Category Archives: Legal Updates

Do M&A lawyers care about contract drafting?

Like all generalisations, it can be shot down in flames with counter-examples. But IP Draughts has seen enough evidence to suggest that many M&A lawyers don’t really give a monkey’s about the discipline of contract drafting.

What matters in that world is following a process, using standard templates, and “doing the deal”. The individual M&A lawyer, negotiating the agreement, is not expected to care too much about the words used. Standard contracts are so long and complex, and deals are done at such speed, that “academic” musing over the meaning of words is alien to the usual way of doing business. Drafting is for the back-room boys and girls (professional support lawyers). If the firm has to take a hit occasionally with a professional indemnity claim, well that’s what insurance is for.

This approach is not unique to M&A work. Finance lawyers are also said to be guilty – see this article about the “three and a half minute lawyer” who spends that amount of time on each transaction.

Of course there are exceptions, including Allen & Overy’s former head of banking, the very distinguished Philip Wood CBE, QC (Hon). A smuggled copy of his drafting notes from the 1980s helped to persuade IP Draughts to write his books on contract drafting and boilerplate clauses.

If these negative thoughts reflect a conscious bias on IP Draughts’ part, fuel for the bias is given by a recent case in the English Court of Appeal. Judgment in the case of Hopkinson & Ors v Towergate Financial (Group) Ltd & Ors [2018] EWCA Civ 2744 was published this week. The case was about a claim under an indemnity in a share sale agreement.

Several clauses of the share sale agreement were scrutinised in this case, but the one that received the most attention from the Court of Appeal read as follows:

6.7 The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to:

6.7.1 the seventh anniversary of the date of this Agreement in the case of any Claim solely in relation to the Taxation Covenant;

6.7.2 the date two years from the Completion Date in the case of any other Claim; and

6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.

The dispute concerned whether the Purchaser had given valid notice of a claim under the indemnity in clause 5.9. In particular, did the notice comply, and did it need to comply, with the obligation to provide details and an estimate of the total amount – i.e. the words in brackets, quoted above?

In the view of the Court of Appeal, “…it cannot be said that …clause 6.7 was well-drafted nor that, as drafted, it fits well with related provisions elsewhere in the agreement.” The court identified several drafting mistakes, which made interpreting the clause difficult.

With some simplification, the mistakes included:

  1. The clause uses the defined term Claims. The definition is limited to warranty claims and doesn’t mention indemnity claims. So how do you interpret the word Claims in the quoted phrase in brackets, in relation to claims under clause 6.7.3? Does it mean the details need not be provided? Or that you read “Claims” as meaning “Claims and other claims”?
  2. The clause refers to not making claims against the Warrantors. But clause 5.9 (mentioned in clause 6.7.3) doesn’t refer to claims against the Warrantors. Instead it refers to the Vendors and their spouses. Does this mean that clause 6.7 doesn’t apply to people who are not within the definition of Warrantors?
  3. Clause 6.7.1 refers to the Taxation Covenant. This is not a defined term. Tax Covenant is defined. But the definition of Claim makes no mention of the Tax Covenant. So should Claim or Taxation Covenant be interpreted broadly?
  4. Clause 6.7.1 imposes a 7 year time limit for claims in respect of the Taxation Covenant, while clause 6.7.2 imposes a 2 year time limit for any other Claim. Schedule 4 defines Tax Covenant and separately defines Tax Warranty. One might therefore expect that clause 6.7.2 covers Tax Warranties. But Schedule 4 goes on to provide a 7 year time limit for any claims under either a Tax Warranty or the Tax Covenant. How can one resolve this apparent contradition? By assuming that Taxation Covenant includes Tax Warranties? This was David Richards LJ’s conclusion.

David Richards LJ identified further drafting errors and inconsistencies, in other clauses.

At issue was a letter that purported to give notice of claims. The letter was sent to the sellers within the 7 year time limit but didn’t include any details about the claims or an estimate of losses. The letter referred rather generally to two reviews that the target company had been required to make by the Financial Conduct Authority, and any payments that might be made to customers for misselling of financial services, arising out of those reviews.

