Category Archives: General Commercial

Why do people have a problem with deeds?

Two incidents this week prompt IP Draughts to reflect on why deeds are sometimes not correctly executed – a niche subject, perhaps, but one that affects the validity of contracts that parties may wish to enforce.

First, a quick reminder: what is a deed? Under English law it is a more formal way of executing a contract than simply signing it. An older name for this is “contracts under seal”, as until 1989 it was necessary to apply a seal to a contract made as a deed. English legislation in 1989 abolished the requirement for most corporations (those incorporated under the Companies Acts) and individuals to apply their seal to a deed. There is still a degree of formality about who must sign and witness deeds, even though the requirement for applying a seal has been abolished. If you need to know more about this subject, read our book, Execution of Documents.

Peculiar types of corporation such as bodies incorporated by Royal Charter (most UK universities) or by special statute (eg NHS Trusts, ie most UK hospitals) or government bodies, still have to apply their seal. Typically the constitution of the corporation will specify what authority is required for the use of the seal, eg it must be done in the presence of two board members who must sign the document next to the applied seal.

Why would one execute a contract as a deed? Two possibilities:

  1. No alternative. Because that is the only way to make the contract (or other instrument) legally effective. This only applies to a few types of contract, including conveyances of land, powers of attorney and financial guarantees.
  2. Nice to have. Because, though executing the contract as a deed is not compulsory (which is true of most contracts), there may be legal advantages of doing so. The two main, potential advantages are (a) there is no need for “consideration” in a contract made as a deed, and (b) the limitation period – the time limit for bringing an action for breach of contract – is 12 years for deeds and only 6 years for ordinary contracts.

So, why do these rules cause people problems in practice?

Two examples that IP Draughts encountered this week illustrate the point.

In the first, a client was seeking to enter into a contract executed as a deed, where one of the other parties was an NHS Trust. The signature blocks showed clearly that the Trust’s seal should be applied. The document comes back, apparently signed as a deed by all parties. But there is no impression of a seal on the document. (Corporate seals are typically small steel devices which clamp together to squash the paper and impress it with an image of the corporate seal.)

The client reports that he has spoken to the Trust’s representative who assures him that they don’t have a seal. IP Draughts is puzzled. He searches for and finds on the internet:

  1. Model constitutions for this type of Trust, which include reference to them having a seal.
  2. A copy of what appears to be the actual constitution of this particular Trust, which also refers to it having a seal.

He suggests to his client that he go back to his counterparty and get them to check the point, preferably involving their legal department. Some time later, the document comes back, now bearing a seal.

The second example that IP Draughts encountered this week was on Twitter. He saw this report, by a US law firm, of a recent case in the Virginia Supreme Court, where the court invalidated a lease that wasn’t executed as a deed (with the application of a seal), as state law required. Thanks to @profrobanderson (no relation) for drawing this to IP Draughts’ attention.

IP Draughts is not an expert in US state laws, but his impression/guess has been:

  1. Centuries ago, US laws had rules on deeds (contracts under seal) that were similar to English law.
  2. But perhaps the rules were originally or later limited to conveyances and long leases of land.
  3. And perhaps in the 21st century the practice of using seals has largely been abandoned, but without legislation directly equivalent to the English laws that were passed in 1989.
  4. So that the subject is seen as something of a formality whose importance has gradually been eroded, and it takes people by surprise when, as in the Virginia Supreme Court case mentioned above, the rules are actually applied and seen to have a significant legal effect.

As IP Draughts has mentioned before on this blog, he was once involved in a licensing transaction with a Massachusetts corporation, where the other party had prepared the drafts, and they included a signature block that referred to the parties applying their seals. When IP Draughts indicated that his client, a UK company, didn’t intend to apply its seal, this point seemed to take the US party by surprise. The surprise didn’t seem to be that we weren’t intending to apply our seal, but rather that we were taking literally the wording of the signature block. The other party revised the signature block so that it no longer referred to sealing.

The lessons that IP Draughts draws from these examples are that those of us who are responsible for contracts need to be ever-vigilant for wrongly-executed contracts, even if in doing so we make ourselves unpopular with clients who “just want to get the deal done”.

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Simplified UK government contract terms: hit or miss?

It seems that the Crown Commercial Service – a part of the UK government that has responsibility for procurement of goods and services – made a press announcement this week about their new, simplified form of contract. Government officials, including a commercial lawyer from the Government Legal Department (GLD), have spent a year reducing 50,000 words to about 8,000 words and made the terms less legalistic.

This initiative is, apparently, intended to make it easier for small and medium sized enterprises (SMEs) to contract with the UK government. Small companies ‘without a dedicated legal team will be able to better understand and adapt the Public Sector Contract to its needs by selecting the elements it needs to apply’, the government said. The story was picked up by the Law Society Gazette here.

With some detective work, IP Draughts was able to find the new terms here. (Click on the link to “terms and conditions” near the bottom of the page found at the last link.)

