Category Archives: General Commercial

Why do organisations ignore their contractual obligations?

Last night, a contract lawyer asked on Twitter:

Various people, including IP Draughts, came up with suggestions. The most depressing was this one from another lawyer who is prominent on Twitter, @LegalBizzle, who wrote: “All of them. Not even joking.”

Why do lawyers and commercial executives spend large amounts of time and emotional energy negotiating detailed contract terms, only for their operational colleagues to ignore them?

It so happens that IP Draughts has encountered this issue most often in IT contracts between large organisations. The contract specifies a procedure, e.g. on how to escalate or resolve a dispute over performance. The operational teams of both parties work to a completely different procedure, or to none. There are plenty of email communications but none that clearly identifies what the issue is, when it was first identified, what action is expected and when the issue must be resolved. No-one, it seems, is using the contract as an operational manual.

If and when the dispute reaches the attention of the parties’ lawyers, they may reach for the contract and taken into account its procedures when communicating with the other party. Or they may just resort to bluster and, again, ignore the terms of the contract.

If the dispute ever gets to court, the parties’ advocates and witnesses will likely be forced to justify their actions through the prism of the contract terms. The judge is likely to use those terms as the starting point for determining whether the contract has been performed.

In other words, as the dispute becomes more and more “legal”, the terms of the contract will come into sharp focus. But at an operational level, there may be much less interest in what the contract actually says.

Why is this? Several theories occur to IP Draughts:

  1. The contract is off-putting to the operational managers in its style and content, and too difficult for them to use. If this is the only reason, then senior management and the legal department are to blame for not providing simple, user-friendly procedures, based on the contract, for them to use, and periodically reinforcing the message that they must follow these procedures.
  2. Nobody in the company, including the senior managers, cares what the contract says. Perhaps the in-house lawyers care, but they don’t have much influence. Perhaps all that senior management cares about is revenue-generation, and contract terms are regarded as something remote, like an insurance policy: recognised as important in principle, but not really cared about in practice. It is not difficult to decide who is to blame in this scenario for the failure to follow the contract’s procedures.
  3. The operational and commercial managers are temperamentally incapable of following detailed written procedures as set out in the contract. If this is the case, they need a process manager (who could be a lawyer, but need not be) to keep them on the straight and narrow. But perhaps senior management doesn’t realise or recognise that such a person is needed.
  4. Team dynamics result in a different way of working. The operational teams of both parties work together during the implementation of a project, and they get used to working in a particular way, that may or may not bear any resemblance to how their colleagues responsible for negotiating the contract have agreed that they will work. In this case, either they need guidance on how they should work in compliance with the terms of the contract, or the parties negotiating the contract should have taken account of the operational work-process when agreeing the contract terms. Either way, there has been poor communication within the company.

Why does any of this matter? As long as the project is working well, perhaps it doesn’t. But contracts are partly there to govern the parties’ conduct if the project isn’t working well, and to determine whether one party is liable to the other for breach of contract. Having a mis-match between how the parties behave and how they are supposed to behave, as laid down in the contract, can make it very difficult to advise on contractual rights and remedies.

This topic also reminds IP Draughts that many contracts are far too long and complex, and this fact reduces the likelihood of their being used at an operational level. An extreme example that came across IP Draughts’ desk last week was a government contract that included large numbers of clauses that seemed to be cut-and-pasted from a clause bank, as well as cross-references to the identifying names and numbers of dozens of standard government contract terms. It is easy to dismiss this as the approach of a government bureacracy, but IP Draughts has seen plenty of examples of B2B contracts that are far too long and complex.

Occasionally, IP Draughts comes across organisations that have taken a conscious decisions to simplify both the language and content of their standard contracts. He applauds such decisions and wishes more organisations, including governments, would take this approach.

If this could be combined with a determination on the part of senior management that contract terms should either be followed at an operational level, or if this is not workable the terms should be scrapped, the whole process of negotiating, and operating under, contracts would become much more streamlined and efficient.

 

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What are “standard terms of business”?

