Category Archives: Contract drafting

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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The lawyer’s role as scribe

sketchIn olden times, long before document-scanning software was invented, a scribe was someone who was employed to make manuscript copies of documents, including legal and religious texts.

In a modern legal setting, IP Draughts uses the term to refer to the contract drafter’s job of converting conversations between commercial negotiators into clear, legally-accurate contract language.

The importance of this role varies between market sectors and types of agreement. Some financial transactions rely on industry-standard agreements, as do some agreements dealing with commodities, such as the shipment of grain. The drafter’s job may be simply to record a few ‘variable factors’ such as specification, price and delivery times.

Moving a little down the scale towards freehand drafting, lawyers who advise on business sale agreements typically start with a favoured template. But they make detailed changes to particular clauses, eg converting an absolute warranty into a knowledge-based one, or carving out exceptions and qualifications to the template terms.

In the field of R&D agreements, commercial parties often agree tailored deal terms that cannot readily be found in any single template. For example, R&D collaborations frequently include ‘what if’ clauses that deal with a range of possible outcomes to a collaborative research project. An obvious example of this is the Lambert research agreements, which now have 7 or 8 variants. The variations deal mostly with one issue – intellectual property. If further standard agreements were prepared to deal with variations in other clauses – payment terms, say, or dispute resolution – the number of templates needed would quickly multiply.

In this world, the commercial parties tend to focus on negotiating the headline issue. Once this has been agreed, there may be numerous points of detail and logic surrounding that issue that the drafter needs to address, if the agreement is not to be full of holes. Sometimes, it may even be necessary to tell one’s commercial colleagues that their solution may work for the scenario that they discussed, but is unworkable in other possible situations, and therefore should be rethought.

Identifying these issues, prioritising them, anticipating what the client is likely to want, and then drafting suitable wording, all take skill and effort. Often this work is done under time pressure.

One of the skills required for this work is the ability to draft clear, accurate contract wording. This skill is not learnt overnight, and some lawyers are concerned that insufficient training in freehand drafting is given in large law firms, where the priority may be to ‘get the deal done’ and where many deals are of the commoditised type referred to at the start of this article.

monkey-pastePractising this skill can sometimes seem a lonely occupation, particularly when one is surrounded by lawyers who have not been sufficiently trained in it, commercial parties who just want to get the deal done, finance directors who are focussed more on the numbers than the words, and procurement managers who see their task as avoiding changes to their companies’ templates. It requires some strength of mind to insist that the drafting is important.

Our recent panel discussion at UCL on Dysfunction in Contract Drafting reminded us that there is a community of professionals who think drafting is important, even if people disagree about some of the details. If you would like to see the recording of that discussion, it is available on YouTube here. Over 400 people have already viewed it, in addition to the 150 or so people who attended the live event. Persuade your colleagues to view it too, and let’s get the viewing numbers up to well over …1,000?

 

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Dysfunction in contract drafting: expert views

perrinThis is your final reminder about a free panel discussion by experts in contract drafting. The title of the discussion is: Dysfunction in Contract Drafting: Are the Courts, Law Firms and In-House Legal Departments Stuck in a Rut?

The discussion will be held next Tuesday, 8 November, from 6 pm to 7.30 pm in the Great Hall, BMA House, Tavistock Square, London. It will be followed by a drinks reception, courtesy of Thomson Reuters.

IP Draughts will be moderating the discussion. The panel members are:

adams4Ken Adams, known to many readers of this blog as the author of A Manual of Style for Contract Drafting (3rd edn, American Bar Association), and a teacher of contract drafting. He will already be in London to give his Drafting Clearer Contracts course on 7 November.

 

Sir Julian Flaux, a former judge-in-charge of the Commercial Court in London. It was recentlyflaux1 announced that he has been promoted to the Court of Appeal. Before becoming a judge, he was a barrister who practised at the Commercial Bar, specialising in disputes involving insurance and reinsurance, shipping, and international trade.

 

gibbonsKate Gibbons, a longstanding partner at the leading UK law firm, Clifford Chance, a specialist in banking and capital markets, and the firm’s Global Knowledge partner, where she has responsibilities in the fields of contract drafting and training. She also has management responsibilities as a member of the firm’s Executive Operations Group.

 

mcfetridgeKristin McFetridge, Chief Counsel at British Telecom, who manages a team that drafts and advises on standard commercial contracts for BT’s global, wholesale, and small-to-medium-enterprises business divisions. Kristin is a dual-qualified New York attorney and English solicitor. She is currently in charge of a programme to redraft all standard contacts of these divisions so they’re clearer, better address customer needs, and reflect a balanced approach to risk.

 

Known Unknowns, etc

If you have registered for the event and will be attending, IP Draughts looks forward to seeing you there.

If you have registered and will not be attending, please un-register as we have a waiting list of people who would like to come. UCL’s experience is that perhaps 25% of people who register don’t turn up, hence the above request for un-registering if you know you can’t make it.

If you have not registered and would like to attend, it may still be possible to attend, please sign up for the waiting list. Book here.

