Workshop Outline
1. Introduction to Drafting2. Contract Language3. Principles of Contract Interpretation4. Contract Drafting Basics5. Contract Elements in Detail6. Boilerplate Provisions7. Patent Licensing8. Solution to the Patent Licensing Scenario9. Final Thoughts
1. Introduction to Contract Drafting
• What is the goal of contract drafting?
• How can a contract be precise?
• Who should draft the contract?
2. Contract Language
What makes contract language “special”?
• Mixture of languages
• Desire to avoid ambiguity
• Habit
• Pressure to conform
Examples of Unusual Language
• Doublets and Triplets
• Deeming
• Here-, there-, and where- words
• Other old-fashioned language
Obligations, Authorisations and Conditions
• Avoid the overuse of “shall”
Use “will” to state a future fact Use “shall” to state an obligation Use “may” to state an option or a right Use “must” to state a condition precedent
Special Issues for Chinese Writers
• Articles (a, an, the)
• Tense
• Grammar (particularly prepositions)
• Punctuation
• (Over)Use of Chinese-English dictionaries
Characteristics of Plain English
1. Short sentences2. Definite, concrete, everyday language3. The active voice4. Tabular presentation of complex information5. Separate paragraphs and sections, with headings, for
separate concepts6. The absence of highly legal jargon or highly technical
business terminology and use of Latin or other foreign languages
7. The absence of double or multiple negative8. The use of multiple columns of text if the font is small
Benefits of Drafting in Plain English
• Increased Efficiency and Understanding
• Fewer Errors
• Positive Image for the Legal Profession
• Compliance with statutory Requirements
• BUT: There is resistance!
3. Principles of Contract Interpretation
I. The document must be read as a whole
II. The Literal and Golden Rules
III. Ut res magis valeat quam pereat
IV. Contra Proferentem
V. Noscitur a sociis
Principles of Contract Interpretation
VI. Ejusdem generis
VII. Expressio unius est exclusio alterius
VIII. Commercial (purposive) Purpose
IX. UCC §3-114 on Contradictory terms.
4. Structure of a Contract
• Title• Introductory paragraph• Preamble / Recitals / WHEREAS Clauses• Definitions• Operative Clauses • Representations, warranties, covenants,
indemnities, guaranties, releases• Events of default and remedies• Boilerplate• Signature Block• Exhibits and Attachments
Introductory Paragraph
Example:
• This Agreement (hereinafter referred to as the "Agreement") is made by and between XYZ Inc. (hereinafter referred to as "Licensor"), a corporation with principal offices at 1 Main Street, Buffalo, New York, and ABC Company, a limited company with principal offices at 250 Zhong Zhen Road, Taipei, Taiwan (hereinafter referred to as "Licensee").
Preamble / Recitals
• WHEREAS …
Facts about:• Relationship and goals of the parties• Nature of the transaction• Other related transactional documents
… The parties agree as follows:
Definitions
Inclusive:
“Intellectual Property” means intellectual
property as that term is generally used and
includes all patents, copyrights, and trademarks.
Exclusive:
“Intellectual property” means patents, copyrights,
and trademarks.
Signature Block
The Parties agree to the terms of this
Agreement above.
Licensor
XYZ Inc. By: ________Name: John SmithTitle: President
Licensee
ABC CompanyA Limited CompanyBy: __________Name: Kevin ChangTitle: Owner
5. Contract Elements in Detail
• Representations and Warranties
• Covenants
• Conditions Precedent
• Remedies
• Language to soften provisions
Representations and Warranties
• Distinction is not normally important
• They tend to be coupled:
“Party represents and warrants that…”
• Creates a snapshot of the facts• Important for assigning risk and due diligence• Drafted in present or past tense
Covenants
• Affirmative covenants• Negative (Restrictive) covenants• Financial covenants
Example:
“Licensee shall pay Licensor a royalty of fivepercent (5%) of Licensee's selling price for eachLicensed Product manufactured, used, or sold byLicensee in the Territory or imported by Licenseeinto the Territory.”
Conditions Precedent
• Requirements that must be satisfied before a party has to perform or before the contract is enforceable
• Simultaneous Closing vs. Delayed Closing
Remedy Provisions
• Triggering Event Remedy
Four types– Termination– Acceleration– Indemnification– Liquidated Damages
Remedy: Termination
“In the event Operator defaults in the performance of any covenant or agreement made hereunder, as to payments of amounts due hereunder or otherwise, and such defaults are not remedied to the Supplier’s satisfaction within ten (10) days after notice of such defaults, the Supplier may thereupon terminate this agreement and all rights hereunder of the Operator but such termination shall not affect the obligations of the Operator to take action or abstain from taking action after termination hereof, in accordance with this agreement.”