Readers who are English commercial lawyers, and perhaps some others, will be familiar with the provisions of the Unfair Contract Terms Act 1977 (UCTA). Specifically, they will be aware of section 3(1) which, in business-to-business contracts, requires exclusion clauses that form part of “written standard terms of business” to be “reasonable”. Separate requirements apply to consumer contracts, both under UCTA and under consumer legislation more generally. Section 3 of UCTA provides:

3(1) This section applies as between contracting parties where one of them deals on the other’s written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term—

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled—

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

[emphasis added]

These provisions raise a number of questions, including when is a term reasonable. But today’s blog article is on the question of when a party contracts on its written standard terms of business.

For example, consider the following scenarios. In which of these am I required to justify my exclusion clause as reasonable, and in which am I free to impose unreasonable terms?

  1. I send you my standard contract and tell you it is not negotiable.
  2. I send you my standard contract and tell you that it is negotiable, but no change is made to the clauses dealing with liability.
  3. I send you my standard contract and tell you that it is negotiable, and offer to change the limit of liability from the price paid (in the standard contract) to twice the price paid.
  4. I send you my standard contract and tell you that it is negotiable, and agree to something close to your request for liability to be limited to the level of my insurance cover.
  5. I send you a draft contract and make no comment on whether it is a standard contract (but it does bear my company’s logo), and you think it might be based on a template from the PLC database. When negotiating liability issues in this draft contract, I take one of the positions outlined in 1-4 above.

This type of thought process may be relevant to a company that is seeking to limit its liability, eg through standard terms of sale and through standard contracting processes that seek to win the “battle of the forms”.

It may be unrealistic to reach definite conclusions on these points. To date, there has been little judicial guidance. But even if there were a body of case law, the court’s interest in doing “justice” in the individual case may be of more practical importance than general categorisation of this kind.

The recent case of African Export-Import Bank & Ors v Shebah Exploration & Production Company Ltd & Ors [2017] EWCA Civ 845 (28 June 2017) was one of the first times that the Court of Appeal had been asked to consider what are written, standard terms of business. Longmore LJ, giving the unanimous judgment of the court, went through the limited case law that touched on this subject. He approved a judgment in an earlier case which decided that a party relying on UCTA must establish:

  1. the term is written,
  2. it is a term of business,
  3. it is part of the other party’s standard terms of business, and
  4. the other party is dealing on those written standard terms of business.

Usually, he thought, there would be little controversy about points 1 and 2. On point 3, and where the contract was based on an industry-standard contract, he approved an earlier decision in which it had been said:

I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of model forms drafted by an outside body. However, if the Act ever does apply to such model forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the model form is invariably or at least usually used by the party in question. It must be shown that either by practice or by express statement a contracting party has adopted a model form as his standard terms of business. For example, an architect might say, “My standard terms of business are on the terms of the RIBA Form of Engagement”. Without such proof, it could not be said that the form is, in the words of the Act, “the other’s” standard terms of business.

On point 4, he quoted various earlier decisions, including the following quote from a judgment of HHJ Seymour:

…it is not enough to bring a case within Unfair Contract Terms Act 1977 s.3 that a party has established terms of business which it prefers to adopt, as, for example, a form of draft contract maintained on a computer, or established requirements as to what contracts into which it entered should contain, as, for example, provision for arbitration in the event of disputes. Something more is needed, and on principle that something more, in my judgment, is that the relevant terms should exist in written form prior to the possibility of the making of the relevant agreement arising, thus being “written”, and they should be intended to be adopted more or less automatically in all transactions of a particular type without any significant opportunity for negotiation, thus being “standard”.

He also quoted some comments from Nourse LJ in St Albans District Council v ICL, a leading case from 1996 in which the terms were held not to be reasonable:

The fourth requirement is that the deal must be done on the written standard terms of business. That raises the question whether the Act applies in cases where there has been negotiation between the parties the result of which is that some but not all the standard terms are applicable to the deal. In St Albans City and District Council v International Computers Ltd [1996] 4 All E R 481 (the only other case, so far as counsel were aware, which has come before this court on this issue since the Act was passed), the party relying on the Act submitted that, if there were any negotiation of any kind, the Act could not apply. That broad submission was rejected by this court in an obiter passage of the judgment of Nourse LJ with whom Hirst LJ and Sir Iain Glidewell agreed, but Nourse LJ went on to approve (at page 491g) the statement of Scott Baker J at first instance that the deal in that case had been done on the defendant’s standard terms of business because those terms remained “effectively untouched” by the negotiations that had taken place. That leaves open the question of the correct approach when some of the standard terms are not part of the deal.

