International Commercial Agreements (Thorogood Professional Insights series)

THOROGOOD PROFESSIONAL INSIGHTS A SPECIALLY COMMISSIONED REPORT INTERNATIONAL COMMERCIAL AGREEMENTS Rebecca Attree B...

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THOROGOOD PROFESSIONAL INSIGHTS

A SPECIALLY COMMISSIONED REPORT

INTERNATIONAL COMMERCIAL AGREEMENTS Rebecca Attree

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A SPECIALLY COMMISSIONED REPORT

INTERNATIONAL COMMERCIAL AGREEMENTS Rebecca Attree

Published by Thorogood

Other Thorogood Professional Insights

10-12 Rivington Street London EC2A 3DU. t: 020 7749 4748 f: 020 7729 6110 e: [email protected]

Commercial Contracts – Drafting Techniques and Precedents Robert Ribeiro

w: www.thorogood.ws

© Rebecca Attree 2002

Successful Competitive Tendering Jeff Woodhams

The Legal Protection of Databases Simon Chalton

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic,

The Internet and E-Commerce Peter Carey

photocopying, recording or otherwise, without the prior permission of the publisher.

Technical Aspects of Business Leases Malcolm Dowden

This Report is sold subject to the condition that it shall not, by way

The Commercial Exploitation of Intellectual Property Rights by Licensing Charles D. DesForges

The Competition Act – Practical Advice and Guidance

of trade or otherwise, be lent, re-sold, hired out or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than in which it is published and without a similar condition including this condition being imposed upon

Susan Singleton

the subsequent purchaser.

Damages and Other Remedies in Commercial Contracts

No responsibility for loss

Robert Ribeiro

or refraining from action as a

Managing Corporate Reputation Susan Croft and John Dalton

Special discounts for bulk quantities of Thorogood books are available to corporations, institutions, associations and other organisations. For more information contact Thorogood by telephone on 020 7749 4748, by fax on 020 7729 6110, or e-mail us: [email protected]

occasioned to any person acting result of any material in this publication can be accepted by the author or publisher.

A CIP catalogue record for this Report is available from the British Library. ISBN 1 85418 286 2 Printed in Great Britain by printflow.com

To my husband, Paddy, and our children, Leo, Anna and Tom.

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The author Rebecca Attree is an international commercial lawyer working for her own law practice, Attree & Co, based in Westminster, London. She advises UK and overseas clients in relation to international commercial agreements. Rebecca also lectures in Europe on international commercial law topics and provides in-house legal training. She regularly contributes to various Croner Journals and also wrote and co-edited with Patrick Kelly European Product Liabilities (Butterworths). Rebecca also appears on radio and television in relation to consumer and commercial law. Rebecca is a member, former branch chairman and director of the Institute of Export. She is also a member of the Court of Assistants of the Worshipful Company of World Traders.


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Contents

1

INTRODUCTION

1

MASTERING THE ESSENTIAL SKILLS OF INTERNATIONAL NEGOTIATION

3

Introduction..................................................................................................4 Overview of negotiating theories ..............................................................6 Negotiating styles and ethics......................................................................7 Communication..........................................................................................19 Cultural factors .........................................................................................20 Negotiating a written agreement.............................................................22 Conclusion ..................................................................................................25

2

PRE-CONTRACT ISSUES

27

Introduction................................................................................................28 Commercial versus legal background .....................................................28 Duty of good faith......................................................................................30 Tactics to avoid pre-contractual liability .................................................31 Types of non-binding documents ............................................................32 Drafting non-binding documents ............................................................32 Checklist for drafting a pre-contract document ....................................35


3

INTERNATIONAL LAW CONSIDERATIONS

37

Introduction................................................................................................38 Jurisdiction .................................................................................................40 Checklist: Jurisdiction ...............................................................................46 Recognition and enforcement of judgments ..........................................46 Checklist: Recognition and enforcement of judgments ........................48 Choice of law..............................................................................................48 Checklist: Governing Laws.......................................................................52 Conclusion ..................................................................................................53

4

RESOLVING INTERNATIONAL COMMERCIAL DISPUTES

55

Introduction................................................................................................56 Arbitration and mediation contrasted ....................................................56 Arbitration and litigation contrasted ......................................................57 Potential disadvantages ............................................................................58 The timing of the submission ...................................................................58 Preliminary issues......................................................................................58 Governing law............................................................................................59 Selecting institutional or ad hoc arbitration...........................................59 Drafting an arbitration clause ..................................................................59 Ad hoc arbitration clauses........................................................................60 Institutional arbitration clauses ...............................................................60 Conclusion ..................................................................................................61

5

COMPETITION LAW CONSIDERATIONS

63

Introduction................................................................................................64 Articles 81 and 82 of the Treaty of Rome ................................................65 EC law: the basic prohibitions .................................................................65 Article 81: Treaty of Rome ........................................................................66 Infringement of Article 81 ........................................................................67 Minor agreements exempt........................................................................68 Article 82.....................................................................................................70

I N T E R N AT I O N A L C O M M E R C I A L A G R E E M E N T S

Infringement of Article 82 ........................................................................70 Modernisation Proposals..........................................................................71 Vertical Agreements ..................................................................................72 The exemption............................................................................................73 Methodology of analysis of the Regulation ............................................78 Specific vertical agreements.....................................................................79 Agreements dealing with intellectual property rights ..........................79 Competition and parallel imports ............................................................79 Typical licence of technology agreements ..............................................80 The Technology Transfer Block Exemption ............................................80 Ancillary provisions...................................................................................81 The protection of trademarks and the free movement of goods..........81 Horizontal agreements..............................................................................83 Block Exemptions for Specialisation Agreements and Research and Development Agreements................................................83 Scope of Guidelines on Horizontal Co-operation Agreements............83 Analytical framework................................................................................84 Research and Development Agreements................................................85 Production agreements .............................................................................87 The Specialisation Block Exemption Regulation....................................88 Purchasing agreements.............................................................................89 Commercialisation agreements................................................................90 Agreements on standards.........................................................................92 Environmental agreements ......................................................................92 Mergers and joint ventures ......................................................................93 Notification to the commission ................................................................93 The Merger Regulation .............................................................................93 Mergers in the UK .....................................................................................96 The UK Competition Act 1998..................................................................97 UK competition law based on EU law.....................................................97 UK guidelines .............................................................................................98 The UK Competition Law..........................................................................98 Conclusion ................................................................................................101


6

TECHNIQUES FOR DRAFTING COMMON CLAUSES

103

Introduction..............................................................................................104 1. Interpretation .......................................................................................107 2. Indemnity..............................................................................................116 3. Force Majeure ......................................................................................118 4. Change of control ................................................................................121 5. Severability ...........................................................................................121 6. Notices ..................................................................................................123 7. Waivers .................................................................................................124 Conclusion ................................................................................................125

7

NEGOTIATING AND ENTERING INTO E-CONTRACTS

127

Introduction..............................................................................................128 Pre-contract considerations ...................................................................130 Who are the parties? ...............................................................................135 Forming valid e-contracts.......................................................................138 Using standard terms ..............................................................................141 Website design and hosting agreements ..............................................141 The Distance Selling Directive 1997/EC ................................................144 The Database Directive ...........................................................................145 Conclusion ................................................................................................148

8

DRAFTING AGENCY AND DISTRIBUTION AGREEMENTS

151

Introduction..............................................................................................152 Types of arrangement .............................................................................153 Distributor and agent contrasted ..........................................................153 Sole and exclusive agents contrasted....................................................154 Franchise ..................................................................................................154 Commissionaire .......................................................................................154 The two classic forms of agency ............................................................155


Tax issues ..................................................................................................155 Competition law and agency agreements.............................................156 European law ...........................................................................................156 Sale of goods by agents in the EU .........................................................160 Applicable law..........................................................................................162 Who does the directive not apply to?....................................................162 Regime under the directive ....................................................................163 Rights and obligations ............................................................................163 Remuneration...........................................................................................164 Creation of agency agreements .............................................................165 Notice for termination.............................................................................165 National breach of contract provisions.................................................166 Non competition clauses.........................................................................166 Damages and indemnity payments .......................................................166 Practical points for agents and principals ............................................169 Sale of goods by agents outside the EU – relevant laws .....................170 Global overview of agency laws ............................................................171 English Common Law of Agency ..........................................................174 Checklist of points to consider including in an agency agreement ....175 Distribution agreements: type, form and key considerations ...........175 Common clauses in distribution agreements .......................................179 Competition law distribution agreements ............................................185 The Regulation applies to vertical agreements ....................................186 The exemption..........................................................................................186 Guidelines .................................................................................................189 Practical steps ..........................................................................................189 Laws of distribution around the world .................................................190 Conclusion ................................................................................................192


9

INTERNATIONAL LICENSING AGREEMENTS

193

Introduction..............................................................................................194 What may be transferred........................................................................196 Typical clauses..........................................................................................201 Jurisdiction and applicable law..............................................................202 How much does it cost ?..........................................................................203 Computer software licensing agreements ............................................204 The Software Directive............................................................................205 The Copyright Directive 2001/29/EC.....................................................206 Databases..................................................................................................209 Competition law.......................................................................................212 Conclusion ................................................................................................214

10 CONCLUSION


215

Introduction Contracts are at the heart of all business transactions, be they oral or written. The increasing globalisation of business, aided by e-commerce, means that frequently contracts are negotiated and entered into across national boundaries. It is hoped that the development of more truly international businesses will facilitate ‘peace through world trade’1. Successful business people in the new millennium need to be skilled international negotiators, and to have an understanding of the legal issues that underlie their business transactions. This Report deals with how to negotiate successfully internationally, and also aims to provide an overview of the commercial points to be considered as a result of the laws relating to pre-contract, private international law, resolving disputes (including alternative methods, such as mediation), competition law, drafting common clauses, and contracting electronically. It also looks in more detail at certain specific international commercial agreements, namely agency and distribution and licensing. This Report is written at an exciting time for international commercial lawyers. The relatively recent changes to EC Competition law have made a significant impact upon parties’ freedom to contract commercially, generally giving them greater flexibility. In the field of e-commerce, the EC has issued a welter of laws that are in the course of being implemented into national laws. Proposals for further laws are also in the pipeline. The law is stated as at July 2002. I would like to thank Paddy Kelly and Elaine Gardiner at Laytons, Judy Weatherstone at Hawksmere and Angela Spall at Thorogood for encouraging and helping me to write this Report. I am also grateful to the speakers and delegates at the Hawksmere Seminars Negotiating, Drafting and Understanding International Commercial Agreements whom I have met and worked with over the past several years. Their presentations, questions and discussions have deepened my understanding of the legal and practical implications of entering into international commercial agreements. Rebecca Attree, London, 2002

1

The motto of the Worshipful Company of World Traders


1

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Chapter 1 Mastering the essential skills of international negotiation Introduction............................................................................................4 Overview of negotiating theories ........................................................6 Negotiating styles and ethics ...............................................................7 Communication....................................................................................19 Cultural factors ....................................................................................20 Negotiating a written agreement.......................................................22 Conclusion............................................................................................25

Chapter 1 Mastering the essential skills of international negotiation

Introduction Almost every aspect of business life, and indeed human life, involves negotiating skills. We are all constantly striking deals and re-negotiating them with business counterparts, business partners, family and friends. A comforting factor for anyone new to the subject is that negotiating skills are innate, and indeed children are probably the best negotiators of all. Many successful business people realise that their business negotiating skills became particularly honed when dealing with their young children. Most of us become less skilful negotiators as we become older and more sophisticated. This chapter looks at how those skills can be remastered and put to use when negotiating international commercial agreements. It considers discussing initial proposals through to negotiating written contracts.

Who is negotiating? It is important to bear in mind not only what you are negotiating but also with whom you are negotiating. Every negotiator is interested in the issue at stake as well as the ongoing relationship with the other party. In a long-term relationship, the latter will frequently be more important than the former. Remember that the party on the other side is not an inanimate representative of the ‘other side’, but a human being. Like all humans, they have emotions, values and views, and are unpredictable. It is important to ask yourself at all stages of a negotiation: ‘Am I paying enough attention to the people problem?’ The process of separating the people from the problem is a fundamental skill in international negotiation and is explored in greater depth later in this chapter.

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1 M A S T E R I N G T H E E S S E N T I A L S K I L L S O F I N T E R N AT I O N A L N E G O T I AT I O N

What is negotiation? Negotiating is the process of communicating in order to reach a joint agreement about different needs or ideas. It involves persuasion rather than power. Ideally, negotiation should leave both sides feeling positive about the agreement reached. As such, negotiation involves a collection of skills ranging from communication to conflict resolution.

