quasi-consumers, there is still a vast category of general business contracts. When it comes to persuading people to improve the clarity and content of business contracts, IP Draughts sees the target audience as people who draft and negotiate those contracts, whether as lawyers or commercial managers.

What is the best way to persuade decision-makers to improve their business contracts? In IP Draughts’ view, it is to provide examples of well-drafted contracts, and provide training and guidance on how to improve contract wording. This is a focus on the nitty-gritty, the detail, and the hard work required to make things better over time. IP Draughts has also done some preliminary work on the idea of legislation, e.g. through trying to initiate a United Nations project to produce standards for international IP licence agreements.

There is more than one way of skinning a cat, or so we are told. IACCM is very interested in the subject of simplifying contracts, and has its own way of advocating this topic. Last week, IP Draughts tried to engage with them on LinkedIn, but withdrew when he felt he was being bludgeoned with statistics and examples that didn’t ring true to him, and which he felt were a kind of hard sales technique that repelled him. Tim Cummins and Sally Guyer of IACCM used the examples of indigenous peoples, and people who were illiterate, in support of their arguments for simplifying contracts. When IP Draughts mildly suggested that these examples were of marginal relevance to mainstream business contracts, he received this response from Sally:

there are somewhere between 12,000 and 16,000 indigenous businesses in Australia. The Canadian Council for Aboriginal business cites 43,000 Indigenous entrepreneurs in Canada.  According to UN data from 2018, there are 370 million indigenous people living in more than 90 countries – I don’t believe that’s marginal.  Governments and major corporations around the world have policies (and rightly so) to ensure inclusion of small enterprise and indigenous businesses – do the contracts required to support their inclusion fall into your somewhat ubiquitous definition of “regular business contracts”?

IP Draughts has now had a chance to look into some of these statistics. At first glance they seem impressive, but a closer examination reveals them to be misleading.

First, on the Australian example, it appears from this PWC report of 2018 that there are about 12,000 Aboriginal owner-managers of businesses. The number of incorporated businesses or businesses that employ staff is much smaller, and they contribute a tiny percentage of the GDP of Australia.

Similarly it appears from this Canadian report that “according to the 2011 National Household Survey (NHS), there are more than 43,000 First Nations, Inuit and Métis in Canada who are business owners.” This sounds like a big number. But if you dig into the details of this report, you discover for example that:

In general, Aboriginal businesses tend to be quite small, with three-quarters (73%) that are unincorporated and more than six in ten (64%) that have no employees.

And:

The majority of Aboriginal businesses also continue to be home-based. Two-thirds (66%) of Aboriginal business owners report that their business currently operates from their home or the home of their business partner, which is essentially unchanged from 2010 (66%).

In IP Draughts’ mind, this research confirms his initial impression that these examples are of marginal relevance. This has nothing to do with the ethnicity of the people whose statistics are given. He has exactly the same reaction to any very small business.  Taking business contracts as a whole, to focus on the needs of (for example) a one-man-band plumber in Wallingford, Oxfordshire, will not tell us much about how business contracts should be drafted or structured. Often, these businesses won’t even have a written contract with their customers.

Of course, some of the people covered by the statistics that Sally quotes will be operating on a larger scale and will be regularly involved in mainstream, written business contracts. But the headline statistics presented by IACCM are, in IP Draughts’ view, misleading and shouty.

There may be a place for IACCM’s approach in the bigger picture. Some people may be persuaded by bold, high-level arguments made with passion. But in the world that IP Draughts inhabits, business people and their lawyers prefer a more grounded approach that reflects everyday experience, when deciding what terms to include in their contracts and how to express them.

IP Draughts’ starting point is that people who share a professional interest – here, to make business contracts more user-friendly – should be able to cooperate in pursuit of a common cause. Clearly, we will all need to do some work before there can be a meeting of minds.

 

 

 

 

 

 

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Contract drafting wars: who will win?

Once upon a time, business contracts were short and simple. Before the time of photocopiers and personal computers, contracts had to be written out by hand, typed on manual typewriters, or sent off to a printing firm to prepare final versions. The limitations of the technology encouraged brevity.