If you click through to those terms and conditions, you will be faced with about 43 documents of varying sizes. The largest of these documents, Schedule 1, is approximately 76,000 words and takes up 234 pages. Some are considerably shorter. But this and most of the other documents are schedules to a set of “Core Terms”.

So far as IP Draughts can tell, it is the Core Terms that have been the subject of the redrafting exercise. The other documents vary in their drafting style. Some are very heavyweight. For example, clause 1.1.1 of Call-Off Schedule 4 includes the following lead-in wording:

Without prejudice to any other right or remedy of the Buyer howsoever arising (including under Framework Schedule 6 (Order Form and Call-Off Schedules Template) and subject to the exclusive financial remedy provisions in Paragraph 2.4 of Call-Off Schedule 14 (Key Performance Indicators) and Paragraph 9.1.2 [concerning Delay Payments] of Part A of Call-Off Schedule 13 (Mobilisation Plan and Testing), if the Supplier commits any Default of this Call-Off Contract then the Buyer may (whether or not any part of the Deliverables have been Delivered) do any of the following:

Any initiative to reduce this style of drafting is to be welcomed. IP Draughts sympathises with the plight of an SME “without a dedicated legal team” struggling to understand the above monstrosity.  It is difficult for an experienced commercial lawyer to understand it.

If this was the style of the Core Terms before they were revised, then the redrafters deserve credit for greatly improving them. This is not, however, unqualified praise. In IP Draughts’ view, the new document could be much better still.

As Ken Adams is fond of saying, contract drafting consists of both “what you say” and “how you say it”. Reducing 50,000 words to 8,000 almost certainly involved taking decisions on omitting matters of substance and reducing the text down to terms that were thought essential to protect the government’s interests. (The cynical side of IP Draughts wonders how many unnecessary provisions have really been omitted, or have they just been moved to, or left in, the schedules, many of which continue to be, in IP Draughts’ view, excessively heavyweight. But let’s hope the next phase of this simplification process will be to reduce the overkill in the schedules.)

IP Draughts commends the GLD for reducing the “what you say” elements of the Core Terms. And for attempting to make the “how you say” elements easier for a non-lawyer to understand. Unfortunately, the “how you say” task has not been performed consistently and some of the choices of non-legal language are suspect. Some examples will illustrate the point.

The document adopts the word “must” for expressing contractual obligations. That is an understandable stylistic choice, and an alternative to “shall”. It is seen in some other UK contracts, eg the Law Society’s recently updated template property leases.

Where the drafter falls down, though, is in his consistent use of other words to express rights and obligations. At various times he uses “may”, “can” or “has the right to”. For example, clause 10.8 uses all three of these phrases at different points. In IP Draughts’ view, these terms mean the same thing, and one choice should have been made – preferably “may” – and the drafter should have stuck with that choice.

IP Draughts would not have used the expression “lets the Supplier know” in clause 3.2.4. It is, in his view, too conversational, and “informs” or even “tells” the Supplier would have been better. Similarly, the phrase “The Relevant Authority may talk to the Supplier” in clause 16.3 is not a good choice, in IP Draughts’ view. “Talk to” could simply be replaced with “contact”.

Even worse, in his view is the choice of the phrase “accepts that they can’t get relief for suspension” in clause 5.2 as one of the conditions for the operation of clause 5.1. IP Draughts is not even sure what form the “acceptance” is meant to take. Sometimes, the choice of modern language is just clumsy, eg the indemnity in clause 12.2 uses the phrase “any costs resulting from any Default by the Supplier relating to any applicable Law to do with a Contract.” “To do with” is not a good choice. The whole sentence needs unpicking, but this phrase should be replaced with “relating to” or “concerning” unless a better, plain English choice can be found.

In other cases, the drafter has tried, unwisely in IP Draughts’ view, to avoid technical language, but only in part of a sentence, leaving in other technical language. For example, clause 9.1 includes an IP licence:

The Supplier gives the Buyer a non-exclusive, perpetual, royalty-free, irrevocable, transferable worldwide licence to use, change and sub-license the Supplier’s Existing IPR…

In this example, the drafter seems to have objected to the word “grants” on the grounds that it is a technical term, but left in “non-exclusive, perpetual, royalty-free, irrevocable, transferable” which are all technical terms. This inconsistency seems all the more suspect when you look at the schedules to the Core Terms, which have not been “modernised”. For example, in the ICT schedule, the following words are used in clause 9.2.1:

The Supplier hereby grants to the Buyer a perpetual, royalty-free and non-exclusive licence…

These examples illustrate what IP Draughts interprets as a desire by the drafter to introduce a chatty, breezy tone to some of the contract terms. But he is doing so within a document that still contains a large amount of technical detail, and the result is a series of false notes that will make very little difference to the overall comprehensibility of the terms. IP Draughts suspects that most SMEs will probably not even notice the chatty phrases, as they are minor features of what is still a long, technical document.

This is hopefully the first of a series of improvements to government contract terms. IP Draughts doesn’t want to discourage the initiative or the individuals who are working on it. But he hopes they will approach the task in a spirit of continuous improvement, rather than treat the new Core Terms as a template for the drafting style of future government contracts.







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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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