Why negotiate? It is always worth considering negotiating. After all, the old adage ‘if you don’t ask, you don’t get’ may apply. Many business parties expect to negotiate and differing levels of disappointment will be felt around the globe if proposals are accepted wholeheartedly. Indeed, unhesitating acceptance may render the proposer suspicious as to the motives of the accepting party. On the other hand, it is foolhardy to negotiate every deal. There may be instances where it is clear that the terms of the bargain on offer will not be improved. The point at issue may be minor and to negotiate it may jeopardise the relationship. Separating the human relationship from the problem may mean you decide not to pursue with a particular point of negotiation. One way of deciding how far to negotiate is to consider your ‘best alternative to a negotiated agreement’, commonly referred to by its acronym ‘BATNA’. This method involves considering how a proposal compares with your realistic alternatives. To do so, it is necessary to: a)

Consider anything you might do if you fail to reach an acceptable agreement;

b)

Turn the most promising alternatives into practical options;

c)

Select the best option (your BATNA);

d)

Compare the proposal with this BATNA;

e)

If the proposal is better than your BATNA, consider accepting it;

f)

If the proposal is worse than your BATNA, continue negotiating;

g)

If the other side will not improve their offer, suggest your BATNA.


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Overview of negotiating theories There are essentially three schools of thought on negotiating techniques:

1. Streetwise, tactical ploys The streetwise school largely originated from Southern California. It became a world-wide phenomenon by the 1980’s, and was prevalent at that time among solicitors in the City of London when negotiating international commercial agreements. Essentially, the streetwise school adopts the maxim ‘survival of the strongest’. It is valuable to know about these ploys so that they can be recognised and dealt with when others use them. However, knowledge of negotiating ploys is not sufficient to negotiate effectively, particularly since it is not recommended that they be actively used by skilled negotiators. Some Streetwise ploys are discussed further in the next section.

2. Principled negotiation Principled negotiation is explained in Getting to Yes2 by Roger Fisher and Bill Ury of Harvard University. They suggest that you ‘decide issues on their merits rather than through a haggling process focussed on what each side says it will and won’t do. You look for mutual gains wherever possible, and where your interests conflict, you should insist that the result be based on some fair standards independent of the will of either side’. No tricks are involved and fair play is aimed for at all times. Most of the negotiating skills advocated in this chapter are based on principled negotiation.

3. Psychological categorisation Whereas the 1980’s signified cunning, tactical manoeuvres being used heavily in negotiation, and the 1990’s brought principled negotiation, the late 1990’s and the new millennium heralded more subtle, discreet negotiating skills. Many of them are based in a way of thinking about ideas and people that is known as neuro-linguistic programming (NLP). NLP is the study of personal excellence. It looks at people’s unique styles and analyses the patterns used by outstanding individuals to achieve excellent results. The patterns are used in business for more effective communication and negotiation. NLP can make an important contribution to the use of language and non-verbal communication when negotiating and it is the background to the communication section of this chapter.

2

6

See Bibliography for details



Although NLP may have a role to play in negotiating styles generally, it is a highly complex subject requiring personalities, actions and reactions to be analysed in technical detail. Only the highly skilled negotiator could carry out such analysis at the necessary speed to keep up with the negotiations.

Negotiating styles and ethics ‘If I listen, I have the advantage: If I speak, others have it.’ From the Arabic. Principled negotiation is based on the following: People: Separate the people from the problem (see above). Interest: Focus on interests, not positions. Negotiators have emotions that drive them to prefer one solution to another. These preferences are known as ‘interests’. A ‘position’ on the other hand is something that the negotiator has decided upon. Often the real problem in a negotiation is conflicting interests rather than conflicting positions. Less skilled negotiators tend to assume that when the other side’s positions are different to theirs, their interests must be too. In many negotiations, however, a close examination of the underlying interests will reveal that many interests are in fact shared or at least compatible. It is therefore important for both sides to communicate their interests to each other, not to keep banging the drum about their positions. An example of where one party does not disclose his interest is the businessman who goes to see his bank manager just before he goes on holiday, asking to borrow £100 on an overdraft. They agree the rate, then the businessman says “Don’t you want some security? I would be happy to pledge my Rolls Royce car and you could keep it in your car park until I repay the loan.” “Done” says the bank manager. Two weeks later, the businessman returns from holiday, repays the £100 loan and says to the bank manager, “Thanks, that’s the cheapest long term secure parking anyone round here will offer for a smart car!” Options: Skilful negotiators remain flexible during discussions and put forward a number of different options. They are open to and listen carefully to suggestions from the other side. The more time spent brainstorming a difficult issue, the more likely the parties will be comfortable with the result and the less likely for litigation to ensue. Some of the techniques of creative problem solving (see below) could be used during the discussion.


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Criteria: It is important to keep in mind when negotiating what the objective standard is for the particular issue. The more you can compare what you are asking for to recognised standards of fairness or science, the more likely the other side will agree on the basis that your request is sensible and fair. For example, referring to precedents and custom will enable you to benefit from past experience. This principle must be used with care in the context of global negotiations where precedent and practice may vary greatly in a particular field from one country to another. Discussing objective criteria also reduces the ‘ping pong’ effect of negotiations, when parties bat a point backwards and forwards. It renders the negotiators almost part of the same team, aiming for the same goal of reaching an agreement. Some major international organisations even go so far as to ‘test’ a negotiated outcome before a binding commitment is made. The draft agreement is passed before one or two individuals within the company who have not been involved in the negotiations, to see whether they agree with its terms. This review by a fresh person will hopefully confirm that objectively a fair deal has been reached. The choice of such ‘objective reviewer’ needs to be made carefully however, since weeks and months of hard work should not readily be undone overnight.

World class negotiating strategies Keeping the four principled negotiation concepts in mind, a skilled negotiator needs to adopt a series of negotiating strategies. Although there are differences in the methods of negotiation used around the world (see later), there are certain universal strategies that are considered below. 1. PREPARE FOR NEGOTIATION

A negotiation, like so many other tasks, benefits from careful advance preparation. It is worth taking time to consider the negotiation per se, in addition to the commercial deal. To do so, all the issues need to be identified and then prioritised. If more than one person is to negotiate, it is particularly important for the team to agree on the priorities. The team or individual authorised to negotiate should then consider which areas they would be willing to concede and the parameters within which they would be willing to settle. Ideally, they should also gather further information relating to the other side, their culture, organisation, and other potential players in a negotiation. From this information, strategies and tactics can be prepared in advance.

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2. AIM FOR A WIN-WIN SOLUTION

It is best to aim for a win-win outcome of a negotiation. This occurs when both parties feel that not only have they achieved as good a result as possible, but that they have also helped each other to achieve it. All joint ventures should be formed on this basis; the synergy of the parties and the ability of each to enhance the other side’s business is critical to success. One-sided joint venture agreements rarely last. A win-win solution is to be contrasted with both parties losing (i.e. a deadlock) or one party winning at the other’s expense. If for any reason one party is unhappy with the deal, or how it was reached, the win could be a Pyrrhic victory. This will mean the parties are unlikely to do more business together. For example, squeezing a supplier on the price of the products may result in costs being cut at the expense of the quality of the product. 3. AIM HIGH

The advice to aim high is a hangover from the Streetwise negotiating approach of the 1980’s. It does still have a place in negotiating, provided it is not used to extreme. Research has shown that there is a relationship between power and result. If somebody acts as if they have power and the other person believes this, then that power can influence the outcome of negotiations. This suggests that behaving as if you have power, and aiming high, will improve your chances of achieving your goals. This may happen, irrespective of your actual skill level, even if in fact you have no more power or skill than the other side. Indeed, a high unexpected demand may succeed because it will influence the other negotiator’s expectations. For example, if you ask for delivery of a product in a relatively short time-scale, the other side may be too embarrassed to suggest the very much longer time period that was initially in their mind. Aiming high in negotiations should always be carried out bearing in mind the ‘people issue’. Extravagant demands made by a relatively new player to an established company may seem arrogant and turn the latter away from the deal completely. An exaggerated demand can always be reduced, and indeed leaves ample room to make concessions. If, or when, the demand is reduced, the other side will feel they have ‘won’. For example, the ‘haggle’ is an essential part of bargaining with someone from Central America or Saudi Arabia where initially requested prices are usually much higher than those actually paid.


9


4. KEEP COMMUNICATIONS CLEAR

If you do not all speak the same mother tongue ensure that you use plain, simple language and avoid colloquialisms which can make it hard for others to understand. Do not assume that because your counterpart speaks your language, he or she fully understands it. Some people find it easier to raise questions in a foreign language (using vocabulary that is already familiar to them) than to understand the answer which may use unknown vocabulary. The reverse may also be true: other people are not confident actively to speak a language but their comprehension skills are far better than their communication skills. Never make assumptions about people’s language capabilities and rely upon them by using a language in the hope that they will not understand a side conversation between you and your colleagues. It is likely that they, or one of their colleagues, will understand every word. 5. ASK QUESTIONS AND THEN LISTEN

The more questions asked, particularly in the early stages, the more the interests of others are ascertained and understood. However, do not ask anything that would embarrass the other side. The extent to which questions are acceptable will depend upon the culture of the other side. For example, North Americans and Northern Europeans are likely to respond better to direct questions than people from Southern Europe, the Far East or South and Central America. Having asked the questions, it is important to allow the other party time to answer, and to listen carefully to their answers. Listening is usually the least successful skill of the below-average negotiator. This is particularly important in cultures where the message is not ‘up front’ but embedded in the context of what is said. This is the case in countries such as Japan, China, Saudi Arabia, Greece or Spain. Listening produces silence, which can also be an effective tool when negotiating. Too often people fill ‘gaps’ in discussion by speaking. This is most common in people from countries who are not comfortable with silence, such as the UK. If you make a proposal and the other side does not reply instantly, speaking again means that you are in fact negotiating with yourself. It is much better to see whether the power of silence will pressurise the other side to agree to your proposal. In addition, stop speaking after you make a proposal or ask a question. In each case, you should wait for the other side to respond before you speak again. 6. REMEMBER THE HUMAN ELEMENT

The personal relationship you develop with your counterpart is important in addition to the deal itself. Indeed in many cultures, such as Brazil, Japan, Greece, Spain, Italy and the Czech Republic, it is more important. In other countries, such as Germany and Switzerland, what you are negotiating takes precedence

10



over with whom you are negotiating. Only when a number of successful deals have been negotiated will parties in those countries build a substantial relationship. If you have built a strong relationship or are dealing with someone from a culture that prizes personal relationships, the principled negotiation concept of separating the people from the problem is even more vital. An essential building block to any relationship is mutual trust. It can be difficult to build and even harder to rebuild when it has been broken. Many countries, such as Saudi Arabia, place a higher dependency on the person they are dealing with than any written document. Other cultures, principally Anglo-Saxon ones, do not feel comfortable until the parties have signed on the dotted line of an agreement. This latter approach is especially prevalent in the United States. Anglo-Saxon negotiators often try to overcome issues of trust by entering into a written contract at an early opportunity. They then hold the other side to the contract, regardless of how much they trust them. In many cultures, however, it is the person or the relationship that is trusted, not the contract. Making and keeping contractual commitments is not a high priority for many international negotiators. Much of this view relates to the relative uncertainty felt by those from different cultures. Malaysians, for example, prefer to have termination clauses in their contract in case things do not work out. They feel little control over future business events or even their country as a whole and want provisions for a respectful withdrawal should future circumstances make their compliance impossible. In much of the Arab world, negotiators stress mutual trust and see themselves doing business with ‘the person’ rather than a company or a contract. In Britain, there are strong legal precedents but less reliance on formalised contracts than in the United States. The diverging approaches can sometimes be bridged by using a Letter of Intent or Heads of Agreement. This non-binding document sets out the principal terms of the agreement, and forms the basis of the detailed contract. Those who like to have something written down take comfort from such a document, even though it is non-binding. Those who place greater trust on the person than the paper do not usually mind entering into a non-binding letter. The human aspect of negotiation affects the appointment of the negotiator or the negotiation team. In cultures where trust is placed on the individual negotiator, it is better to vest the negotiating power in him or her alone. Where greater emphasis is placed on written contracts, teams of people may be appointed to agree the documentation.


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In the case of negotiating teams, it is best to appoint representatives of a similar standing within each company to work together. This ensures that they will be talking at a similar level, and with a similar degree of delegated power. If a person is viewed as trustworthy by the other side, it is vital to protect this. This is another aspect of the ‘people’ side of negotiation. Trust will be vital for a long-term relationship, and future deals. A final point in relation to the ‘human element’ is to allow plenty of time for negotiations, and not to be too ambitious when preparing deal timetables. Global negotiation tends to be more protracted than domestic. Dealing with cultural differences, as well as operating in different time zones, means that patience is vital. It takes patience to obtain information from the other side. Politeness helps to build the relationship which in turn increases the chances of a win-win agreement. 7. CONCEDE CAREFULLY AND CAUTIOUSLY

A great deal can be understood about a person, their style and their resolve from the concessions they make. How they are used sets the tone, not only for a current negotiation but for future negotiations as well. Be careful therefore as to the message you will convey in making or refusing concessions. a) Be aware of cultural differences The more you know about the culture of the other side, the more easily you can bridge the cultural gap to become an effective negotiator. Frank L. Acuff suggests the following guidelines: “Adopt the platinum rule. The golden rule ‘Do unto others as you would that they do unto you’, works well when like-minded people are together. With international counterparts, it is no longer very helpful, because how one party may want to be treated may be very different from another coming from a different culture. Instead, the platinum rule needs to be adopted: ‘Do unto others as they would have done unto them’.” This advice is helpful, but needs to be tempered by the old adage: ‘Be yourself’. There is no point in behaving in a way that feels completely unnatural. You are unlikely to be convincing, and you may end up behaving in a way that is appealing to neither culture. The other point to bear in mind is: Which side of the fence are you on? It is more likely for sellers to adapt to their buyer’s culture than vice versa. Somehow purchasing departments, rooted on home soil, seem to maintain their own sense of culture more strongly than sales agents who typically travel to the deal and are more flexible.

