Category Archives: Contract drafting

Indemnities are often misconceived

When will we three meet again:
cause, remote and mitigate?

Why are there so many contracts in circulation that include indemnities?

The short answer may be that the drafter thinks they are expected, and doesn’t want to be criticised for omitting them.

But too often the wording seems misconceived, as if the drafter doesn’t really understand the principles behind them, or just has a vague idea that they somehow provide greater protection than a contract that merely has warranties and other obligations.

The classic way of looking at indemnities is to say that they provide stronger protection to the beneficiary of the indemnity than a contractual obligation on the other party. For example, being entitled to an indemnity against third party claims for IP infringement may provide greater protection than being the recipient of a warranty that no third party IP is infringed. This argument assumes that the indemnity provides, in effect, a “blank cheque” for the amount of any damages or settlement payment to the third party IP owner. By contrast, if there is merely a warranty, the recipient of the warranty can only recover if the “holy trinity” of contract claims are satisfied, namely:

  1. Causation. The loss suffered must have been caused by the breach of warranty.
  2. Remoteness. The loss must not be too remote from the breach.
  3. Mitigation. The recipient of the warranty must take reasonable steps to mitigate, or minimise, the loss.

There is some case law that suggests that mitigation, at least, may be required, even in the case of an indemnity. But, in general, drafters feel that an indemnity of this kind may provide stronger protection than a warranty, and in some types of negotiation a possible advantage is enough to justify including a clause, even if the precise extent of that advantage in an individual case is not clear.

While this argument is understandable using the above examples, there are many other examples, seen in practice, where the argument is much less clear. Sometimes, an indemnity is given against breach of warranty. Adapting the previous examples, a party warrants that no third party IP is infringed, and indemnifies the other party against its breach of warranty.

In this example, it is much less clear that the indemnifier is giving a blank cheque to the other party. The party asking for the indemnity is, no doubt, hoping that the indemnity will provide greater protection than the warranty, otherwise what is the point of the indemnity? But are they clear in their mind what that greater protection is? Are they expecting that the court will say that, because an indemnity against breach of contract is given, the party in breach no longer has the protection of causation, remoteness and mitigation?

In IP Draughts’ view, the case law on this point is far from clear. See further Wayne Courtney’s excellent book, Contractual Indemnities, for a discussion of the case law.

Even if it might be possible to persuade a court that an indemnity against breach strips away the protection of causation, remoteness and mitigation, why would the party in breach want to agree to removing their rights under contract law, which arguably provide a reasonable balance between the interests of the parties?

This type of indemnity, which has gradually crept into many English contract templates from overseas, notably from the USA, is arguably misconceived and should be avoided. Of course, the counter-argument is that it depends on which party you are acting for, but we shouldn’t just put stuff in contracts because others do, and where the rationale is not clear.

Once you start including this type of indemnity, the next question and area of confusion is whether liability under the indemnity should be limited. If the indemnity is viewed as a bolster or flying buttress for a breach of contract claim, then yes, liability probably should be limited in the same way that the contract typically limits liability for breach of warranty. But if the indemnity is designed for a different purpose, namely to allocate responsibility for third party claims (as in the first example given above) then different considerations apply. Some of this confusion can be avoided if the indemnity is drafted not as an indemnity against breach of contract, but as an indemnity against a third party claim.

Or the contract might not need any indemnities. In IP Draughts’ view, the contract drafter should start from the assumption that no indemnities are needed, then add them if there is a good reason to do so, rather than the other way around.

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Oxford commas are for wimps

Are you tired of seeing articles about whether the absence of a comma changed the interpretation of a law or a contract? If so, look away now.

As tomorrow is International Workers’ Day, and some of the sentiments expressed below are a touch radical, you may wish to listen to the Internationale while reading this article.

There seems to be a spate of cases and articles on this subject, many coming from the USA. IP Draughts has a confession to make: he hadn’t even heard of an Oxford comma until a few years ago. As far as he remembers, they weren’t discussed when he was taught grammar at school. Yes, he is old enough to have been taught the rules of grammar, or at least a version of the UK version of the rules as they existed before the UK joined the Common Market, adopted decimal currency and the SI system, and generally went to the dogs. Or not.

It seems that many people in the USA have been taught about the Oxford or serial comma, including many judges who are called upon to interpret legal language.

Consider the following instruction from the Maine Legislative Drafting Manual:

Although authorities on punctuation may differ, when drafting Maine law or
rules, don’t use a comma between the penultimate and the last item of a series.