In the end, David Richards LJ decided (agreeing with the judge at first instance) that the notice given in this letter was sufficient to bring it within the conditions in clause 6.7, and on this basis dismissed the appeal by the sellers and their spouses. The other two judges in the Court of Appeal agreed with Richards.

Comments

Two observations from David Richards LJ resonate with IP Draughts.

First, the judge speculated (and IP Draughts thinks this speculation is very plausible) that some of the mistakes arose because clause 6.7.3 was bolted onto clause 6.7 as an afterthought, and the drafter didn’t clean up the rest of the agreement to take account of this change.

Drafting detailed agreements is difficult. It requires painstaking care to ensure  clarity and consistency. It is not enough to bolt a clause on to an existing clause and hope it works. Other parts of the clause, associated definitions and other clauses may need to be considered to ensure that the new clause works properly.

Second, the judge discussed that the starting point for interpreting a contract clause was:

the court should assume, unless driven to a contrary conclusion, that the parties who have entered into a professionally drafted agreement in which terms have been elaborately defined intend to use such terms in accordance with the definitions.

In other words, in such circumstances, it may be appropriate for the court to limit its focus to a textual analysis of the words used. This is the traditional approach to contracts drafted by commercial lawyers as distinct from business people.

But just because the contract has been drafted by solicitors from a respectable commercial law firm, that doesn’t necessarily mean that this assumption will hold. In this case, the judge concluded that the relevant clauses were so strewn with errors that rigorous textual analysis was unlikely to reveal the parties’ intended meaning.

A sad indictment of the drafting of a share sale agreement.

 

 

 

 

 

 

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G-whizz. Wake me up after May 25!

At this year’s UCL course on IP Transactions, many of the speakers commented to IP Draughts about how busy they were, advising clients on the EU General Data Protection Regulation (GDPR), which is due to come into force later this month. Except for one lucky speaker who said that her firm had a separate department dealing with such matters.

For many IP lawyers, it seems to go with the territory to advise on data protection issues. Perhaps it is because they are really IT and IP lawyers, and GDPR is part of the regulatory regime that protects the “I” part of IT. Or perhaps because they are EU laws, and who better than an IP lawyer to advise on EU laws, when most of the IP laws in the UK are at least tinged with EU influence, even if they are not directly derived from EU legislation.

IP Draughts is not immune from this trend, and has recently been the partner-in-charge of several GDPR projects, advising clients on compliance with the new regime, or revising contracts to take account of the new law. Fortunately we have some GDPR gurus within the firm, so that IP Draughts can be “young Mr Grace”, wheeled out as a figurehead, but sometimes a bit redundant when the detailed discussion starts.

He has picked up enough on the subject to recognise the issues that seem to come up time and again. This is fortunate, as he has agreed to be the moderator of a panel discussion on data protection at an American Bar Association conference in Copenhagen in June.

IP Draughts would appreciate your help, dear reader, in putting together a list of incisive questions (or themes) to ask the panellists, who are a mixture of US and European lawyers and data protection managers. Here are some crude, general questions to get us going. Under the new regime:

  1. Is the definition of personal data broader than at present?
  2. Should organisations rely on consent, or another lawful basis for processing? Is consent less likely to be used under the new regime than it is at present?
  3. Are existing consents going to be sufficient to comply with the new law, or will we need to get fresh consents?
  4. Can you rely on more than one lawful basis of processing? Eg if you start off with consents, but the consents are not compliant, can you switch to another basis of lawful processing as a back-up?
  5. Is it realistic to suggest that employees can give consent freely to their employer? Won’t they feel pressurised to give consent and won’t this make the consent invalid under GDPR?
  6. Do we need to rewrite our privacy statements? Can we rely on small print on website terms and conditions, and if not how “in your face” do we need to be?
  7. If you make the right noises, and try to institute new processes to comply with GDPR, will that get you off the hook if the regulator knocks on your door, even if your processes are not, in fact, compliant? Is the sensible course to treat GDPR a bit like many companies treat health and safety issues – going through the motions, without conviction – until you see some case law that shows you exactly what you need to do?