As did the fee structure. Before the billable hour, lawyers charged a rate for the job. IP Draughts’ former firm, Bristows, has records dating back to the nineteenth century; these include an invoice for its work on licensing a version of the electric telegraph for the United States territory. The invoice stated a rate, if IP Draughts remembers correctly, of “six shillings per folio”. In other words, it was a fee per page of the final contract. Not quite charging by the word, but close. A fee system of this kind is likely to make the client apply pressure on the lawyers to be brief.

Similarly, IP Draughts has seen artiste contracts for Hollywood stars of the 1930s that were only two or three pages – much shorter than today’s versions of the same contracts.

When IP Draughts started in practice in the 1980s, business sale agreements were sometimes in the region of 30 pages. Nowadays they tend to be many times that length. The pressure from some clients, e.g. buyers of companies or professional investors, is to address all conceivable risks and try to pass them on to the sellers. They will blame the lawyers if a risk is not addressed. This can result in monstrous contracts.

While contracts have grown in susbstance over the last 30 years, there has also been pressure in the UK to make the drafting more modern and clear. The Campaign for Plain English was one of the early advocates. Techniques for clear drafting were taken from seminal texts such as The Complete Plain Words by Sir Ernest Gowers. Resistance to modern drafting has now all but evaporated among English business lawyers. This doesn’t guarantee that contracts will be well written, but it provides a healthy context for those us who teach the subject.

A pressure in the opposite direction has come from the increased use of US-style contract wording in many international business contracts. The USA has been slower to adopt modern drafting techniques, and many of the templates that are seen are full of turgid, archaic wording and (US) lawyers’ jargon. Ken Adams has almost single-handedly campaigned to improve US contract drafting over the last 15 years. At the core of his work has been his magnum opus, A Manual of Style for Contract Drafting, published by the American Bar Association. Now in its fourth edition, it has grown to nearly 600 pages, and is a comprehensive guide to clear drafting. Ken is currently working on an abridged version, which will be an introduction to the subject.

He tirelessly travels across the world teaching and advocating for clear drafting. But it is a labour of Hercules for one person, particularly in the US legal market which by some measures is about 10 times the size of that in the UK.

Ken is very clear that his focus is on the “how” and not the “what”. In other words, he is concerned with expressing contractual obligations as clearly as possible, but leaves it to others to decide what those obligations should be.

And of course both of these factors affect whether a reader of a contract can understand the contract terms. You can write a 100-page contract with beautiful clarity of expression, but it will still be overwhelming to some, or perhaps even all, of its readers.

Thus, Ken’s efforts are an essential component of making contracts easier to understand, but they are not enough on their own. There also needs to be an appetite for simplifying the substance of the template agreements that are commonly seen in business transactions. This requires decision-makers in companies and other organisations to take responsibility for that substance, and to pressurise their contract lawyers to focus on key business risks rather than take a comprehensive approach.

And this is increasingly the battleground of the contract wars. The combatants sometimes shoot down their allies in “friendly fire”. Ken’s work has been criticised recently by an organisation known as IACCM. The International Association for Contract & Commercial Management has the strapline “enabling organizations and professionals to achieve world-class standards in their trading relationships.”

Sally Guyer, global CEO of IACCM, recently posted an article on LinkedIn that provoked a considerable amount of comment about what contract drafting should be trying to achieve. It was perhaps not surprising that Ken reacted to the following comment in Sally’s original article:

Designing contracts for users equally demonstrates a level of social inclusion that is so powerful and necessary today. If you have the time and inclination to read Ken’s 600 page tome – enjoy! For those looking for more practical and bite size solutions to designing contracts for users, however complex the transaction, IACCM’s Contract Design and Pattern Library is worth a look.

In response to a comment from Ken on this statement, she wrote:

We certainly acknowledge the work that you do as a component of simplification – it just doesn’t go to the level that modern society requires and increasingly demands.

Another commenter wrote in the same thread:

Can it be that difficult to express intentions clearly? Or do we really need a 600 page manual to be able to do so?

In IP Draughts’ view, these criticisms are misplaced. By all means say that the substance of contracts should be simpler – but that criticism should be directed primarily at decision-makers in businesses (and their professional investors) rather than their lawyers, even if the latter are sometimes complicit in following the status quo. It should certainly not be directed at Ken.