Longmore LJ concluded:

I would also approve these first instance decisions and hold that it is relevant to inquire whether there have been more than insubstantial variations to the terms which may otherwise have been habitually used by the other party to the transaction. If there have been substantial variations, it is unlikely to be the case that the party relying on the Act will have discharged the burden on him to show that the contract has been made “on the other’s written standard terms of business”.

On the facts, he concluded that the parties did not contract on standard terms of business, and therefore UCTA didn’t apply. He commented:

A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. …It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.

At one level, this case is very specific to its facts. But it does indicate that:

  1. It is for a party that seeks to rely on UCTA to show that the other party was contracting on its standard terms of business. This may seem harsh, but presumably on different facts, where a party puts forward its own template agreement, this may be slightly easier to establish than when a party drafts an agreement based on a third-party template.
  2. If standard terms of business are used, but are substantially changed in negotiations, UCTA doesn’t apply.

There is nothing very earth-shattering about these conclusions, but it is useful to get some guidance from the Court of Appeal on this subject.

 

 

 

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Resolving disputes over IP agreements

friendsHow should the parties to a licence agreement, or other IP agreement, resolve their contract disputes?

Some would reply: amicably, quickly, reasonably. If they can, all well and good, and no special contract terms are needed. But the drafter of the IP agreement needs to cater for the possibility that they can’t.

If you know what the dispute is about, you can form a view on the most favourable dispute resolution mechanism to protect your client’s interests. For example, do you want a thorough examination of the legal issues by a superb court that leaves no stone unturned, and comes up with a magisterial (and public) conclusion? Or would you prefer something cheap, quick and private, focussed more on commercial outcomes than legal precedent?

At the time the agreement is made, it may be difficult or impossible to predict whether any disputes will arise, and what they will be about. So, any dispute resolution clause is a bit of a gamble. It may be best to stick to something ‘plain vanilla’ and, if a more fancy mechanism is needed, try to negotiate it with the other party when the dispute arises.

But what is a plain vanilla solution? Should you go for litigation in court, or arbitration? In the latter case, do you opt for a 3-person arbitration panel which will be expensive but reduce the risk of a quirky decision, or is it best to have a single arbitrator?

In the middle of negotiations, and depending on one’s bargaining position, the priority may be to find a solution that is not obviously terrible. The issue is important, and may justify two or three rounds of proposal and counter-proposal, but probably not many more.

IP Draughts’ preferences tend to reflect the type of clients that instruct him, and his background as an English solicitor. Others may have a different starting point that is better for them and their clients.

There is no absolute right or wrong on this issue, but the closer one can get to a list of preferences, the easier it is to strike a deal.

Trial by Ducking Stool - not part of the ADR toolkit

Trial by Ducking Stool – not part of the modern ADR toolkit

Remember that the final method of dispute resolution is either to go to court or arbitration. Other methods of ADR, such as mediation, can only be viewed as intermediate steps. If you want to force the parties to go to mediation or to have the CEOs negotiate, fine, but IP Draughts doubts the value of such an obligation. It may be better to include these as voluntary options that the parties must consider, but not be obliged to follow.

For the final dispute resolution mechanism, IP Draughts’ preferences, if English law and jurisdiction are not acceptable, include:

Choice of law

Dealing with European parties

  • A large trading nation with a ‘North European’ approach
  • Laws that are not too prescriptive
  • Difficult to get a common law legal system (there aren’t many in Europe)
  • Possible solutions: Swedish or Dutch law
  • Second choices: German or Swiss
  • To avoid: French, Italian, Greek, smaller nations

Dealing with US parties

  • Try to avoid US, offer European alternative
  • But if forced to choose US, go for large State with reputation re commercial disputes
  • Preferably East Coast
  • Preferably laws as close as possible to English law
  • Possible first choice: New York law
  • Second choices: Massachusetts or Delaware