If you have not registered and cannot attend, but would like to see the event, it will be live-streamed on the internet at the following address: http://www.ucl.ac.uk/live/contract-drafting-dysfunction

If you have any questions that you would like to put to the panel, or would like IP Draughts to put to the panel, please let him know via mark@andlaw.eu

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New standard agreements for universities are published

Sir Richard Lambert

Sir Richard Lambert

Have you had sleepless nights? Have you found it difficult to concentrate on Brexit or the US presidential elections, through wondering when the new Lambert agreements, promised many months ago, will finally be issued?

Worry no more: over a dozen new agreements and term sheets are waiting for you on the UK IPO website.

How are they different from the old Lambert agreements, IP Draughts hears you ask. In fact, he is one of those asking. Well, it’s difficult to say, without a line-by-line comparison. Has anyone done such a comparison? The Lambert committee, for example? And could they share the mark-ups? That would be very helpful for the university community.

Comparing the new and the old agreements won’t provide a complete picture, as some of the new documents are completely new, and don’t have an equivalent in the old set. In particular, there are now 7 bilateral agreements, numbered 1-6 (yes, that is confusing – there is a 4A as well as a 4). The old set comprised 5 bilateral agreements. There continue to be 4 multi-party agreements, numbered A-D.

A European consortium: Queen Victoria and Albert, the Prince Consort

An early European consortium: Queen Victoria and Albert, the Prince Consort

IP Draughts prefers to call the documents bilateral, or two-way, agreements, and multi-party agreements, though the documents themselves are named “collaboration agreements” and “consortium agreements” respectively. In IP Draughts’ mind, these official names are not descriptive. Some bilateral research agreements don’t involve a true collaboration, and are merely one party paying another to do research. And most multi-party research agreements are collaboration agreements, as that term is normally used. The name consortium agreement seems to have become popular through its use as a term of art in EU funded research projects, and in this context is synonymous with collaboration agreement.

Sometimes, universities will instinctively select Lambert 2 as a starting point. Its terms are similar to those used by US universities in most cases, ie the university owns the resulting IP, and grants the sponsor a non-exclusive use licence plus an option to negotiate an exclusive licence to commercialise.

From a quick scan through the new Lambert 2, and without the benefit of a line-by-line comparison with the old one, IP Draughts spotted the following:

  1. Many or most of the terms are familiar from the old document.
  2. There seem to be more optional terms, marked in square brackets.
  3. One of the clauses mentions the need for the university to demonstrate public impact in its research, and to disclose certain information for this purpose. “Impact” as an important policy objective for UK universities post-dates the date of publication of the old Lambert agreements.
  4. There are some tediously lengthy schedules that set out policies on issues such as anti-bribery, non-use of child labour, etc. Many large companies now seem to require references to such policies in their standard agreements.

As with the old agreements, the main “variable” between them is their different IP terms. Below is a summary of the IP terms in each case.

Bilateral agreements
No Terms IPR owner
1 Collaborator has non-exclusive rights to use in specified field/territory; no sub-licences (Institution)
2 Collaborator may negotiate further licence to some or all Institution IP (Institution)
3 Collaborator may negotiate for an assignment of some Institution IP (Institution)
4 Institution has right to use for non-commercial purposes (Collaborator)
4A Each party has right to exploit certain results created during project and takes assignment of those results. Institution has right to use for academic and research purposes, Collaborator for research purposes (Both)
5 Contract research: no publication by Institution without Collaborator’s permission (Collaborator)
6 Institution has right to use for academic and research purposes (Collaborator)

Multi-party agreements
No Terms
A Each member of the consortium owns the IP in the results that it creates. They grant each other party a non-exclusive licence to use those results for the purposes of the project and any other purpose.
B The other parties assign their IP in the results to the lead exploitation party (or the lead exploitation party is granted an exclusive licence).
C Each party takes an assignment of IP in the results that are germane to its core business and exploits those results.
D Each member of the consortium owns the IP in the results that it creates. They grant each other party a non-exclusive licence to use those results for the purposes of the project only. If any member of the consortium wishes to exploit another’s IP they must negotiate a license or assignment with the owner of that IP.

A new feature in the 2016 Lambert agreements is that two templates for term sheets are provided, one for Lamberts 1-6, and one for Lamberts A-D. In IP Draughts’ view, these are not particularly useful documents. They are very detailed and lengthy. If one is going for that amount of detail, it will often be better to move straight to negotiation of the actual agreement. IP Draughts has previously commented on his preference for term sheets, MOUs, heads of agreement and similar documents to be brief, perhaps no more than 2-3 pages. For instance see this article: Keep the Term Sheet Simple. Pretty please…?

IP Draughts is aware that some UK universities use modified versions of the (old) Lambert agreements. It will be interesting to see if those documents are updated to reflect the new Lambert terms. If not, we may end up with a proliferation of versions, and the original Lambert message – that parties should use the Lambert agreements rather than their own, favoured documents – may be further diluted.

 

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