And by all means say that many users of contracts are not good at words – the essence of traditional contracts – and need more visual explanations such as flowcharts and diagrams. Direct that criticism at companies who don’t invest enough time in explaining their deals to those who have to manage them at an operational level.

It is true that contracts are based on words, and that if the contract comes before a court, the judge and the advocates will be using their advanced-level skills with words – oral and written – to argue and decide the case. And this may be a very different approach to that taken by some business managers when they try to work with the contract.

But does this all add up to a valid criticism that we don’t need A Manual of Style for Contract Drafting or the lessons that it contains? In IP Draughts’ view the answer to this is a resounding no. We may need more than Ken’s work, in the form of a different approach by people in the business world to the deals that they strike and how they integrate them with the needs of operational managers. But we still need  a disciplined use of language, and we still need an advocate for stripping out the lawyerisms and turgid language from contracts.

IP Draughts reads in IACCM’s approach a dismissive approach to someone who is a natural ally. Demanding “bite sized solutions” is fine as a rallying cry in a consumerist world, but it fails to engage with the necessary hard work involved in making things simple. It is ironic that if you read the pages of text that introduce the IACCM “pattern library” mentioned above, they include extensive disclaimers that they are not offering a simple, plug-and-play solution and that the reader will need to do their own work to make effective use of any pattern that is offered.

To repeat the often-quoted line: “I’m sorry this letter is so long, but I didn’t have time to make it shorter.”

 

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Post-employment restrictions on scientists

The judge referred to this leading textbook in his judgment

The case of Invista Textiles (UK) Ltd & Anor v Botes & Ors [2019] EWHC 58 (Ch) (Birss J) has now been published. It is a good illustration of how difficult it is for an employer to impose post-termination restrictions on scientists.

General context

Disputes with ex-employees tend to take several, related forms. They include:

  • has the individual taken documents that belong to the employer;
  • has the individual used the employer’s trade secrets; and
  • has the individual become involved in a competing business, in breach of a non-compete clause in their contract of employment

Defences to such actions tend to include:

  • the information that the individual is using is part of their “general skill and knowledge” rather than their employer’s trade secrets
  • the non-compete clause is “in restraint of trade” and therefore unenforceable, e.g. because it is too widely drawn in terms of territory, field, or duration, and doesn’t focus on a legitimate interest of the employer (such as to protect the employer’s trade secrets)

Some of the leading cases in this field concern obvious wrongdoing with clear evidence, e.g. a salesman taking a list of customers with him when he leaves the company, or someone setting up a rival business in the same town in breach of a non-compete clause. In other words, many of the cases are about local businesses and sales activities.

When IP Draughts has drafted non-compete clauses for high-tech clients, it has sometimes been difficult to apply the case law to the facts of those clients’ employees. For example, in the case of a molecular scientist working for a biotech company, the company’s main competitors may be based in another continent. Case law about territorial restrictions of a few miles is of limited relevance. There has been very little English case law about scientific staff working for a technology-based, internationally-focussed company.

Background to this case

Invista is part of a large, international group that owns the Lycra trade mark. The first three defendants were scientists employed in Invista’s Sustainability Group (SG). The SG was researching the possibility of genetically engineering microorganisms for use in the production of polymers such as nylon, as an alternative to generating polymers from oil.

After the defendants left Invista, their employer discovered that they might have taken documents relating to their employment. Invista sought an interim injunction against them, which was compromised on terms that allowed Invista to conduct forensic searches of their laptops and other devices. Thousands of documents were discovered, many of which had been deleted (and emptied from the deleted box) from the computers but which could be recovered from the hard drives using a special program. There was no evidence that the defendants had sought to recover them. Some of the documents were on a memory stick that one of the defendants had used at a conference while employed by Invista. The memory stick was found in a barn at the defendant’s property; the defendant had forgotten that she had it. In some cases the documents were password-protected, and the evidence was that the password had been forgotten.

Retention of documents

Part of the case is about whether the defendants had wrongfully retained property belonging to Invista, after leaving its employment. Birss J found that a small number of documents had been wrongfully retained out of the thousands that were recovered from computers through forensic techniques.