Dealing with parties in the Far East, India, etc

  • Common law system if possible, eg Australia, Hong Kong, Singapore

Choice of dispute resolution mechanism

Generally

  • No overall, strong preference for courts or arbitration
  • In England, courts are efficient so may be preferable
  • Arbitration may be preferable in countries whose court systems are unattractive
  • If confidentiality is a major issue, this may point to arbitration

If arbitration is chosen

  • Essential to specify arbitration body
  • Consider WIPO arbitration
  • Avoid ICC – too expensive, heavyweight, not user friendly
  • Prefer single arbitrator
  • Sometimes prefer expedited arbitration procedure (eg for smaller claims)
  • Need to specify seat of arbitration – procedural laws in that jurisdiction will govern

If court litigation is chosen

  • Should be same as law – don’t have law of country A and courts of country B
  • Overlapping issues with choice of law, above
  • Avoid corrupt, biased, slow, jury trials, difficult to get to from Heathrow Airport

 

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Should the courts hear more appeals against arbitrators’ decisions?

Cwm Giedd: attractive venue or remote dead-end?

Cwm Giedd: attractive venue with good facilities, or remote dead-end?

This posting is a response to a lecture given by the Lord Chief Justice of England and Wales, Lord Thomas of Cwmgiedd, on 9 March 2016. The title of the lecture was Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration.

The central argument of Lord Thomas’s lecture is that legislation brought in 36 years ago to make England and Wales more attractive as a venue for arbitration is having a long-term, detrimental effect on the development of English contract law.

The Arbitration Act 1979 strictly limited the circumstances in which a party could appeal against an arbitrator’s decision to the courts. According to Lord Thomas, before the Act was brought in:

  • “Much was made of delay, the cost and expense and lack of finality because of the [appeal] procedure. It was said to make London an uncompetitive venue for dispute resolution.”
  • 300 applications to appeal were made each year in the English courts against arbitral awards. After the Act was introduced, this dropped to 50 a year. Only a third of these applications are accepted and lead to a hearing of the substantive issues.

It seems that the Act was successful in helping to establish a thriving market in arbitration in England and Wales. But a consequence of this success is that the English courts (including the appeal courts) are hearing fewer commercial cases. In some market sectors, the courts (it is said) have an insufficient throughput of cases to enable the common law to adapt to changing commercial practices. Again in the words of Lord Thomas:

  • “[A] consequence has been to undermine the means through which a significant part of  [London’s] strength – its ‘excellence’ [-] was developed.”
  • “[The loss of cases to arbitration, and loss of appeals to the courts] reduces the potential for the courts to develop and explain the law.”
  • “[Another effect is] retarding public understanding of the law, and public debate over its application.”
  • “The restriction in relation to appeals where the question is one of general public importance is, I have little doubt, a serious impediment to the growth of the common law.”

commercial courtReading the speech, IP Draughts struggled to relate it to his own experience of commercial contracts. It seems that Lord Thomas has past experience as a judge of the Commercial Court, though much of his time now as Lord Chief Justice is devoted to the criminal justice system. The Commercial Court is set up to handle high-value contract disputes, particularly in traditional areas such as shipping and insurance, and these areas seem to be the focus of Lord Thomas’s concerns.

But the Commercial Court is by no means the only part of the High Court that deals with contract disputes. The Technology and Construction Court deals with many contract disputes concerning computer technology, and the Chancery Division tends to be the place where disputes concerning IP contracts are heard, on topics as diverse as the licensing of the patents for the blockbuster drug Humira, or Elton John’s management and recording contracts. Other commercial disputes find themselves in the general list of the Queen’s Bench Division or elsewhere in the English court system. The development of English contract law through reported cases is not necessarily prejudiced just because one part of the court system has a reduction (but not a complete drying-up) in case numbers in certain market sectors.

That the lecture is focussed on the diet of the Commercial Court becomes clearer in a key sentence in paragraph 23, where Lord Thomas refers to:

…particularly relating to the construction industry, engineering, shipping, insurance and commodities, there is a real concern …at the lack of case law on standard form contracts and on changes in commercial practice.