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Negotiating techniques Studies of negotiators have identified some of the characteristics of above-average negotiators3. Broadly, they tend to: •

Explore more options;

•

Devote much more time to considering areas of potential agreement;

•

Spend twice as much time considering long-term as opposed to shortterm issues;

•

Set objectives within a range rather than a fixed point;

•

Leave open the order in which they consider the issues during face to face contact;

•

Not sing the praises of their own proposals which do not usually persuade and are therefore counter-productive;

•

Not make instant counter-proposals;

•

Not go in for ‘tit for tat’;

•

Label their own behaviour before proceeding (“Could I ask a question?”);

•

Give their reasons first and then state that they disagree;

•

Test their understanding more often by briefly summarising how they understand issues;

•

Ask many more questions;

•

Give more information about personal feelings in order to let others know their ‘interests’;

•

Refrain from diluting arguments with weaker ones (a good argument does not improve by the addition of supplemental minor ones);

•

3

Review the events that occurred during the negotiation.

See Bibliography on page 25 for details


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Manipulative ploys There are numerous manipulative ploys engaged by negotiators around the world. They are worthy of mention merely so that skilled negotiators can recognise them and counter them. It is not recommended that they be actively employed. Gavin Kennedy in Pocket Negotiator provides a whole dictionary of ploys. The most common ones mentioned are: Tough guy/nice guy: where the other side puts forward two negotiators; one who appears much tougher than the other. In reality, their approaches may be similar. You will be encouraged to strike a good relationship with the nice guy, and seek to reach an agreement with him. You will tend to be more conciliatory to the nice guy, comforted by the illusion that it is easier to deal with him than the tough guy. Salami: ‘A slice of cut sausage will not be missed’. Slicing up the elements of the other side’s conditional proposal like a salami may enable you to omit certain elements at a later stage without others noticing it. Mother Hubbard: Where the cupboard is always bare. Essentially this involves stating at the outset that it is impossible for you to pay the price/agree to certain terms because you are not in a position to do so, and backing up this statement with information such as profit forecasts and budgets. Russian Front: This is where you give the other party two options, neither of which is desirable from their point of view. This will induce the other party into choosing the least palatable option. Presented with one option, they probably would never have taken it. The name derives from the effect on soldiers of threats of being sent to the ‘Russian Front’ in the Second World War from ‘B’ movies. If the officer had the power to send someone to the Russian Front, he could exact compliance with his wishes. The solder cringed, “No, no, anything but the Russian Front”. Split the difference: This involves one party suggesting that the difference in amounts or percentages between the two parties be split equally. This may lead to one party agreeing to a much greater reduction than they would have otherwise done. To counteract this ploy, simply suggest an unrounded number with decimal points which does not lend itself to being easily split. Blame it on the lawyer: Once a draft written agreement has been prepared by the parties, one party says they wish to pass it before their lawyer. They then adjourn, and a lawyer is consulted (or not as the case may be). That party then returns to the negotiating table and raises points, apparently highlighted by the lawyer, which in reality may be commercial rather than legal.

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Starving or over-indulging the other side: We all know that our resilience is low when we are very hungry or recovering from excessive food and drink. Fortunately this blunt trick of the 1980’s is now rarely used. Distract the other side: A technique usually used with great rapidity to divert the other side’s attention when you have been put in a difficult spot. A technique used to great effect by a war veteran with a false arm that he would discreetly unstrap and let fall to the floor with a crash, much to the embarrassment of the others in the meeting.

Negotiating with difficult people One of the greatest challenges for a negotiator is to be confronted by a difficult person, from whatever culture. To overcome the problems, many of the concepts and principles referred to in this chapter need to be applied, albeit in a reverse fashion, in order to enable the difficult person to become a good negotiator. This, indeed, is the key to the problem: empowering the other side to be an effective negotiator, without allowing them to realise that you have done so. The first rule when faced with an emotional, irrational person is to stay calm and not to react to their excessive demands. This is likely in the long-term to help the other side to stay calm. Although some people, faced with a perfectly calm and measured response, will initially become more irrational, in the longer term they are likely themselves to calm down as they subconsciously mirror the behaviour of their counterpart. You should also seek to defuse the negative emotions of the other side as far as possible, by giving logical responses. The more you can encourage your emotional counterpart to stop ranting and to listen to you, the greater effect your calming words will have and the easier it will be to execute the following steps. A caveat to this technique is that some cultures, notably of Latin origin, feel more comfortable with anger than calm and may even consider an element of anger essential in the expression of their views. When, eventually, you have persuaded the other side to stay calm and to listen, you have then created a favourable negotiating environment. If you have not already done so, seek to ascertain the interests of the other side, and communicate your own interests to them. Look out for any manipulative ploys that the other side may be using and neutralise them insofar as possible. Often the most effective ways to counter the Streetwise type of negotiator is to change the game from the particular manipulative ploys they are using and approach the negotiations from a different footing.


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Once you have achieved these goals, there is one major stumbling block that will prevent the other side from reaching an agreement with you: Saving their face. No one likes to back-track from the initial position, particularly when it has been forcefully expressed. You therefore need to help your opponent to save face. This can be done by starting the discussion from the thought process of your opponent and involving them in developing an agreement from that starting point. Develop any new ideas that they promulgate that have the slightest merit. Tactfully overlook suggestions from the other side that have no place in the desired outcome. It is necessary to focus on the positive and encourage the other side to take ownership of the developing solution and to believe that it was truly ‘invented by them’. Initially, it may take some time to move your opponent from their original standpoint, but once you have got them on side and some form of accord is developing, albeit very minor, the floodgates may open and negotiations may even develop rapidly. During this process of convincing the other side that their view forms an important part of the negotiation, you may wish to employ the BATNA test on behalf of your opponent. For example, you may wish to show that your offer is better than his or her BATNA. This should make it hard for the other side to refuse your request. Once the relationship is on a firmer footing, some cultures use humour to break down tension and overcome stumbling blocks. Stopping a heated discussion to share a humorous aside can help to diffuse emotions. Care has to be exercised in the international context because a sense of humour varies greatly from one country to another. Anglo-Saxons are generally thought to be endowed with a keen sense of humour that is appreciated by other nations.

Creative problem solving When loggerheads appear to have been reached, there are a number of approaches which may be employed to avoid a complete deadlock. These include: a)

Reduce the issue to economics: Where one party agrees to make a concession demanded for a price. The basis for this is that greater risks or extraordinary performance requirements should be undertaken only in return for greater rewards. For example, a performance specification for a product might lead to a price increase.

b)

Re-define the problem: This technique is based upon the premise of looking at people’s interests rather than positions. If you can analyse the requirements of the other side to see what their interests really are, you may be able to make an alternative proposal which will satisfy their interests. The position that they were formerly taking will then

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seem irrelevant. For example, two parties may disagree over whether goods should be transported by land or sea (positions). The interests underlying these requirements could be speed or cost. A discussion of the reasons for selecting one method of transport over another may mean that speed or cost requirements can be accommodated. c)

Take up opportunities: By listening carefully to the other side, you may hear them mention a possible benefit. You may be able to take up this opportunity simply by discussing it. For example, your purchaser may mention they need to buy your goods for a particular event. You may wish to see whether there are sponsorship opportunities or other products of yours that could be used at the event.

d)

Consider history: Consider how you or someone else you know resolved a similar issue in the past successfully. It is worth keeping a ‘memory bank’ of particularly good techniques used by others when you spot them.

e)

Don’t get bogged down in the detail: If you find yourself engaged in highly technical discussions, it is helpful to step back from the detail and consider the broader scope of the negotiation. This may help you to explain more convincingly why you are arguing certain technical points. Stepping back from the detail of the negotiation may also enable you to see an obvious solution to your problem which you had otherwise overlooked. The old story of the man on a donkey crossing backwards and forwards over a border accused of smuggling unknown goods comes to mind. The customs officials could not find anything in his personal possessions, but still were convinced he as was smuggling something. Finally, the penny dropped. He was smuggling donkeys!

f)

View the difficulty from another angle: You may wish to look at the other side’s reasoning for not accepting your proposal in a different way in order to ascertain flaws. There may, for example, be inconsistencies between the other side’s position on the difficult issue and its position on other issues. For example, they may refuse to use your standard terms and conditions for a new deal, whereas another part of the company has already agreed to be bound by your terms for a separate contract.

g)

BATNA: The best alternative to a negotiated agreement. Consider everything you could conceivably do if you fail to reach an acceptable agreement. For example, what if you altered your position slightly, or if you halted negotiations and sought another supplier? Would this make them return with a more acceptable proposal?


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h)

Are the rules really rules and can you break them?: Remember though it is generally not a good idea to break rules. However, it is worth questioning whether rules that have the effect of being dealbreakers are really written in stone and whether management could be persuaded to waive them on this occasion.

i)

Each side allows an important point: Each side may have separately raised an issue important to them during the negotiation and it has been rejected. Consider revisiting one important point from each side and agreeing to both.

j)

Change words: The terminology used may create emotion or reactions in others. For example, ‘agreement’ may seem less imposing than ‘contract’. ‘Accrued interest’ sounds more favourable to the lender than ‘unpaid interest’. By changing the word, you may be able to diffuse negative emotions.

k)

Put yourself in someone else’s shoes: It maybe helpful on some occasions to consider how another person might resolve a difficult issue. This could either be done privately, or in an open meeting.

l)

Focus on the positive: New ideas are often rejected by others because of a ‘not invented here’ negative bias, or because one aspect of the idea seems flawed. Rather than rejecting a new idea outright, it is usually better to consider it and comment on its positive aspects, before commenting on the negative aspects. This encourages the other party to amend the negative aspects of its proposal and the revised idea may then be used to solve the problems.

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Communication Nuances of words need to be considered particularly carefully in international negotiations. Just because, for example, the common language is English, parties operating on different sides of the Atlantic may interpret words differently. What is ‘neat’ to an American will have a totally different meaning to a British person. The method of ‘chunking up’ and ‘chunking down’ advocated by NLP trainers is particularly effective in negotiations. Essentially, it involves a series of movements through the speech between the parties whereby the conversation is turned from generics to specifics, and vice-versa. The closer the parties come to agreeing on a particular point, the more specific the conversation will become. If they fail to agree on a specific point, it can be helpful for one party to make a more general statement about which they are confident that both parties are in agreement. Alternatively, the other party may ‘chunk sideways’ by raising an associated issue. For example: A:

“We need to agree how the intellectual property rights will be dealt with.”

B:

“Yes. Essentially they will all be yours, but you will license the trademarks and patents to me.” (chunking down)

A:

“You will need to pay me a royalty and a fee for the use of these intellectual property rights.” (chunking down)

B:

“I thought that was included in my initial down-payment.”

A:

“No, it wasn’t. However, clearly I need to receive something of value in return for these rights.” (chunking up)

B:

“I did not pay you royalties or fees when we did a similar agreement for Japan.” (chunk sideways)

Non-verbals A powerful statistic is that when we communicate, only 7% of the message is conveyed by what we say. The rest of the message is conveyed by factors such as the tone and volume of our voice, facial expression and body language. Body language can be quite individual. Therefore, an observant negotiator may learn over a period of time what certain signals given by a particular individual mean. As mentioned above, silence can be a very effective negotiating tool for customers. In the US, UK, Canada and Australia, silence is perceived as a negative reaction. If nothing is said in response to a proposal, proposers coming from those countries are frequently tempted to start talking again and soften their stance.


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Whilst body language may be a useful indication as to the other person’s views and feelings, it should be interpreted with caution. This is because body signal meanings vary from one culture to another. Further, some body language will vary depending upon the situation (e.g. the ambient temperature of the room), and some can be gender dependent. These potential pitfalls may be partially overcome by questioning the individual displaying the signals, to confirm the accuracy of your interpretation of the signal. A few examples of non-verbal behaviour: •

Crowding the private space of the other negotiator or grasping a stranger’s handshake as if they are a long lost friend can destroy the intended effect;

•

Touching the face, rubbing the cheek or covering the mouth can mean someone is being less than candid;

•

Chin stroking can mean a person is reaching a decision and it is better not to interrupt;

•

If the other negotiator sits back, folds his arms and is about to say something, it is almost bound to be “no”, so swift intervention to go over the positive points might be helpful;

•

Hands folded across the chest are defensive, suggesting that the other negotiator does not accept what you have said.