Remedy: Acceleration
“Whenever, within the sole judgment of Seller, the credit standing of Buyer shall become impaired, Seller shall have the right to demand that the remaining portion of the contract be fully performed within ten (10) days.”
Remedy: Indemnification
• Breaching party indemnifies (pays back) innocent party for all costs, damages and losses suffered as a result of the breach
• Could be limited by baskets or caps.
Remedy: Liquidated Damages
• Specific payment upon occurrence of certain event.
Could be unenforceable (a penalty):
• Is the actual damage from breach difficult to calculate?
• Was a good faith effort made to estimate the damage?
Softening Contract Provisions
Good Faith
Reasonable Efforts
Diligent Efforts
Best Efforts
Str
on
ger
6. Boilerplate Provisions
What does “boilerplate” mean?
• Miscellaneous
• Pre-litigation planning
• NOT unimportant!
Arbitration
• Why go to arbitration?
Example Clause:
“Any controversy or claim arising out of or relating to this Agreement, or its breach, is to be settled by arbitration administered by [organization] in accordance with its [subject matter] Rules.”
• Arbitration or Mediation?
Choice of Law
• ALWAYS include this provision• Which law should you choose?
Example:
“This Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, without regard to its choice of laws principles.”
Consent to Jurisdiction
• Choice of forum provision
Example:
“Each party shall submit to any court of competent jurisdiction for purposes of the enforcement of any award, order or judgment. Any award, order or judgment pursuant to arbitration is final and may be entered and enforced in any court of competent jurisdiction.”
Waiver to Trial by Jury
• Why waive the right to a jury?
Clause must be:
• Binding on both parties
• Conspicuous – bold or CAPS
Headings
• What is the proper function of headings?
Example: “The descriptive headings of the Articles,
Sections and subsections of this Agreement are for convenience only, do not constitute a part of this Agreement, and do not affect this Agreement’s construction or interpretation.”
Severability
• Remove (sever) void provision and interpret the remainder
• Remainder must still represent the bargain
Integration
• The contract is the whole agreement
• No other oral or written promises
• Invokes the Parol Evidence Rule
Waivers
• No Oral Waivers
• Effect of failure or delay to enforce rights
• Written waivers are limited to one occasion
Amendments
• In Writing• Signed• Identify the original agreement
Example: “The parties may amend this Agreement
only by a written agreement, signed by the parties, that identifies itself as an amendment to this Agreement.”
Assignment and Delegation
• Assignment of rights or delegation of duties to a third party
• Only with prior written consent from other party
• Issue of control – important to know who you are dealing with
Costs and Expenses
• Parties cover their own expenses unless otherwise stated.
• Minor, but it avoids arguments
Further Assurances
• Attempts to deal with unforeseen circumstances
Example:
“The parties agree to do such further acts and things and to execute and deliver such additional agreements and instruments as may be reasonably necessary to give effect to the purposes of this Agreement and the parties’ agreements hereunder.”
7. Patent Licensing
• What is a license?
• Types of Licenses– Exclusive License– Non-Exclusive License– Paid-Up License– Running Royalty License– Cross License
Structure of a License Agreement
• Title• Introductory Paragraph• Preamble / Recitals• Definitions• Grant• Royalties• Representations and Warranties• Term and Termination• Boilerplate provisions • Signature Block
Patent Enforcement
• Who should sue infringers?
• Do we always want to sue infringers?
• How should the court award (compensation) be distributed?
Representations and Warranties
• What should the Licensor promise?– That the patent is valid?– That the Licensor can grant a license?– That there are no rights of third parties?
• What should the Licensee promise?– Paying Royalties?– Best efforts in selling product?
Improvements
• Licensor’s Improvement– Can the Licensee use it?– Additional Fee?
• Licensee’s Improvement– Can Licensor use it? If so, to what extent?– If patentable, who gets the new patent?
Indemnification
• Licensor may want to be indemnified against tort actions in relation to use of the final product
• Licensee indemnification depends of bargaining power
Royalty Rate
• Agreed on in negotiations and put into contract
• If disputed, Georgia-Pacific 15 factors may be relevant
8. Solution to the Patent License Scenario
• Exclusive or non-exclusive?
• Paid-up or Running Royalty?
• Territory?
• Improvements?
• What if a dispute arises?
9. Final Thoughts: Precedents
• Where can we find precedents?
• Use multiple, relevant precedents
• Get first and final drafts
• Think before copying