This sentence is also helpful for clarifying which aspects of the development of the law Lord Thomas is really concerned about, namely:

  1. Case law on the interpretation of clauses in standard form industry contracts, such as those developed by trade associations. In some industry sectors, parties tend to use these standards rather than draft bespoke contract terms.
  2. Changes in commercial practice in the above sectors. Lord Thomas goes on to the refer to new Financial List, where specialist judges “are expected to keep up to date with the changes in practice in the financial markets and to resolve disputes on the basis of their specialist knowledge and understanding of the markets…” This comment helps to explain what he has in mind: that judges should apply their knowledge of market practice when interpreting the contracts that parties have entered into in that market.

fossiliseWhile undoubtedly important, these topics are so specific as to be irrelevant to the areas of commercial law in which IP Draughts practises. Even if these areas of the English courts’ work become fossilised through a lack of throughput of cases, it won’t result in a “serious impediment to the growth of the common law” in relation to business contracts more generally.

Several aspects of Lord Thomas’s argument trouble IP Draughts.

  1. The law on the interpretation of contracts is much wider than the two aspects highlighted above. There are more fundamental and general questions such as whether liquidated damages clauses are enforceable (the subject of a recent Supreme Court case), or what amounts to valid consideration, or what categories of loss are recoverable for breach of contract. The law in these and many other areas continues to be developed through a large number of court cases. In fact, we are suffering from a glut of cases on Bailii, so many that it is difficult to keep up to date with them, including many reported decisions in the Commercial Court. This didn’t use to happen a couple of generations ago, when reported cases tended to be limited to those that established a new principle or had some other outstandingly important quality.
  2. In many areas of commercial practice, the judges really don’t have much insight into commercial practice in the industry sector, because the throughput of cases is too small, and would be even if all arbitrations were diverted to the courts. IP licensing is a good example. Not only are there few cases in the courts, judges can’t rely on experience gained when they were barristers, because very few IP licence agreements are drafted or negotiated by barristers in private practice.
  3. A distinction should be made between interpretation of industry-standard contracts, where the court may be strongly influenced by the interpretation of the same clause by an earlier court, and the larger number of other (non-industry-standard) contracts, where the courts tend to be reluctant to place much weight on the interpretation of similar words in an earlier contract. In other words, Lord Thomas’s comments about interpreting standard form contracts are not relevant to contracts generally. For example, this is true of his statement that “courts [give] definitive rulings on the scope and interpretation of contractual clauses.” In fact, the misguided view of some that the courts do develop standard interpretations of contract wording is often trotted out as an argument against updating template agreements or changing from old-fashioned legalistic contractual language to modern English. It is disappointing that Lord Thomas was not clearer that his remarks in this area were limited to industry-standard contracts.
  4. Contrary to Lord Thomas’s view, IP Draughts has some sympathy with the comments of Lord Denning in the Nema case, which Lord Thomas summarised as “that a commercial arbitrator was more likely to be better placed to interpret the contract in a commercial sense than a judge…” Perhaps Lord Thomas is right to dismiss this comment in relation to contract disputes in markets with which he is familiar. IP Draughts, however, can foresee many situations in which a well-chosen arbitrator, with experience of IP licensing, would be better able to reach a commercial conclusion on the interpretation of an IP licence agreement than a High Court judge. This is not to say that he would always prefer arbitration over litigation, but he thinks Lord Thomas is on dodgy ground if he is arguing that judges are better than arbitrators at interpreting the commercial intentions of contracting parties.
  5. The extracts from the lecture quoted above include references to the importance of “public understanding of the law and public debate over its application”. Elsewhere in the lecture Lord Thomas makes a similar point, where he comments that “open court proceedings enable people to watch, debate, develop, contest and materialise the exercise of both public and private power”. This theme struck IP Draughts as a weak argument to use in relation to the development of contract law. Other areas of the law, such as criminal law or defamation, seem more likely to attract public interest and debate than incremental developments in the canons of construction or other principles of contract law.

IP Draughts is left feeling that Lord Thomas probably has a valid point to make (though IP Draughts has insufficient experience of the market sectors that Lord Thomas cites to know whether this is the case), but that he weakens his argument by making it too broadly. It will be interesting to see if others, including companies that make use of arbitration in England and Wales, agree that something needs to be done to rebalance the relationship between the courts and arbitration.

 

 

 

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