The impression given by his judgment is that these were technical breaches rather than deliberate wrongdoing. Essentially, the judge found the defendants to be honest, despite the apparent “smoking gun” of Invista documents being found on various devices.

Misuse of confidential information

Birss J considered the obligations of confidentiality that were provided for in the contract of employment, as well as the general duties of confidentiality of an ex-employee towards their former employer.

He thought the wording of the written confidentiality obligations was far too wide to be enforceable against an ex-employee, as it was not limited to trade secrets. For example, he focused on clause 1.1.2 of the contract, which formed part of the definition of the employer’s confidential information and was drafted very broadly:

Business methods and processes, technical information and know how relating to the Employer’s business and which is not available to the public generally, including inventions, design, programs, techniques, data base systems, formulae and ideas.

Together with other clauses (e.g. clause 1.2 which required the employee not to use the employer’s confidential information after termination of the contract) this was too wide to be enforceable.

He also found that none of the information highlighted by the claimants was genuine trade secret-type information. Their best shot was some Powerpoint slides.

His conclusion:

Therefore I dismiss the case based on misuse of confidence either in contract or in equity altogether.

Non-compete clauses

The contract included various obligations not to work for a Competing Business or solicit staff, customers, etc, for a period of 3 months after termination of the employment. Some key definitions in this part of the contract included:

“Competing Business” means any entity or persons engaged in or about to become engaged in research, development, production, marketing or selling of a competing product(s).

“Competing Products” means product(s) process(es) or service(s) with which the employee has worked within five years preceding termination of such employment, or about which the employee has acquired the employer’s trade secret, technical or non-technical information.

Birss J considered that these definitions were very broad. In relation to the obligation not to work for a competitor, he considered:

All this clause achieves when applied to employees like the individual defendants is to prevent them from exercising the very same skills they were hired for in the first place for three months post-employment. That does not benefit Invista at all. I find that the clause, in its operation as it operates after the employment has ceased is an unreasonable restraint of trade. The period in the clause is just a relatively short period to try and make an unreasonable clause seem more reasonable. That is not a justification.

In relation to the non-solicitation part of the clause, he found that the first defendant had breached it by seeking to recruit the second and third defendants to her new business during the 3 month period.

So, he found a few technical breaches. But he decided not to order an enquiry as to damages:

Overall, I will not order an inquiry as to damages in relation to the proven breaches of contract. It would be entirely disproportionate. There is no justification for it. There is no evidence any of these activities cause any substantive or quantifiable loss to Invista. I am prepared to hear submissions about what sum by way of damages (if any) ought to be awarded for the proven breaches, including the failure to return documents in the Chen Library, at the hearing to deal with the consequences of this judgment but that is as far as it will go.

Comments

This case is interesting to IP Draughts because it sheds a light on the enforceability of non-compete clauses in the case of scientists working for a technology-based company. Much of the case law in this field concerns very different types of industry and employee role.

IP Draughts has tended to advise companies to limit their non-compete obligations to 6 months after termination. In this case, it seems the company’s lawyers took an even more cautious approach, going for 3 months, but the judge decided that even this was too long when the obligations were too broad in scope.
There are various other techniques for improving the enforceability of these clauses, including explicitly limiting their post-termination application to trade secrets. Not all of those techniques seem to have been used in the contract under discussion in this case.

IP Draughts doesn’t recall a case of this kind where the judge’s sympathies lay with the defendants. At one point, when discussing whether he believed the witnesses, he commented on the defendants of “being sued personally by a major multinational corporation which has deployed all the resources at its disposal to do so. The strain that that would place on anyone would be significant.”

In IP Draughts’ view this is a significant judgment on non-compete clauses for scientific staff. It will be interesting to see if it is appealed.

tailor

Tailor-made is best

IP Draughts understands that the UK Supreme Court heard a separate case about non-compete clauses earlier this week, and he looks forward to reading the judgments in due course, to see whether they give further guidance on this subject.

In light of these cases, including any appeal in the Invista case, high-tech (including life science) companies may wish to review the non-compete clauses in their contracts of employment, and obtain specialist advice on whether any revisions are appropriate.

UK companies that have US parents (as in this case) may wish to “push back” against using template wording provided by the parent company for use by all employees in the group, and instead draft tailor-made clauses in light of UK case law.

 

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