Alas, poor [Y]! I knew him, [H]…

There are many more general questions, though they can only sensitise you to the issues, rather than show you how to comply.

Are these questions on the right lines for a panel discussion? Or should IP Draughts take a different approach? Assume that 60% of the people attending the conference are US lawyers and 40% European, and that some, perhaps many, of them will not have much clue about the subject.

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Article on drafting FRAND licences now published

Back in December, IP Draughts had an article published in the online version of the Journal of Intellectual Property Law and Practice (OUP). The article’s title is How to draft a licence agreement that is fair, reasonable and non-discriminatory: a ten-point plan.

IP Draughts learnt at the weekend that this 10,000-word article has now reached the paper version of the journal. For non-subscribers to the journal, it can be purchased here.

The abstract reads as follows:

The English High Court case of Unwired Planet International Ltd v Huawei Technologies Co Ltd & Anor is of great interest to IP lawyers who advise on standards-essential patents (SEPs), on associated questions of competition law, and on licensing patents on fair, reasonable and non-discriminatory (FRAND) terms. The case is also of interest internationally, partly because there have been relatively few cases anywhere in the world, to date, that provided judicial guidance on legal issues relating to SEPs and FRAND and because this is the first time that an English court has determined a FRAND royalty rate.

This article focuses narrowly on the FRAND aspects of the Unwired Planet case, and on what the case teaches us about how to draft a patent licence agreement that is FRAND. But the discussion is broadened to reflect not only on the licensing of SEPs but also of other types of licence where there is an obligation to negotiate fair and reasonable licence terms, with particular reference to the terms of grant of the European Commission for Horizon 2020 research projects.

This focus results in the author omitting discussion of some points that would be of interest to the lawyer who is running litigation against a user of an SEP (perhaps in parallel with negotiating a FRAND licence with that infringer), or who may be advising on compliance with competition laws in the context of such litigation and negotiations.

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Trawling for case law

Those of us who work in the legal profession, or interact with it regularly, are mostly familiar with the ‘legal update’ documents that many law firms produce. Nowadays these documents tend to be available online or emailed to a circulation list. Or they are found through a commercial aggregator such as Lexology, whose daily offerings pop into IP Draughts’ inbox early each morning.

Often, IP Draughts finds that these articles are of limited interest. So much English case law is now available online, eg through the excellent and free BAILII, that cases of very little importance are trumpeted as major news. Law firms need to get better at filtering their case reports. And they also need to get better at explaining the context of the case, and why the reader should care about it. Just because a lot of money is at stake, and parties have thrown every legal argument they can think of at the judge, doesn’t make it a landmark case.

The real “added value” that a law firm could bring to these reports is an editorial one of explaining the longer term significance of the case, eg in the development of legal principles. It seems as though many of these case reports are produced by a lowly researcher or support lawyer, when really they should be issued in the name of a leading practitioner within the firm, whose commentary can be trusted. But of course, this costs more in time and judgment than simply churning out a case summary.

IP Draughts tries to keep abreast of the BAILII reports, but doesn’t have the time or interest to read every case that is reported. A quick scan today revealed nothing that seemed to raise important issues for IP contracts. But without reading every case you just don’t know. The titles of the cases aren’t necessarily conclusive, but he applies his own, rough-and-ready filtering system. For example, he tends to avoid those that name an individual and the Home Office as parties – these cases are more likely to be about immigration than commercial law. Cases in the Commercial Court should, in principle, be of interest, but often they concern procedural issues such as whether the English court has jurisdiction, or whether an arbitrator’s decision should be enforced.

Today on BAILII, he spotted a case called Bubbles & Wine Limited v Lusha, but it wasn’t a dispute between someone who likes a drink and his supplier. Nor was the case of Reynard v Fox an Anglo-French dispute between small-to-medium sized, omnivorous mammals. And he was disappointed to see that in the case of Fish & Fish Ltd v Sea Shepherd UK, neither party had instructed Bird & Bird as their solicitors. Ah, the joys of legal research.

 

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