Do not write: Trailers, semitrailers, and pole trailers

Write: Trailers, semitrailers and pole trailers

To IP Draughts’ eye, this advice is correct – it looks weird to put a comma after “semitrailers” (whatever they may be). But if you are going to use a comma there, it is known as an Oxford or serial comma. Or should that be an Oxford, or serial comma? Or Oxford, or serial, comma? Choices, choices…

The State of Maine’s legislative drafting hit the headlines recently, in the case of O’Connor v Oakhurst Dairy, heard in the United States’ Court of Appeals for the First Circuit. Starting his lead judgment, Judge Barron commented:

For want of a comma, we have this case.

The case was about whether delivery drivers were entitled to overtime payments under Maine legislation, or came within a statutory exemption. The relevant part of the legislation provided that overtime payments would not be required in the case of:

The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of:
(1) Agricultural produce;
(2) Meat and fish products; and
(3) Perishable foods.

Okay, Cannery Row is in California, not Maine, but you get the point…

The question before the court was essentially whether “packing for” qualified just the word “shipment” or also qualified “distribution”. In other words, was the exemption for “packing for distribution” or for “distribution” of the numbered items? The drivers argued that it was “packing for distribution”: as they didn’t do this work, the exception didn’t apply and therefore they were entitled to overtime.

In the words of Judge Barron:

Each party recognizes that, by its bare terms, Exemption F raises questions as to its scope, largely due to the fact that no comma precedes the words “or distribution.”
In other words, if a comma had been present, it would have been clear that the exemption was for “distribution” and not “packing for distribution”.

Even if this is true, the absence of a comma does not automatically mean that the exemption is for “packing for distribution”. In context, the wording is unclear. To make it clear(er), and without fundamentally changing the sequence, IP Draughts would have added an “or” before “packing” (but see also his further suggestions below).

Judge Barron’s judgment considers the linguistic arguments, but in the end he resolves the ambiguity in the drivers’ favour, unlike the courts below, by looking to the “remedial purpose” of the statute.

In IP Draughts’ view, if a dispute requires a court to consider the effect of an Oxford comma, the drafter has failed. Other drafting techniques should have been used to avoid getting to that point. In fact, this is also the view of the drafter of the Maine Legislative Drafting Manual. After the passage quoted above, the Manual states:

Be careful if an item in the series is modified. For example:
Trailers, semitrailers and pole trailers of 3,000 pounds gross weight or less
are exempt from the licensing provisions.
Does the 3,000-pound limit apply to trailers and semitrailers or only to pole trailers? If the limit is not intended to apply to trailers and semitrailers, the provision should read:
Pole trailers of 3,000 pounds gross weight or less, trailers and semitrailers
are exempt from the licensing provisions.
If the limit is intended to apply to all three, the provision should read:
 If a trailer, semitrailer or pole trailer has a gross weight of 3,000 pounds or
less, it is not required to be licensed.

Excellent advice! It is such a shame that the drafter of Exemption F to the Maine overtime law didn’t follow it, as the wording would then have become clear.

In this example, changing the word order removed the ambiguity. Other techniques that may be sometimes appropriate include numbering and indentation. Applying those techniques to the above example:

(a) Trailers;

(b) semitrailers; and

(c) pole trailers of 3,000 pounds gross weight or less;

are exempt from the licensing provisions.

In the overtime case, adding more numbering would have been clunky, given the numbering already there in the extract quoted above. On balance, and to make sure that there was no ambiguity, IP Draughts might have been tempted to repeat the words “packing for”:

The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or packing for distribution of…

Clarity overrides elegance in contract drafting.

In summary, don’t rely on the Oxford comma. It is a feeble drafting technique, and liable to have sand kicked in its face. Oxford commas are for wimps!

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Contract drafting tips: avoid such and said

Good contract drafters usually try to avoid vague or ambiguous language in their contracts. Except, of course, when they are indulging in constructive ambiguity – a concept that brings IP Draughts out in a rash, particularly when combined with a client who mistakenly thinks that his personal intentions during negotiations are relevant to the interpretation of the contract. Under English law, evidence of a party’s subjective intent, or the drafting history, is generally not admissable when the court interprets contractual language.

Regrettably a lot of people don’t realise this, including at least one US Federal judge. See the recent, US case of Bayer CropScience AG v Dow Agrosciences LLC (links to the several case reports here) in which, in IP Draughts’ view, the judge makes a complete hash of applying English law rules of contractual interpretation in relation to the grant clause of a patent licence agreement. But that is not the main subject of this posting.

