Category Archives: 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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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

Jurisdiction clauses and Twenty20 vision

deccanThis is a sad tale about an international business venture. When the deal goes sour, and it is near impossible to recover the millions that you are owed (despite a court order in your favour), what should you do? Ah yes, sue the lawyer who advised you on the deal. He must have done something wrong, he has insurance and he is based in a jurisdiction where the legal system works.

Specifically in this case, what should your lawyer advise in relation to choice of jurisdiction in the contract? We now have some guidance from the Court of Appeal.

The case of Wright v Lewis Silkin LLP [2016] EWCA Civ 1308 (21 December 2016) was reported on BAILII this week. Mr Wright was advised by the well-known London law firm, Lewis Silkin, on a contract under which Wright was hired as the chief executive of an Indian company, Deccan Chargers Sporting Ventures Limited (DCSV). DCSV held the Hyderabad franchise of the Indian Premier League, which runs a Twenty20 cricket league across India. DCSV also had ambitious plans to create a “sports city” in India.

To err is human...

To err is human…

While this contract concerned an employment relationship, the same issue could easily have arisen in other types of international business contract, and would likely have been treated by the court in the same way.

The contract, described as Heads of Terms, included the following terms:

Severance Guarantee
In the event that TW’s employment is terminated by the Company (including as a result of a constructive dismissal) at any time, TW will receive the immediate payment (to include contractual notice entitlement and the value of then vested equity (“total package”)) of the higher of the then value of his total package or £10 million.
Law
These terms to be governed by English law.

The contract did not contain any clause stating which courts would have jurisdiction.

Later, Mr Wright was dismissed. He sued DCSV in the English courts. DCSV unsuccessfully challenged the jurisdiction of the English courts. There were other procedural difficulties. Eventually, the English High Court awarded Mr Wright the £10 million referred to above.

Mr Wright sought to enforce his award in the Indian courts, but the Indian courts are very overburdened with work. It is likely to take many years before he stands any chance of the Indian courts recognising and enforcing the English court decision.

So, he sued his solicitor. At trial he alleged that his solicitor should have advised on the following:

  1. To obtain a bank guarantee from the Indian party for the £10M.
  2. To include an exclusive English jurisdiction clause in the contract.

At trial, the judge rejected the bank guarantee point. Thank goodness! In IP Draughts’ view this was a commercially unrealistic argument, for the reasons stated at paragraph 38 of the Court of Appeal’s judgment.

On the second point, the trial judge found that the solicitor had not advised on jurisdiction and was in breach of duty for this failure.

The facts in relation to the second point are a little complicated, but can be summarised briefly as follows:

  • Mr Wright had been recommended to take business advice on the transaction from someone referred to by the parties as the “wise Indian”. The wise Indian had advised Mr Wright to ensure that disputes were resolved in England, “because …India very slow, no good, must be here”.
  • Mr Wright had wrongly assumed that the above-quoted reference to English law meant that disputes would automatically go to the English courts.
  • If the solicitor had advised on this point, he would have indicated, perfectly reasonably, there were pros and cons of including an exclusive jurisdiction clause.
  • But Mr Wright would probably have insisted on exclusive English jurisdiction in light of the wise Indian’s advice.
  • A first action was brought in the English courts for the £10M but was abandoned after DCSV challenged jurisdiction.
  • A second action was brought in the English courts and was successful (as mentioned above), despite a further challenge to jurisdiction.
  • Mr Wright argued that if he had been successful in the first action, he would have been able to bring pressure on DCSV to pay up at an earlier time. At that earlier time, DCSV was a thriving business and would not have wanted to prejudice its business by resisting payment. However, DCSV’s circumstances had changed by the time of the award of damages under the second action. It lost its franchise for Hyderabad in 2012.
  • The trial judge (in the negligence action) held there was a 20% chance that DCSV would have paid up voluntarily if the first action had been successful, and therefore held that the solicitor’s firm was liable for 20% of the £10M judgment debt, ie £2M. There were also some wasted costs in relation to the first action, of a few tens of thousands, for which the solicitor’s firm was liable.

jacksonJackson LJ, a very senior English judge, gave the lead judgment in the Court of Appeal. He dismissed the appeal on the bank guarantee point.

On the jurisdiction clause point, Jackson LJ accepted the trial judge’s view that there was a 20% chance of Mr Wright having recovered his judgment debt if the first action had proceeded. However, he disagreed with the trial judge on whether the £2M was recoverable.

Citing the Court of Appeal case of Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146; [2016] Ch 529, he held that where a solicitor owes duties concurrently in contract and in tort, the test for recovering damages should be the contractual one. Applying the principles set out in Hadley v Baxendale and subsequent English cases, he considered that the £2M damages were too remote to be recoverable, in that a reasonable person would not have had damage of that kind in mind as “not unlikely to result from the breach”. [Apologies for the double negative.]

Thus, the solicitor’s firm, Lewis Silkin LLP, was only liable for the approximately £40,000 of wasted costs that had been incurred as a result of abandoning one action and starting another.

Instinctively, this decision feels right. Mr Wright wanted English jurisdiction and he got it, despite the absence of a clause that said so. If DCSV’s challenge to English jurisdiction had been successful, a more predictable loss might have occurred. There was a risk that DCSV would have refused to include an exclusive jurisdiction clause, if asked. Litigation involves all kinds of delays. It would have been difficult to predict, at the time the contract was made, that a delay in enforcement of several months would make it much less likely that DCSV would voluntarily honour an English judgment.

This judgment prompts several thoughts for IP Draughts:

  1. Non-lawyers sometimes need to be reminded that choice of law and choice of jurisdiction are distinct points.
  2. In many or most cases, it is desirable to have both a choice of law and a choice of jurisdiction clause in the contract.
  3. It is good to get a judgment from a respected court. But if the defendant has no assets in that jurisdiction, enforcement will need to take place in the defendant’s home jurisdiction (assuming he has assets there). Is it better to get a judgment in the same court that will enforce the award? Perhaps not, as in this case.  A court decision in India would likely have taken many years as well.
  4. Even if there is no perfect solution, it is better to discuss the issue with the client and decide on something than overlook the point.

withersThe point about concurrent liability in contract and tort is an interesting one, which also arises in the context of warranties. Where a party “represents and warrants” that a fact is true, some lawyers consider that this gives the recipient of the promise a right to sue in contract or for misrepresentation (ie in tort). IP Draughts has never been comfortable with this idea, and sees little in the case law to support it, though there have been several obiter dicta. He wonders whether the principle in Wellesley v Withers points us in the opposite direction, ie that in such a situation the contractual test for damages is the one to apply. In the words of Floyd LJ in that case:

Nevertheless, I am persuaded that where, as in the present case, contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one. The basis for the formulation of the remoteness test adopted in contract is that the parties have the opportunity to draw special circumstances to each other’s attention at the time of formation of the contract. Whether or not one calls it an implied term of the contract, there exists the opportunity for consensus between the parties, as to the type of damage (both in terms of its likelihood and type) for which it will be able to hold the other responsible. The parties are assumed to be contracting on the basis that liability will be confined to damage of the kind which is in their reasonable contemplation. It makes no sense at all for the existence of the concurrent duty in tort to upset this consensus, particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract.

 

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Filed under Contract drafting, Legal Updates