Cultural factors The principal cultural factors that most affect negotiations between cultures can be identified as follows: a)

Use of time: the Americans, Swiss, Germans and Australians are usually swift workers and precise in their time keeping. To those in many other cultures, they seem obsessed with time. In Latin America and the Middle East, it is not unusual for meetings to start late and for projects to be delayed.

b)

Individualism versus collectivism: Some cultures are more individualistic, placing more emphasis on individuals. Others tend towards working in groups. US people are highly individualistic, closely followed by countries such as Australia, Great Britain and Canada. Most Pacific Rim cultures, such as Japan, Hong Kong, Singapore and Taiwan are more group conscious. This is also true to a lesser extent in Latin American countries.

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The emphasis on the group is partly why the Japanese are slower than some at making negotiating decisions. It takes time to ensure that there is agreement from all members of the team. The group emphasis also influences whom you are trying to convince at the negotiating table. US negotiators bargaining with other Americans usually look for the top person who represents the other side. They do not want to talk to anyone other than the key decision maker. In group oriented cultures, however, it is the group, not an individual that must be convinced. c)

Role orderliness and conformity: Some cultures, such as those in the Pacific Rim, are characterised by a great need for role orderliness and conformity. Often more emphasis is put on the form or structure of behaviour than on content. It is how, not what, things are done. Other cultures, such as the United States, are much more at ease with ambiguity. For this reason, the Japanese pay great attention to ritual, such as presenting business cards. On the other hand, negotiators from the United States, Germany and Switzerland tend to put more emphasis on the content of the negotiations than on the procedures for achieving the end result.

d)

Patterns of communication: Communication patterns differ between ‘high context’ and ‘low context’ cultures. Some countries, such as those in the Pacific Rim, are considered high context cultures, where the meaning of the message is embedded in the context of the communication. Individuals from these cultures tend to assume that the listener will work out the full intent of the message. It is not completely spelt out. Other countries, such as the United States, Canada and most of Western Europe, are considered to be ‘low context’ cultures. That is, the meaning of the message is in what is explicitly stated, not in the context of what is said. Individuals from high context cultures may perceive this approach as direct. On the other hand, the indirect communication pattern of those from high context societies may on occasion lead others to consider them shifty.


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Negotiating a written agreement The foregoing general analysis of negotiation skills applies equally to negotiating oral and written agreements. When it comes to negotiating legal documents, several further points need to be borne in mind.

Preparing the first draft There is no doubt that the party who arranges for the first draft of an agreement to be prepared is in an advantageous position. The first draft sets the tone and style of the document, and also the way that the drafting is structured. Some inexperienced lawyers, when faced with a draft document, will be more able to criticise and object to what is written than to introduce new concepts and ideas. Naturally, there is a price to pay for gaining this advantage: The preparation of a first draft, particularly if it involves ‘blank paper drafting’ rather than using a precedent, is likely to be quite time consuming and costly. This money is however, well worth investing at the outset. The key to preparing a first draft document is to make it quite even-handed and reasonable. There is little point in preparing a totally one-sided agreement which then will antagonise the other side and waste valuable professional time in negotiations. However, a tactic utilised by some people is to include deliberately a few clauses that are particularly onerous on the other side, that you would not mind being deleted. When the other side asks for them to be deleted, you can reluctantly do so, thereby allowing the other side mistakenly to believe that they have ‘scored’ in relation to those points. This tactic is sometimes known as using ‘ugly dog clauses’; it is akin to architects designing beautiful houses but suggesting statues of ugly dogs stand in front of them. The content of the first draft of an agreement needs to be considered carefully. Essentially, most contracts contain the following: a)

The parties – be crystal clear at the outset as to who is contracting;

b)

Recitals – a brief summary of the main purpose of the contract, that technically does not form part of the contract;

c)

The main obligations of each of the parties – these should be set out in detail (i.e. how, when and for how long);

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d)

Apportionment of risk and safeguards;

e)

Term and termination; and

f)

Boilerplate clauses.



If you are operating in a common law jurisdiction, you will be using fairly lengthy agreements which seek to cover many eventualities. Contracts prepared by civil lawyers on the other hand, tend to be shorter, since they rely on the terms of the Civil Code. Care needs to be taken to ensure that the terms of those Civil Codes, which will automatically be implied, are understood. Various techniques are engaged to try to overcome the cultural divide in terms of the length of the document. Some parties seek to enter into a short framework agreement and then leave the rest of the trading relationship to be governed by their standard terms. Others simply print the contract in very small typeface. Ultimately, there is no easy answer. Generally it is better for agreements to be prepared by a lawyer qualified in the jurisdiction of the applicable law of the contract, and for the custom and practice of that country to be followed.

Negotiating the draft contract The advent of e-mails means that people meet on fewer occasions and more contracts are negotiated by correspondence. When responding to a draft contract, it may be sensible, if there are points of principle at issue, simply to respond by a written e-mail rather than to go to the time and expense of amending the draft until such time as those points have been agreed. Once agreement on those points is reached, it is important to follow up quickly with a revised draft so that both sides can see the detail of the point explained in words. As negotiations progress, it is advisable not only to amend the travelling draft but also to send an accompanying e-mail which sets out the reasons behind the requested changes. Meetings to negotiate a draft contract should be prepared for in advance. If it is a complex transaction involving a series of documents, it is a good idea to agree beforehand an agenda and who will attend the meeting. In a particularly large transaction, it may even be that the meeting is divided into small sub-groups who each work on one or two documents. It may be desirable to begin the meeting by looking at the major areas of difference, rather than beginning with the first page of the contract and going through it line by line. This enables greater time to be placed on areas which are harder to resolve. Going through the contract line by line may result in the last few pages of the contract never being considered until almost the last negotiating meeting. The disadvantage with addressing principal points at the beginning of the meeting is that it can set a hostile tone. If so, the parties may wish to leave certain points, sometimes called ‘deal breakers’, until the end of the negotiation. Sometimes these ‘deal breakers’ are more easily resolved when the parties have invested considerable time and expense in negotiating the deal to that point, and everyone is focused on getting the deal signed and moving on to its execution.


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Lawyers from common law jurisdictions will frequently ‘trade off’ one legal point against another in a detailed document. For example, there are frequently ‘trade offs’ to be made in the lengthy warranties a purchaser may request from a vendor in relation to a sale of company shares. The extent to which drafting should take place during a meeting can vary greatly from one deal to the next. Some clients prefer to have meetings with both sides and their lawyers present, followed up by a ‘lawyers only’ meeting during which the lawyers can draft the commercial points agreed. If this is the case, it is important that as each point is agreed, it is summarised by a lawyer and a careful note taken. The advantage of this method is that it usually saves clients’ time. The disadvantage is that quite often the detail of the commercial point will only be considered thoroughly when it comes to drafting it into the contract and the clients may need to give further instructions following the ‘lawyers only’ meeting. At the end of a negotiating meeting, one person should summarise the actions to be taken, by whom and by when and a note should be made of this. A future timetable for the negotiations should be agreed. Research has shown that people remember things best when they occur in the first or last few minutes of a meeting. Take advantage of this and place the important points at the beginning and end of the meeting.

The final draft of the agreement Before a negotiated agreement is signed, both the lawyer and client should read it through in its entirety at one sitting. This is to check for irregularities and to make sure no obvious matters have been overlooked. The lawyer should also make a final check that the agreement complies with all applicable regulatory requirements and competition law. These issues will have been considered at the outset, but can easily be overlooked as the deal evolves through negotiation. It is important not to be pressurised into signing an agreement without allowing time for this final read through.

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Conclusion Negotiating skills are innate to humans. At the same time, they are worth studying and analysing so that they can be swiftly put to use at appropriate moments. It is also vital to be aware of the more manipulative skills used by others so that you can recognise and counter them when you have to. It takes confidence to be a skilled negotiator, and part of that confidence comes from knowledge. A key aspect of negotiating is not always reacting quickly; frequently, it is a good idea to take a deep breath and engage the brain one more time before speaking. Do remember that silence is in itself a negotiating tool. Negotiating with people from different cultures raises even more interesting and complex challenges. Communication skills (both verbal and non-verbal) come to the fore, and an awareness and appreciation of the cultural background in which your counterpart operates is vital. Negotiating international legal documents involves general negotiating skills and cultural awareness. The inter-position of lawyers between the commercial parties and the need to ‘put the deal into weasel words’ gives rise to a further set of issues. The advent of the Internet and the popularity of e-mail means that a whole new science of negotiating in cyberspace is developing. Again, the old rules still govern, but technology forces us to adapt our ways to keep apace of the changing times.

Bibliography •

Getting to Yes – Roger Fisher & William Ury (Random House Business Books 1999)

•

How to Negotiate Anything with Anyone Anywhere around the World – Frank. L. Acuff (Amacom 1997)

•

Pocket Negotiator – Gavin Kennedy (The Economist Books 1997)

•

Introducing NLP – Joseph O’Connor & John Seymour (Thorsons 1995)

•

Getting Past No – William Ury (Random House Business Books 1999)

•

Mind your Manners – John Mole (Nicholas Brearley Publishing)


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Chapter 2 Pre-contract issues Introduction..........................................................................................28 Commercial versus legal background...............................................28 Duty of good faith................................................................................30 Tactics to avoid pre-contractual liability ...........................................31 Types of non-binding documents ......................................................32 Drafting non-binding documents ......................................................32 Checklist for drafting a pre-contract document ..............................35

Chapter 2 Pre-contract issues

Introduction The pre-contract stage of a transaction often performs the vital role in shaping the nature of the final deal that is entered into. At this initial stage, it is important to ascertain the ‘big picture’ of the deal; for example, how it will be structured, financed and operated. All too frequently, agreement on these fundamental points is reached between the parties without legal advice. It is often too late to completely re-shape the deal when lawyers are brought in at a later stage. The better solution, therefore, is to seek legal advice at the outset, although the fact of so doing may not be disclosed to the other side.

Commercial versus legal background The different approaches adopted by a commercial director on the one hand and a lawyer on the other are most stark at the pre-contract stage. This may partially account for the reluctance on the part of the commercial director to instruct lawyers early in the proceedings. The other constraint frequently cited by companies is budget; many companies prefer not to incur the expense of legal advice until it is reasonably sure that a proposed deal will go ahead. Generally, commercial directors are optimistic, forward thinking people who hope that their business idea will be realised. In order to propagate this hope, they may tend to ignore difficult points that arise early on in order to keep the deal alive. A commercial director may have some broad commercial objectives and methods of achieving them, but such ideas may lack clarity in their detail. A commercial director will rarely consider issues of confidentiality and, unless it is standard company policy, is unlikely to request the other side to enter into a confidentiality agreement regarding either the proposed deal or any information relating to the company that may be divulged to them. Finally, a commercial director may be unaware of regulatory issues that may later cause the deal to collapse.

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2 PRE-CONTRACT ISSUES

The early involvement of a lawyer is likely to provide an antidote to some of the above-mentioned aspects of a commercial director. The lawyer’s role is to advise their client in relation to the advantages and disadvantages of the proposed deal, and the pitfalls that they may encounter by entering into it. To this extent, a lawyer is more likely to confront early on some of the difficult issues, and in particular regulatory issues, such as competition law or tax. This may unfortunately result in the deal collapsing at an early stage, but it is usually better for this to happen, rather than for expensive negotiating and drafting to have taken place. A lawyer will almost always advise that a binding non-disclosure agreement be entered into between the parties. This will protect confidential information on both sides whether or not the deal progresses. If a lawyer is instructed after a Memorandum of Understanding or other similar non-binding document has been signed, a dilemma may arise when the lawyer subsequently advises on the pitfalls and regulatory issues that may apply. It is better to address these issues as soon as possible rather than to put them aside and deal with them as the main negotiations progress. Ideally, a revised, more detailed Memorandum of Understanding should be discussed and agreed. The quickest and most effective way to do this is to leave its amendment in the hands of one principal at senior level in each organisation, each advised by a senior lawyer. This will save the faces of the possibly more junior parties who initially masterminded the transaction. Time and money spent in perfecting the Memorandum of Understanding will be well spent since it will facilitate more effective negotiation later on. In international negotiations, it is particularly important to remember that trust is hard to win and easy to lose. Therefore, any ‘undoing’ of commercial discussions must be done sensitively and stated to be necessary due to the legal background. As mentioned in Chapter 1, the question of whether parties trust people or documents varies from culture to culture. Those in the Arab world typically place more importance on the people they are negotiating with. Those from Anglo-Saxon backgrounds, such as the United Kingdom and the United States, place a heavy reliance on written agreements. Frequently, a Memorandum of Understanding is used to bridge the gap between these divergent approaches. Such a document gives comfort to both sides: Those who trust people do not mind to enter into a Memorandum of Understanding since it is not binding. Those who place reliance on documents take solace from the written form of the Memorandum of Understanding, although it is not binding.