One of the areas where drafting precision is important is where the text refers to an item (eg an obligation) set out in another clause, or to another sentence in the same clause. Contracts sometimes vaguely refer to “the said …” or “such …” as a shorthand, and this vagueness can lead to disputes, particularly if there is more than one preceding example and it is not clear which one is being referred to. A classic example of this can be found in the Rainy Sky case, which IP Draughts blogged about in 2011 and re-posted earlier today.

Consider the following, fictitious example:

At the start of each monthly meeting, the Vendor shall perform a handstand before bowing three times to the Purchaser’s representative.

During such meetings with the Purchaser, the said Vendor shall…

In this example, “said” is completely redundant, assuming that Vendor is a defined term. If, however, vendor is not defined, and in the unlikely case that it is appropriate to cross-refer to an earlier usage, “said” is not the word to use, as it has an old-fashioned, lawyerly, off-putting ring to it.

Often, no linking word is needed, because it is obvious in context that the term means the same as it meant in the earlier reference. Lawyers are sometimes too ready to reach for legal-sounding jargon, and a few seconds spent thinking about the point may lead to the conclusion that there is no plausible ambiguity.

If a word really is needed, “that” sounds better than “such”, and “such” sounds better than “said”, at least to IP Draughts’ ear. But if a word is used several times with the same meaning, IP Draughts often finds that defining the word, and then using the defined term, is a simple way of avoiding these types of vague links. Alternatively, one could refer more precisely to the previous usage, eg by referring to the “[item] described in clause X” or “[item] referred to in the previous sentence”.

Without seeing the rest of the agreement, it is impossible to know whether the second sentence in the above example would be ambigious without the word “such”. Are there any other references in the contract to meetings, eg annual meetings? Will the second sentence only apply to the monthly meetings referred to in the previous sentence? And if so, does “such” remove the ambiguity?

Depending on context, it may well be better to use one of the following phrases in place of the second sentence:

  • During meetings with the Purchaser…
  • During monthly meetings with the Purchaser…
  • During all meetings with the Purchaser…

Other formulations may be even better. And “At each meeting…” may be better than “during meetings”, again depending on context.

In IP Draughts’ view there is no hard-and-fast rule about this issue, but “such” is an over-used word that sometimes gives a misleading impression of precision, and sometimes is best avoided in contracts.

 

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Contract drafting tips: word order

Techniques for drafting contracts – we all use them, whether we consciously follow a formal guide such as the Manual of Style for Contract Drafting, or take an ad hoc approach based on our previous experience. Older readers in the UK, and perhaps a larger number of readers outside the UK, tend to apply rules of grammar and other writing techniques that they were taught at school. Sometimes those techniques are now considered out of date or discredited. Most of us have moved on from rigid obedience to rules (if we were even taught them) such as never start a sentence with a conjunction, or never split an infinitive.

IP Draughts finds that some techniques keep coming back to him when drafting contracts. A particularly valuable technique is to critically review the order of the words in the sentence. An example that IP Draughts uses when teaching is the following:

Being ignorant of the law, the attorney argued that his client should receive a light sentence.

The phrase “being ignorant of the law” is in a weak position in the sentence. If it is put immediately after “attorney” or “client”, the meaning becomes clear and unambiguous.

Consider the following example from a consultancy services agreement:

MegaCorp shall provide all access to documentation in its possession and to personnel under its control where required by Consultant within 7 days and if notified in writing to Megacorp.

Several techniques can be used to improve the clarity of this sentence, but for now let’s focus mainly on word order.

Within 7 days of the Consultant’s written request, MegaCorp shall provide access to (a) documentation in its possession and (b) personnel under its control.

Alternatively, the 7-day deadline point could be moved to after “access” or could be addressed in a second sentence. It is clearly in the wrong place in the original version, as it suggests that the obligation to provide access only applies where the Consultant needs access within 7 days. If the Consultant’s needs are less urgent, the obligation will not apply.

In a full review of the wording, many other points of drafting and substance might need to be addressed, including:

  • Who is the access to be given to – employees of the Consultant?
  • Confidentiality obligations
  • What does “access” mean in practice? Free rein to rummage in the company’s files, or something more controlled?
  • Are there any limits on access to documentation? Eg is access to pricing information on the Consultant’s competitors allowed?
  • Are there any limits on access to personnel, eg if they are busy or on holiday?
  • Cost implications

The careful drafter will be thinking about all of these points and more, even if some of them are quickly dismissed in the context of the deal.

Applying a scalpel to the sentence, and moving bits around, is often a good way of removing potential ambiguity, cutting out redundant wording, and improving clarity generally.

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