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Duty of good faith Although many aspects of company commercial law have been harmonised throughout the European Union, there remains a large divergence between European Union countries as to the extent to which parties may be liable for pre-contractual behaviour and information. Most civil law countries (i.e. most of continental Europe) have a well developed concept of pre-contractual liability for behaviour and information supplied in the pre-contract discussions. Indeed, civil courts will even go so far as to fill in the bargain and specify a reasonable price or terms. Germany, Switzerland, Italy, Spain, Belgium, France, Netherlands, Poland and Portugal have a particularly high duty to negotiate in good faith. This is encapsulated in the concept known as culpa in contrahendo. It requires a party to inform the other side of all the important points that they could not discover alone. Examples of such important points include the fact of a secret contract race, an unfair tender process, information known by one party that they are aware the other side does not know, or the introduction of a significant modification to a term. Further, each party must exercise reasonable diligence in performing their obligations and they must behave morally and ethically. This last requirement effectively prevents a party from withdrawing from negotiations that are quite well developed without reasonable justification. The bottom line is that if a civil law applies to the negotiations, which is likely to be the case if one of the parties operates in a civil law country and the discussions take place there, they cannot simply pull out of the deal without incurring a liability to the other side. The aggrieved party may seek to bring a claim in pre-contractual liability and to recover damages that represent their loss of opportunity, loss of opportunity to pursue other proposals, and wasted professional and other management time and expense. Although the duty of good faith exists at the outset in most civil law countries, it grows with time. The entering into a document, albeit non-binding, crystallises the duty and provides evidence of it. It is therefore more likely that a claim for breach of duty of good faith as a result of withdrawal from negotiations is more likely to succeed the further the negotiations have developed, and in particular, will be easier to prove if the parties have entered into a Memorandum of Understanding or other similar document. By comparison, common law countries such as England, Wales and Ireland have a very limited duty of good faith. There is no duty in law to continue negotiations and indeed the common law protects the parties’ freedom to contract or not as the case may be. With regard to liability for information supplied, mere

30



opinions are not actionable. Full statements inducing one party to enter into a contract are actionable in tort for misrepresentation. Statements that are specifically incorporated into a contract or warranties that can be shown to be collateral to the contract are actionable for breach of contract. For this reason, main agreements frequently contain clauses that specifically exclude or include certain information supplied before entering into the contract itself.

Tactics to avoid pre-contractual liability Parties operating in England and unaccustomed to the well developed doctrine of pre-contractual liability may wish to avoid it applying to themselves. Equally, they may wish to be alert to instances when a counterpart from a civil law jurisdiction seeks to exclude pre-contractual liability. •

A party may seek to exclude pre-contractual liability specifically in the Memorandum of Understanding. If so, any such clause needs to be legally binding (see below).

•

The laws of some countries, e.g. France and Portugal, do not permit pre-contractual liability to be excluded.

•

In any event, liability for fraud or gross negligence can never be excluded.

•

The negotiations themselves could be made subject to English law. To do so, it is best to make such a statement in writing and have it acknowledged in writing by the other side. Any meetings that take place should be conducted in England as far as possible. Private International law considerations should be borne in mind, since they may impact upon the extent to which the parties can agree to make the negotiations subject to English law. (see Chapter 3). Essentially, if one of the parties is English, the meetings are in England and correspondence is in English, it is likely that a submission to English law will be upheld.


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Types of non-binding documents There are a number of types of non-binding documents. The title given to a document will not of itself guarantee that it is non-binding. It is important to ensure that it is drafted so as to be non-binding (see below). The following types of document may be used: •

Letter of Intent: a unilateral letter sent from one party to the other that may then lead to heads of agreement or a contract.

•

Memorandum of Understanding: this is a bilateral document signed by both parties. It is sometimes referred to as Heads of Agreement, Deal Memorandum or Term Sheet.

•

Intention to proceed (ITP): this is used largely in building or manufacturing contracts. It is an instruction for one party to proceed with the construction or manufacture pending legal documents. It relies on the concept of unjust enrichment which allows the party who has performed the contract to receive payment to the extent that the work has been largely performed.

Drafting non-binding documents The typical contents of a non-binding document include: •

A non-binding outline of the agreed terms (although it is nonbinding, in practice it is usually difficult to change these terms once they have been drafted in the non-binding document. If a civil law applies, it may not be possible in law subsequently to change the terms).

•

Timetable for the progress of discussions and the transaction.

•

Obligations of the parties during negotiation, e.g. due diligence.

•

Binding clauses, e.g. lock-out, confidentiality, publicity, non-solicitation.

Typical clauses used in a non-binding document •

To ensure clauses are non-binding: “Subject to clause ( ), the clauses of this Memorandum are not intended to be legally binding nor are they an offer to sell the Target. They are only an expression of the current intention of the parties. They are not exhaustive and shall not give rise to legal rights or obligations.” It is much better to use a clause of this type than simply to put ‘subject to contract’.

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•

To ensure certain clauses are binding: “Clauses ( ) of this memorandum are legally binding.” If it is intended that certain binding obligations are created, the document itself must be capable of being a contract under its putative law (i.e. the law that would apply if it were to be a contract). For example, under English law, a contract is validly formed if there is offer, acceptance, an intention to create legal relations and consideration passed between the parties (i.e. money or money’s worth). If no consideration passes between the parties, the document should be made a deed to ensure that it is binding. A deed may be executed by a company if it is signed by any two directors or by one director and the secretary of the company and the wording of the document makes it clear that it is being executed as a deed by the company. This, in practice, is fulfilled if the document is called a ‘deed’ and the signature contains the words ‘Signed as a Deed by’. It is also necessary to consider whether the content of a document is capable of being binding. Under English law, an undertaking to agree or to negotiate to reach an agreement is unenforceable. For example, an undertaking to buy a car at a price to be agreed is not enforceable. An undertaking to buy a car at a price to be fixed by a third party is enforceable since there is certainty, albeit to be created by a third party.

•

Exclusivity Frequently a purchaser may request that a seller agrees not to negotiate with anyone else during a specified period of time. Such a provision (known as a ‘lock out’) is generally enforceable provided the obligation is to continue only for a reasonable time. This type of clause does not have the effect of requiring the seller to deal with the current purchaser. In practice, a seller who wishes to deal with an alternative purchaser can play for time and delay during the evaluation period so that the transaction does not reach fruition during it. A typical lock out clause would be as follows: “You shall terminate and procure that your agents shall terminate all discussions currently taking place with anyone other than us or our agents. During the evaluation period, you shall not: 1.

Directly or indirectly solicit, initiate or respond to any approach with a view to (

2.

) by any person other than us

Give anyone other than us or our agents any information in relation to such an approach save for information in the public domain.”


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Alternatively, the parties may agree to a ‘lock in’ clause, whereby they agree to negotiate for a set period of time. Such an agreement is unenforceable in England due to the freedom of parties to contract. In theory, it should be operative in most civil countries but in practice, the courts are reluctant to enforce such a clause. •

Penalty clauses The parties may wish to agree that a ‘break up fee’ be payable by a defaulting party if the deal does not go ahead. In civil law countries, the break up fee is typically drafted as a penalty clause as follows: “If you breach any binding requirement of this letter you shall pay within 30 days of receiving a written demand from us (amount) which shall be in addition to any sum recoverable as damages. You acknowledge that we will incur fees and expenses in reliance on this exclusivity undertaking you have made and we shall be entitled to damages arising from any breach.” Under English law, a penalty clause is unenforceable. To be enforceable, the break up fee needs to be set out in a liquidated damages clause as follows: “Without prejudice to any other rights we may have in the event of a breach by you of your exclusivity undertakings we shall be entitled to recover from you by way of liquidated damages for such breach the sum of ( ) being a good faith estimate of the costs likely to be incurred by us for fees and disbursements of professional advisers.” To ensure the enforceability of this clause, it is advisable to link it to the lock out clause and to express it as compensation for expenses. This is because English law will not allow the parties to take the law into their own hands and agree penalties to be imposed on each other that should otherwise be determined by a court of law.

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Checklist for drafting a pre-contract document •

Do you need a pre-contract document?

•

Only write definite terms if you are sure they are to form part of the deal.

•

Concentrate on important matters.

•

State exceptions or qualifications.

•

Ensure the behaviour of the parties accords with the document.

•

Consider liability.

•

Include a choice of law and jurisdiction clause.


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Chapter 3 International law considerations Introduction..........................................................................................38 Jurisdiction ...........................................................................................40 Checklist: Jurisdiction .........................................................................46 Recognition and enforcement of judgments ....................................46 Checklist: Recognition and enforcement of judgments ..................48 Choice of law........................................................................................48 Checklist: Governing Laws.................................................................52 Conclusion............................................................................................53

Chapter 3 International law considerations

Introduction Selling goods and services overseas, licensing manufacture in other countries, maintaining a website: all these actions raise important questions of international law. This chapter considers the international law considerations arising from international agreements. The principal issue is to ascertain which law governs an action. Secondly, it is essential to be aware of where one can sue, or be sued, if a dispute results.

Choosing a country in which to bring a claim Consideration of all relevant countries may give rise to a choice of jurisdiction. If so, there are a number of factors that may affect the choice. These include: 1.

Which law will the courts apply to the dispute? Is it advantageous to the case?

2.

Is the claim out of time in the country in question, due to the local limitation period legislation?

3.

Can the decision be appealed?

4.

What weight is attached to different types of evidence such as oral, written or expert?

5.

What kind of cost award is likely to be made?

6.

Will lawyers in the relevant countries agree to a conditional or contingency fee?

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3 I N T E R N AT I O N A L L AW C O N S I D E R AT I O N S

To sue or be sued Usually the question of jurisdiction will initially rest with the claimant. The claimant will commence the litigation in the courts of the country that it believes will have jurisdiction to hear the claim. However, if a company is put on notice that it is about to be sued in respect of a major claim, it may prefer to commence an action itself (for example for a declaration that it is not liable). The effect of this is for the company to attempt to ensure that the proceedings are heard before a court of the jurisdiction that is most favourable to it.

Frequently asked questions: jurisdiction, enforcement and governing laws Q

What is the difference between the terms jurisdiction and governing law?

A

Jurisdiction is attributed to the courts of a country that can hear a dispute. Governing law is the law that those courts will apply in determining the dispute.

Q

Do courts always apply their own law?

A

Not necessarily. Courts will often apply their own national laws, unless one of the parties claims that another law should be applied. In some countries, judges have to take the initiative and ascertain which law in their view should apply.

Q

What is the point in suing a company in a country where it has no assets?

A

It may be possible to enforce the judgment in the court of another country where it does have assets.

Q

Is it possible that courts of different countries may decide a dispute in different ways?

A

Yes. The private international laws of each country are not harmonised and therefore different courts may apply different national laws to one set of facts. Even if the courts hold the same law to govern a dispute, they may interpret and apply it differently.


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Jurisdiction Global considerations The question of whether the courts of a country have jurisdiction to determine a claim will be decided according to: •

international treaties to which a country has acceded, and

•

the national private international law.

Within the EU, there are several relevant conventions, which are discussed below. Outside the EU, there are currently no significant international treaties on the subject. This means that there is almost no harmonisation. The rules of each country and their inter-relation have to be considered in turn. There is, however, a proposal for a Hague Convention on International Jurisdiction and Judgments in Civil and Commercial Matters that would provide a degree of global harmonisation (see below). The following general principles apply to global questions of jurisdiction: •

There is virtually no restriction on the exercise of jurisdiction by any country.

•

Most countries exercise civil jurisdiction over property, persons, acts or events occurring within their territory.

•

Most states exercise civil jurisdiction over defendants who are nationals of that state.

•

Most states exercise civil jurisdiction if a national suffers injury or damage.

•

If the parties agree in the contract for jurisdiction to be given to the courts of one country, that choice will normally be upheld, provided the country has a substantial connection with the parties and the contract.

•

With regard to criminal jurisdiction, the state on whose territory a crime is committed will usually have jurisdiction.

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Service of proceedings If jurisdiction is to be exercised in respect of a party who does not reside in the territory, leave from the court is usually needed to serve proceedings outside the jurisdiction. If a company enters into a commercial agreement with an overseas party, it is desirable to include an ‘agent for service’ clause in the contract. This means that the other party appoints a third party resident in the company’s country to accept service on its behalf. Such appointment eliminates the need to apply to court for leave to serve proceedings outside the jurisdiction. A typical ‘agent for service clause’ would be: “X hereby irrevocably appoints Y as its agent for service to accept all proceedings and legal documents on its behalf served in connection with this agreement.”

Jurisdiction clauses In international contracts there will therefore often be several countries where the courts may have jurisdiction to hear a dispute. To avoid arguing with another party about where a case should be brought before considering the substance of a case, it is best to include a jurisdiction clause in the contract. An example of a jurisdiction clause is as follows: “The parties hereby irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to determine all disputes in connection with this agreement.” The inclusion of a jurisdiction clause does not however guarantee that the chosen courts will hear the dispute. Some countries may have mandatory rules that override such a choice. If a party commences an action in one country but the other party does not consider it to be an appropriate choice of jurisdiction, the latter party must usually oppose the choice of jurisdiction at the outset, before issuing a defence. The opposing party will need to prove in the first court that another country’s courts are a more appropriate forum to hear the dispute. Only once the first court has decided that the courts of another country are more appropriate, will the initial action be struck out and proceedings recommenced in the second country’s courts. If the opposing party seeks, pending the first court’s decision, to bring proceedings in the second country’s courts, they will be stopped. The other party will successfully be able to stay the second set of proceedings by pleading that there is another case being brought in a different country’s courts.


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The Brussels Regulation Questions of jurisdiction and enforcement within the EU are now largely dealt with by the Brussels Regulation 44/2001 on the Recognition and Enforcement of Judgments in Civil and Commercial Matters that was issued on 22 December 2000. This Regulation applies in respect of claims against defendants domiciled within the EU or to cases brought before courts of participating Member States. The former Brussels Convention4 will continue to apply as against defendants domiciled in Denmark or cases brought before the Danish Courts, since Denmark is currently not participating in the new Regulation. The Brussels Regulation came into force immediately on 1 March 2002 without need for national implementing legislation. It applies to documents formally drawn up and legal proceedings instituted after its entry into force. The Brussels Regulation contains detailed rules on jurisdiction within the EU and defines which country has jurisdiction over a particular action. It reduces the possibility of forum shopping, that is, the number of jurisdictions in which a plaintiff may choose to commence proceedings. It also sets out an efficient procedure for the recognition and enforcement of judgments of Member States throughout the EU. It provides greater clarity in interpreting the rules of jurisdiction first set out in the Brussels Convention. It allows the parties to choose a jurisdiction in the contract, which may be exclusive. It is therefore in the interests of certainty that an international agreement includes a validly incorporated jurisdiction clause. The Brussels Regulation provides that if the parties agree to jurisdiction, there is a presumption that such jurisdiction shall be exclusive unless they agree otherwise. This is a reversal of the presumption in the Brussels Convention, that assumed non-exclusive jurisdiction unless the contrary was stated. The agreement may be made in writing or in accordance with the parties’ practice or trade usage. The Brussels Regulation specifies that a communication by electronic means that provides a durable record of the agreement is equivalent to a communication in writing. If there is no jurisdiction clause, the Brussels Regulation provides that a defendant may be sued in the Member State where he or she is domiciled. Further, in a contract claim, a plaintiff may opt to sue in the courts for the place of performance of the obligation in question.

4

42

The Brussels Convention of Jurisdiction and the Enforcement of Judgmens in Civil and Commercial Matters, 1968



Unless the parties agree, the place of performance of a contractual obligation shall be: •

in the case of sale of goods, where under the contract the goods were delivered or should have been delivered;

•

in the case of services, the place where, under the contract, the services were provided or should have been provided.

This means that if the parties have not included a jurisdiction clause, or if for any reason it may not be upheld, it is important to state in the contract where the place of performance is. Failure to do so may result in sellers unwittingly submitting to the jurisdiction of their buyers. Consumers have the right to sue in the courts of the country where they are domiciled in relation to websites that may be accessed in that country and that are directed to consumers in that country. It is unclear what is meant by ‘directed’; indications may include the currency in which the price is quoted and the nationality of the search engines that lead to the relevant site. The Brussels Regulation also provides that certain peculiarities of the Private International Laws of Member State ‘A’ will not apply as against a person domiciled in Member State ‘B’ if they are sued in Member State ‘A’. (For example, the UK Rule which enables jurisdiction to be founded on the defendant being served with a writ during their temporary presence in the United Kingdom will not apply). The Brussels Regulation also contains measures aiming to reduce the time taken for judgments obtained in one country to be recognised and enforced in another.

San Sebastian Convention When Spain and Portugal joined the EC in 1989, they acceded to the Brussels Convention by way of the San Sebastian Convention, which slightly amended the Brussels Convention. The San Sebastian Convention is in force in all Member States which acceded to the Brussels Convention before 1 January 1995, with the exception of Belgium and Denmark which have only signed the San Sebastian Convention and not yet ratified it. The question of whether the Brussels Convention or the San Sebastian Convention will apply in any given case where the Brussels Regulation does not apply, will be determined by Article 54B of the Lugano Convention and the private international law of the relevant country.


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Lugano Convention On 16 September 1988 in Lugano, the EFTA (European Free Trade Association) countries, namely Austria, Finland, Iceland, Norway, Sweden and Switzerland, entered into the ‘Lugano Convention’ on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters with the Member States of the EC. The Lugano Convention contains materially the same provisions as those of the Brussels Regulation and has largely been superseded by the latter. The Lugano Convention is currently in force in Norway and Switzerland of the EFTA countries, as well as France, Italy, Luxembourg, Netherlands, Portugal and the UK of the EU countries.

Jurisdiction of more than one Member State In many EU cases, even where the Brussels Regulation applies, the courts of more than one Member State may have jurisdiction in respect of a dispute. However, the Brussels Regulation was designed to avoid duplicity of proceedings and contains specific rules relating to actions pending in different Member States. It provides that, in such circumstances, any court other than the court where the initial action was brought must stay its proceedings until the jurisdiction of the first court is established. The Brussels Regulation further provides that the court of a Member State may stay its proceedings where the courts of another State have been asked to determine a related action that has not been the subject of a judgment.

UK considerations In the UK, the Brussels Regulation has been implemented by the Civil Jurisdiction and Judgments Order 20015. This Order essentially amends the Civil Jurisdiction and Judgments Act 1982, that implemented the Brussels Convention into UK law. The UK is divided into three separate jurisdictions:

5

44

•

England and Wales;

•

Scotland; and

•

Northern Ireland.

S.1. 2001 No.3929



It is important to specify in any agreement which of the three jurisdictions is intended, to avoid ambiguity. If the courts of a UK jurisdiction are asked to determine a dispute involving another EU party, the Civil Jurisdiction and Judgments Order 2001 will be applied. If the dispute involves a non-EU party, the relevant private international laws will be applied. These broadly follow those outlined in Global considerations above.

Global jurisdiction: a proposal There is currently a proposal for a UN Hague Convention on International Jurisdiction and Judgments in Civil and Commercial Matters to deal with determining jurisdiction and recognising and enforcing judgments on a global scale. It is expected to be finalised in 2003. This is an important development in international civil law, since the proposal will bring greater harmony to the private international laws of the contracting states worldwide. When implemented, this Convention will greatly facilitate the resolution of international disputes in the courts and make this method as attractive as international arbitration. Many of the concepts contained in the current draft Convention mirror the concepts contained in the Brussels Regulation. It provides, for example, that the parties may agree upon a choice of court. The draft Convention also introduces a presumption of exclusive jurisdiction unless the contrary is stated. The parties’ freedom to choose an exclusive jurisdiction is subject to certain mandatory rules applicable to contracts concluded with consumers, employees and certain contracts, in respect of which the Convention grants exclusive jurisdiction (the most noteworthy being proceedings relating to immovable property, the validity of a legal person, and registrable intellectual property rights). If the parties do not expressly agree jurisdiction and no mandatory rules apply, certain ‘fall back’ provisions will apply. A defendant may be sued where it is habitually resident. A plaintiff may bring an action in the courts of a state where goods or services were supplied pursuant to a contract. A plaintiff may also bring an action in the courts of a state in which a branch, agency or any other establishment of the defendant is situated, provided that the dispute directly relates to the activity of that branch, agency or establishment. The proposed Hague Convention introduces a series of rules dealing with jurisdiction in claims in tort. The relationship between the proposed Hague Convention and existing laws is still under discussion. It is likely that certain residual rules of jurisdiction under national law will still apply. Further it is likely that the Brussels Regulation and the Parallel Convention will continue to apply, although certain provisions will be made subject to the proposed Hague Convention.


45


Checklist: Jurisdiction •

Consider whether you wish to limit where you may sue or be sued.

•

If you do wish to limit this, include a jurisdiction clause in your contract or conditions of sale.

•

Consider asking your overseas customers to appoint a person in your country as their agent to accept service of legal documents.

•

Make sure any business insurance you obtain includes cover for suing or being sued in overseas jurisdictions.

Recognition and enforcement of judgments Global enforcement A relevant factor to the choice of jurisdiction is whether a defendant has assets in the jurisdiction. If the defendant does not, any judgment obtained against it will be a ‘pyrrhic victory’ unless the judgment can be recognised and enforced in another jurisdiction where the defendant does have assets. This will involve further time and expense. The extent to which this is possible will depend upon the national laws of each country and international treaties. Outside the EU, there are virtually no treaties that deal with the point. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards deals with the recognition and enforcement of arbitral awards. (See Chapter 4)

National enforcement National laws often prescribe that in order for a judgment to be recognised it must: •

be of a certain type (for example, some countries recognise awards from both judicial and quasi-judicial bodies);

•

be final and conclusive (this may be the case even if it is capable of appeal);

•

not be contrary to public policy in the country where it is sought to be recognised or enforced;

46

•

not constitute a clear mistake of law or fact; and

•

be for a debt or a fixed sum of money.



If the previous criteria are met, the courts of the country being asked to recognise a judgment will not usually look into its merits, but will recognise it on its face value. The procedure for enforcement varies from country to country. Some states have a registration system, which means that a party applies to register a foreign judgment with a statement of claim. If there is no such registration system, a variety of procedures exist. They usually involve filing a lawsuit in the country where enforcement is sought.

EU enforcement Under the Brussels Regulation, a judgment given in a Member State is in general recognised in the other Member States without any special procedure being required. However, a judgment will not be recognised: •

if it is contrary to public policy in the State in which recognition is sought;

•

if it was given in default of appearance and the defendant was not served with the relevant documents to arrange for a defence;

•

if it is irreconcilable with a judgement given in a dispute between the same parties in the Member State where recognition is sought; or

•

if it is irreconcilable with an earlier judgment involving the same matter and parties, provided the earlier judgment could be recognised in the Member States addressed.

Under no circumstances may the foreign judgment enforced pursuant to the Brussels Regulation be reviewed as to its merits. The Brussels Regulation provides for a standard procedure by which a judgment given in one Member State may be automatically enforced in another Member State.

UK enforcement In England, an application for the enforcement of a judgment to which the Brussels Regulation applies is made first to a procedural judge known as a Master on an ex parte basis. Execution on a foreign judgment registered in the High Court in England may take place in the same way as on an English judgment. Where the foreign judgment is not enforceable under an international Convention or bilateral agreement, a fresh cause of action will be the foreign judgment itself. The position is broadly similar in Northern Ireland and the Republic of Ireland.


47


In Scotland, a judgment obtained under the Brussels Convention or other international convention is enforceable once it has been registered in the Court of Session, following application to the Lord Ordinary. If no such Convention applies, it is necessary to bring an action on the foreign judgment for a decree conform and thereby obtain the authority to enforce from the Court of Session.

Checklist: Recognition and enforcement of judgments •

Check whether a defendant has assets in the country where you are planning to sue.

•

If not, consider the extent to which you could recognise and enforce any judgment you may obtain against the defendant in another jurisdiction. The rules will vary depending upon whether the Brussels Regulation will apply.

•

Consider the extra cost and time you will need to recognise and enforce the judgment.

Choice of law The question of which law courts will apply to determine a dispute arising from an international agreement is governed by all the relevant legislation, which includes: •

international conventions and treaties;

•

EU directives and regulations;

•

national legislation, including the private international laws of the relevant countries involved; and

•

the mandatory rules and public policy of the relevant courts.

The questions of which courts will have jurisdiction and which law will they apply in relation to a dispute will not always be answered in the same way.

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Global legislation There is no global convention dealing with choice of law in commercial contracts. Dealing with the substantive law, by far the most important international Convention outside the EU relating to sale of goods contracts is the United Nations Convention for the International Sale of Goods 1980 (The Vienna Convention). Over 35 countries have acceded to this Convention although the UK has not yet done so. The Vienna Convention provides a series of obligations and rights relating to sales of goods which apply to all contracts which it governs. Its application to an international sales contract will, therefore, provide a ready-made body of law and render the question of governing law less vital. Parties are however free to deviate in their contract from the rules of the Vienna Convention.

General international principle The general principle in an international situation is that the applicable law should be the one that is the most closely connected to the international relationship. This rather vague rule has been developed to cover specific situations. For example, in a dispute regarding property, the law of the place where the immovable property is situated will usually apply. If one party is in a weaker position, the applicable law will often be the one best suited to protect them. This is so in the case of a consumer, where the law of the consumer’s habitual residence is often held to govern.

Private international laws relating to governing laws If a dispute is to be brought before a court, the primary focus must be to ascertain which law applies to the dispute. Each country has its own set of rules that set out how such applicable laws are determined. These rules are referred to as ‘private international law’. Private international law is the part of domestic law that provides rules on how to deal with cases containing a foreign element. Most countries have specific private international rules that govern claims in contract, tort, breach of statutory duty or any other basis. They vary from country to country, sometimes giving rise to different outcomes in different countries for the same set of facts, thus creating a conflict of laws. The private international laws of each country also include rules as to the extent to which a reference to a foreign law will refer to the foreign domestic law or the foreign private international law. If it is the latter, the question of which law the foreign law would apply will be considered. This may lead to the original law, or even a third law, applying. The concept of referring to other laws is called renvoi. Fortunately it is rarely invoked in commercial cases and it is more usually applied in family and probate matters.


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Mandatory rules and public policy There are two mechanisms that may alter the results of the applicable law. One is the system of mandatory or directly applicable rules, such as those on competition, unfair terms in contracts and restrictive practices. The other is public policy. This is where an outcome of a case which would otherwise follow all usual public international law rules of a country, would conflict so much with the interests of the state or an individual that public policy prevents the rule from having effect. In practice, public policy is only invoked in exceptional circumstances.

EU legislation The question of which law governs a contract has been harmonised within the EU by the Rome Convention on the Law Applicable to International Sales of Goods 1980 (The Rome Convention). This Convention adopts the following two principles in selecting the applicable law: 1.

The law intended by the parties.

2.

The law with which the contract is most closely connected.

The law intended by the parties The governing law of a contract will be the law intended by the parties. Therefore, provided the parties expressly agree upon a governing law in their contract, their choice will be binding. The discretion of the parties to elect the applicable law is expressly limited in consumer contracts. The parties cannot contract out of the mandatory consumer protection provisions of the law of a country if all the other elements at the time of the choice are connected with that country. EXAMPLE OF CHOICE OF LAW CLAUSE

“the parties hereby agree that this agreement shall be governed by the laws of England and Wales.”

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The law with which the contract is most closely connected If the parties do not expressly agree upon a governing law, the Rome Convention provides that the governing law will be the law with which the contract is most closely connected. It further establishes a rebuttable presumption that the law will be the law of the ‘characteristic performance’. This is the law of the place where the party who has to effect the characteristic performance has its seat or business. For example, in a contract of sale, characteristic performance is effected by the seller who has to deliver the goods and therefore the law of the seller’s country applies. The application of this rule to contracts made on the Internet may on occasions unfortunately apply a law which has little connection with the reality of the contract. For example, the seller may have set up business in a tax haven and the goods never physically pass through that haven. In such a case, the law of the tax haven would nevertheless apply.

EU consumer legislation The Rome Convention provides special rules relating to consumer contracts. Whatever law is applicable by choice of the parties or otherwise, consumers will remain protected by the mandatory rules of their country of habitual residence if the purchases are made in their home country (e.g. via the Internet), or on the strength of a local advertisement or a direct offer. This important consumer protection provision is retained in the field of e-commerce by the E-Commerce Directive (2000/31/EC) that affirms the application of existing private international laws to e-commerce transactions. There has to date been no harmonisation of the private international laws relating to choice of law in tort of EU Member States. This is unfortunate since the various Member States’ rules are frequently complex and difficult to apply to a given set of facts. It is planned that similar steps will be taken within the EU to harmonise the private international laws relating to tort – as have already been taken in relation to contract. Draft proposals for a new Convention, referred to as ‘Rome II’, have been issued, but at the time of writing are still in the preliminary stage. In the meantime, local legal advice should be sought as to how the law applicable to an international tort case would be resolved on the particular facts.


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UK legislation So far as governing law in an international contract dispute is concerned, the UK has implemented the Rome Convention by way of the Contracts (Applicable Law) Act 1980. The Private International Law (Miscellaneous Provisions) Act 1995 that was implemented in 1996 altered significantly the UK private international law relating to the choice of law in tort (or delict, as it is referred to in Scotland). The law introduced a new general rule that the applicable law of a claim in tort should be that of the place where the tort occurred. Where the relevant events occur in two or more countries, the tort is to be taken to have occurred in the country where: •

the plaintiff was injured;

•

property was damaged; or

•

where the most significant elements in the sequence of events occurred.

This general rule will be displaced in any case in which it appears to be ‘substantially more appropriate’ for another country’s law to apply. The legislation gives little guidance as to the circumstances in which the general rule should be displaced. The exception has led to flexibility as to the choice of law to govern a tort, but on the other hand a degree of uncertainty as to the law the courts may apply. It is noteworthy that the applicable law shall be the domestic law of a country, rather than its domestic and private international law – see Private international laws above.

Checklist: Governing Laws •

Check whether any international Convention such as the Vienna Convention or Rome Convention applies.

•

Include a governing law clause in contracts or standard terms and conditions – see the earlier Example of Choice of Law Clause.

•

Pay particular attention to consumer protection laws that may be mandatory and apply irrespective of any choice of law.

52



Conclusion The courts which may determine a dispute and the law that will apply will not necessarily pertain to the same country. To cut down lengthy disputes and assist certainty, it is highly desirable to include governing law and jurisdiction clauses in international agreements. As a general rule, the private international laws of EU Member States are more harmonised than elsewhere. Particular care needs to be exercised when selling to consumers as special rules apply.

Bibliography •

European Product Liabilities, Kelly &Attree, Butterworths, 1997.

•

International Contracts, Marielle Koppenol-Laforce et al, Sweet & Maxwell, 1996.

•

Enforcement of Foreign Judgments Worldwide, Platto & Horton, Graham & Trotman, 1993.

•

Starke’s International Law, IA Shearer, Butterworths, 1994.

Other sources Hague Conference on Private International Law website: www.hcch.net European Commission website: www.europa.eu.int


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Chapter 4 Resolving international commercial disputes Introduction..........................................................................................56 Arbitration and mediation contrasted ..............................................56 Arbitration and litigation contrasted ................................................57 Potential disadvantages ......................................................................58 The timing of the submission .............................................................58 Preliminary issues................................................................................58 Governing law......................................................................................59 Selecting institutional or ad hoc arbitration.....................................59 Drafting an arbitration clause ............................................................59 Ad hoc arbitration clauses..................................................................60 Institutional arbitration clauses .........................................................60 Conclusion............................................................................................61

Chapter 4 Resolving international commercial disputes

Introduction Parties entering into international commercial agreements should consider at the outset how any disputes arising under them will be resolved. Although traditionally the parties submitted to the courts of a chosen forum, other, less formal methods of dispute resolution are now selected. The parties may agree contractually to pursue non-binding methods of dispute resolution such as negotiation, mediation, mini-trial or early neutral evaluations. They may further agree that if such informal methods fail, they will resort to a binding form of alternative dispute resolution such as med-arb, expert determination or arbitration. Alternatively, the parties may agree to the most formal method of dispute resolution, namely, litigation before the courts, that is discussed in Chapter 3.

Arbitration and mediation contrasted In a mediation, the parties retain control over the dispute and are free to decide the point at which it may be settled. Any settlement therefore, is entirely dependent upon the parties’ willingness to resolve the issues at stake. Although a mediator will assist in the process, each party must negotiate and seek to convince the other side, not the mediator, of the strength of their argument. In an arbitration, the parties transfer the decision-making power to the arbitrator, who determines the dispute in accordance with the applicable law. It is therefore for each party to convince the arbitral tribunal of its case. Arguments are addressed to the tribunal, not to the other side.

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4 R E S O LV I N G I N T E R N AT I O N A L C O M M E R C I A L D I S P U T E S

Arbitration and litigation contrasted The main potential advantages of arbitration over litigation are as follows: •

It provides neutrality in relation to choice of procedural rules, law, language, and venue. These factors are particularly important in the international context.

•

The fact of the arbitration and its outcome remain confidential.

•

Generally, the jurisdiction of the court is excluded or limited, and frequently it is possible to exclude the right of appeal against the award.

•

The parties play a greater role in the selection of arbitrators, who may be specialists in the relevant fields. This is to be contrasted with litigation, where publicly appointed judges are assigned to cases. Such judges will not usually be specialised in the field of dispute.

•

Arbitral awards are generally more easily recognised and enforced in third countries than court awards. This is because there is currently no international convention dealing with the recognition and enforcement of foreign judgments. The draft Hague Convention on International Jurisdiction and Judgments which is expected to be finalised in 2003, will facilitate the enforcement of foreign court awards. Pending the finalisation of this important Convention, the enforcement of court awards depends within EEA upon the Brussels Regulation, and outside the EEA on bilateral agreements or conventions. The enforcement of arbitral awards, on the other hand, is already subject to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which more than 150 countries have acceded. This Convention essentially allows an arbitral award delivered in one country to be recognised and enforced in another country.

•

The winning party may be awarded costs, which may not always be the case in some jurisdictions, such as the United States.

•

Arbitration is generally considered to be a quicker method of resolving a dispute than the court.


57


Potential disadvantages International arbitration can be quite expensive, depending upon the selection of the institution. For example, the International Chamber of Commerce (ICC) levy charges based on the value of the dispute, claim and counterclaim. The London Court of International Arbitration (LCIA) charge on the time spent by the arbitrators. •

It is vital that the submission to arbitration clause is drafted precisely in accordance with the governing body’s rules (see later). Failure to do so may render the submission invalid.

•

Arbitration is still viewed with circumspection in certain parts of the world, such as the Middle East and Africa.

The timing of the submission There are essentially two types of agreement to arbitration, as follows: 1.

Clause compromissoire: an arbitration clause included in a commercial agreement whereby future disputes are submitted to arbitration. It is therefore entered into at the time of the contract. A few countries in South America do not recognise any such agreement.

2.

Compromis: less commonly, the parties agree to submit an already existing dispute to arbitration. It may, in practice, be difficult for the parties to reach an agreement over such an issue when the relationship has already soured due to the existence of the main dispute.

Preliminary issues Arbitrability Although most disputes are capable of being resolved by arbitration, it is important that submission to arbitration only occurs in relation to matters that are capable of being arbitrated. For example, matters of national enforcement, such as competition law and the validity of patents cannot be subject to arbitration. The subject matter must be capable of arbitration pursuant to both the laws of the country where the arbitration is proposed to take place, and the laws of the country where any arbitral award would be enforced.

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Governing law A number of laws will apply to an arbitration: •

The law of the domicile of each party will govern their respective capacity to enter into an arbitration agreement.

•

The law of the place of arbitration will govern the procedural laws of the arbitration, the powers of the tribunal, the extent to which the courts may intervene and, as mentioned above, the question of arbitrability of the dispute.

•

The law of the contract pursuant to which the dispute has arisen is likely to be the law applied in determining the dispute.

Selecting institutional or ad hoc arbitration The advantages of selecting an institutional arbitration is that there are wellestablished rules and an administrative body set up to assist in their operation. The disadvantages can be that the well-established rules are inflexible, costs can be quite high and the parties may encounter delays caused by bureaucracy. An ad hoc arbitration, on the other hand, allows the parties greater flexibility and the proceedings may be tailored according to the nature of the dispute. Costs and delays may be lower than those experienced in institutional arbitration. The main disadvantage of an ad hoc arbitration is that the flexibility may lead to uncertainty as to how issues may be resolved and may ultimately lead to a less predictable result.

Drafting an arbitration clause The essential components of an arbitration clause are: •

The method of selection of the arbitrators

•

The number of arbitrators

•

Qualifications of the arbitrators

•

Powers of the arbitrators

•

Name of the appointing authority

•

The language of the proceedings

•

The governing substantive law


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In addition, the parties may wish to include the following optional elements: •

A cooling off period

•

How to deal with multi-party proceedings

•

An agreement to exclude submission to the court

•

Detailed procedural rules

•

That any award shall be given with ‘reasons’

•

A waiver of the right of appeal

•

Consent to jurisdiction for enforcement

Ad hoc arbitration clauses The parties have a relatively free hand when drafting an ad hoc arbitration clause, provided the essential components mentioned above are included. The following are two sample clauses: 1.

Provided by UNCITRAL “Any dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination, or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL arbitration rules in effect on the date of this contract.”

2.

Specimen International ad hoc Agreement “Any dispute or controversy arising out of or in respect of this agreement shall be referred to and determined by arbitration (in place). The arbitral tribunal shall be composed of three arbitrators appointed as follows:”

Institutional arbitration clauses The following are institutional arbitration clauses as specified by the relevant institution: AAA INTERNATIONAL ARBITRATION RULES

“Any controversy or claim arising out of or relating to this contract shall be determined by arbitration administered by the American Arbitration Association under its International Arbitration Rules.”

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The Parties may wish to consider adding: •

The number of the arbitrators shall be (one or three)

•

The place of Arbitration shall be (country)

•

The language(s) of the Arbitration shall be (specify).

INTERNATIONAL CHAMBER OF COMMERCE (ICC)

“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said rules.” LONDON COURT OF INTERNATIONAL ARBITRATION (LCIA)

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA rules, which rules are deemed to be incorporated by reference into this clause.” Arbitration institutions from time to time amend their rules, procedures and standard submission to arbitration clauses and it is therefore recommended that the relevant website is checked for the latest version of the submission clause.

Conclusion Less formal methods of dispute resolution, notably arbitration, are increasingly favoured in international commercial agreements litigation. The ability to recognise and enforce arbitral awards, internationally facilitated by the New York Convention, renders them particularly attractive where parties and assets reside in various countries. It remains to be seen whether the finalisation of the Hague Convention on International Jurisdiction and Judgments, that will provide a similar treatment to court decisions internationally, will cause formal redress in the courts to find favour again.


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Chapter 5 Competition Law Considerations Introduction .............................64 Articles 81 and 82 of the Treaty of Rome ........................65 EC law: the basic prohibitions .............................65

Block Exemptions for Specialisation Agreements and Research and Development Agreements .............................83

Article 81: Treaty of Rome......66

Scope of Guidelines on Horizontal Co-operation Agreements .............................83

Infringement of Article 81......67

Analytical framework .............84

Minor agreements exempt.....68 Article 82 ..................................70

Research and Development Agreements .............................85

Infringement of Article 82......70

Production agreements ..........87

Modernisation Proposals .......71 Vertical Agreements ...............72

The Specialisation Block Exemption Regulation ............88

The exemption .........................73

Purchasing agreements..........89

Methodology of analysis of the Regulation .....................78

Commercialisation agreements ..............................90

Specific vertical agreements ..79

Agreements on standards......92

Agreements dealing with intellectual property rights ....79

Environmental agreements....92

Competition and parallel imports .......................79

Notification to the commission..............................93

Typical licence of technology agreements ..........80

The Merger Regulation ..........93

The Technology Transfer Block Exemption .....................80

The UK Competition Act 1998....................................97

Ancillary provisions................81

UK competition law based on EU law.................................97

The protection of trademarks and the free movement of goods ................81 Horizontal agreements ...........83

Mergers and joint ventures ...93

Mergers in the UK ..................96

UK guidelines ..........................98 The UK Competition Law.......98 Conclusion .............................101

Chapter 5 Competition Law Considerations

Introduction Competition law is a separate body of law that exists to ensure that businesses compete fairly in the market place. In so doing, it protects all those in the chain of supply, from supplier of raw materials, manufacturer, wholesaler, retailer to purchaser. The essence of competition law is that goods should reach the market at a price that includes the lowest reasonable profit margin attached to them, and that purchasers should be able to acquire products at a reasonable cost.

Relevant law Parties entering into any international commercial agreement should check that it complies with the relevant national and international laws. As a general rule, national laws, such as the UK Competition Act 1998, apply to agreements that may affect trade within the national territory. International laws, such as EC competition law, apply to agreements that may affect trade between states that have acceded to the relevant laws or treaties. For those operating within the EC, the national competition laws of most Member States are broadly similar to EC competition law. Outside the EC, there is little harmonisation of national competition laws. The United States has particularly strict anti-trust legislation that is enforced rigorously.

Proposed transactions Proposed transactions should be checked at the outset to ensure that they comply with the relevant competition laws. This will ensure that the transaction is structured appropriately from the beginning and the parties do not engage in lengthy and expensive negotiations unnecessarily. If the agreement is one of minor importance (see below), it may be possible simply to determine that the size of the parties and their relevant market shares mean that competition law will not apply to them.

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5 C O M P E T I T I O N L AW C O N S I D E R AT I O N S

Market share check Competition law should be borne in mind during the course of negotiations and drafting, and a final check should be made before the completion meeting to ensure that the final draft agreement complies in every respect with competition law. A review of the sizes of market shares of the parties should be made at this point, too, if they are seeking to rely on the agreement being of minor importance. This is because frequently the tests of ‘minor importance’ take into account the size of parent companies and it may be that during the time of negotiations disposals or acquisitions have been made within the group of one of the parties. Further, if reliance is made on the agreement being of ‘minor importance’, the sizes of the parties and their market shares should be kept under constant review during the course of the operation of the agreement to make sure that at no time an acquisition, disposal, or increase in market share will trigger the application of competition law.

Overview This chapter gives an outline of the principal EC and UK competition law affecting commercial agreements in general. The following topics are discussed: •

Articles 81 and 82 of the Treaty of Rome;

•

Vertical agreements;

•

Agreements dealing with intellectual property rights;

•

Horizontal agreements; and

•

UK Competition Act 1998.

ARTICLES 81 AND 82 OF THE TREATY OF ROME EC law: the basic prohibitions Article 3 of the Treaty of Rome provided for “the institution of a system ensuring that competition in the common market is not distorted.” The basic EU prohibitions on anti-competitive practice are contained in Articles 81 and 82 of the Treaty of Rome.


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Article 81: Treaty of Rome Article 81(1) Article 81(1) prohibits agreements or concerted practices between undertakings that may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market. In particular, those agreements which: a)

directly or indirectly fix purchase or selling prices or any other trading conditions;

b)

limit or control production, markets, technical development, or investment;

c)

share markets or sources of supply;

e)

apply dissimilar conditions to equivalent transactions with other trading parties;

f)

make the conclusion of contracts subject to the acceptance by other parties of supplementary obligations which have no connection with the subject of such contracts are prohibited.

Article 81(2) Article 81(2) provides that agreements or decisions that breach Article 81 shall be automatically void.

Article 81(3) Article 81(3) provides that agreements may however be allowed where they:

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a)

contribute to improving the production or distribution of goods; or

b)

promote technical or economic progress; or

c)

do not impose restrictions which are not indispensable; or

d)

allow the undertaking the possibility of eliminating competition.



Methodology of analysis The first question therefore when entering into a commercial agreement is whether it is likely to be contrary to Article 81. There is considerable case law dealing with the interpretation of the basic prohibition and it may be necessary to consider this in more detail. However, if it is thought likely that the agreement will breach Article 81, it may be simpler to consider whether the agreement can take advantage of a specific exemption granted to the type of agreement envisaged, or whether the agreement will be considered to be a minor one (see below).

Comfort or clearance If an agreement is considered to be in breach of Article 81(1) and not come within an exemption or be a minor agreement, three levels of comfort or clearance may be applied for from the Commission: 1.

Negative clearance – the parties may apply for a non-binding certification by the Commission that on the facts there are no grounds for enforcement;

2.

Comfort letter – the parties may apply to the Commission for a nonbinding administrative letter saying no action is being taken for the time being;

3.

Individual exemption – the parties may apply for a specific, binding exemption to be given to their particular agreement.

Each of these applications can be lengthy and expensive. It is better, if at all possible, to ensure that agreements are drafted so as to comply with the law to obviate the need for such action.

Infringement of Article 81 An infringement of Article 81 may result in the Commission imposing a fine. Further an injured third party may bring an action in a national court, seeking an injunction or damages.


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Minor agreements exempt Some agreements which affect competition within the terms of Article 81(1) may nevertheless not be caught because they do not have an appreciable impact either on competition or on inter-state trade. Many agreements escape EC competition law, and hence problems such as the need to notify and the possibility of unenforceability, because they are of minor importance. The Commission has given guidance on the subject, which is generally known as ‘the de minimis doctrine’. Such guidance is not of legislative effect. The European Commission adopted a new Notice on 22.12.2001.6 This Notice replaces the previous Notice of 1997. It reflects an economic approach and has the following key features: The ‘de minimis’ thresholds are raised to 10% market share for agreements between competitors and to 15% for agreements between non-competitors. The 1997 Notice had fixed the ‘de minimis’ thresholds at respectively 5% and 10% market share. Competition concerns can not in general be expected when companies do not have a minimum degree of market power. The new thresholds take account of this while at the same time staying low enough to be applicable whatever the overall market structure looks like. The difference between the two thresholds takes into account, as before, that agreements between competitors in general lead more easily to anti-competitive effects than agreements between non-competitors. It specifies for the first time a market share threshold for networks of agreements producing a cumulative anti-competitive effect. The previous 1997 Notice excluded from its benefit agreements operating on a market where “competition is restricted by the cumulative effects of parallel networks of similar agreements established by several manufacturers or dealers”. This meant in practice that firms operating in sectors, like the beer and petrol sector, could usually not benefit from the 1997 Notice. The current Notice introduces a special ‘de minimis’ market share threshold of 5% for markets where there exist such parallel networks of similar agreements. It contains the same list of hardcore restrictions as in the horizontal and vertical Block Exemption Regulations. The current Notice defines in a clearer and more consistent way the hardcore restrictions, i.e. those restrictions, such as price fixing and market sharing, which are normally always prohibited irrespective of the market shares of the companies concerned. Hardcore restrictions cannot benefit from the de minimis Notice.

6

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Notice on agreements of minor importance which do not appreciably restrict competition under Article 81 (1) of the EC Treaty. Published in the Official Journal of the Communities, C368 of 22.12.2001



For agreements between non-competitors the current Notice has taken over the hardcore restrictions set out in Block Exemption Regulation 2790/1999 for vertical agreements. For agreements between competitors the current Notice has taken over the hardcore restrictions set out in Block Exemption Regulation 2658/2000 for specialisation agreements. Agreements between small and medium sized enterprises are in general ‘de minimis’. The current Notice states that agreements between small and medium sized enterprises (SMEs) are rarely capable of appreciably affecting trade between Member States. Agreements between SMEs therefore generally fall outside the scope of Article 81(1). In cases covered by the current Notice, the Commission will not institute proceedings either upon application or on its own initiative. Where companies assume in good faith that an agreement is covered by the Notice, the Commission will not impose fines. Although not binding on them, the Notice also intends to give guidance to the courts and authorities of the Member States in their application of Article 81. Small and medium-sized undertakings are currently defined7 as undertakings which have fewer than 250 employees and have either: •

an annual turnover not exceeding EUR 40 million; or

•

an annual balance-sheet total not exceeding EUR 27 million.

The current de minimis Notice indicates that this recommendation will be revised. It is envisaged to increase the annual turnover threshold from EUR 40 million to EUR 50 million and the annual balance-sheet total threshold from EUR 27 million to EUR 43 million.

7

Annex to Commission Recommendation 96/280/EC O.J. L 107, 30.4.1996, p.4


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Article 82 Article 82 prohibits the abuse by one or more undertakings of a dominant position within the common market or a substantial part of it in so far as it may affect trade between Member States. Article 82 therefore deals with the behaviour of the parties while Article 81 deals with agreements. Article 82 provides that the abuse of a dominant position may in particular consist in: •

directly or indirectly imposing unfair purchase or selling prices or unfair trading conditions;

•

limiting production, markets or technical development to the prejudice of consumers;

•

applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

•

making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject matter of such contracts.

Infringement of Article 82 An infringement of Article 82 may result in the Commission imposing a fine. Further, an injured third party may bring an action in a national court, seeking an injunction and/or damages.

Dominance and market share There has been significant case law to interpret the application of Article 82. In particular, the question of whether or not a party is ‘dominant’ has lead to significant discussion. Clearly, the more narrowly a market is defined, the easier it is for a party to be dominant within it. The Commission has tended to categorise markets reasonably narrowly, thereby triggering the application of Article 82 more readily.

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Preparing agreements and Article 82 It is therefore essential that proposed transactions and draft agreements be considered in their commercial context to see whether the effect of their being entered into may lead to either a third party bringing a claim for infringement of Article 82 or the Commission taking enforcement actions. There are no Exemptions available in respect of Article 82.

Modernisation Proposals Proposals In April 1999 the Commission adopted a White Paper on modernisation of the rules implementing Articles 81 and 82 (O.J. [1999 C 132/1]). In it, the Commission proposed that a significant amount of its power be devolved to national courts, as follows: •

The Commission’s monopoly over the grant of individual exemptions should be abandoned; and

•

National courts and national competition authorities should be able to share with it the right to apply the provisions of Article 81(3).

•

The Commission intends that the new regime will enter into force on 1 January 2003.

Effect of implementation of proposals If the proposals are implemented, businesses and their legal advisers will have to be more self-reliant. It will become even more important for them to take a view as to whether an agreement satisfies the terms of both Article 81(1) and Article 81(3). This is because it will no longer be possible to notify agreements to the Commission and to ask it for a review, enjoying in the meantime immunity from being fined.


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Vertical Agreements EC competition law deals separately with ‘vertical agreements’ on the one hand and ‘horizontal agreements’ on the other. ‘Vertical agreements’ are generally considered to be agreements between two or more parties which operate, for the purposes of the agreement, at a different level of the production or distribution chain. It therefore covers a whole range of agreements such as: •

distribution agreements;

•

purchasing agreements;

•

selective distribution agreements;

•

franchise agreements; and

•

agency agreements.

Horizontal agreements Horizontal agreements, on the other hand, are agreements between two or more parties which operate, for the purposes of the agreement, at the same level of the production or distribution chain.

Vertical Agreements Regulation Competition law in relation to vertical agreements underwent fundamental reform in 1999 with the adoption by the European Commission of a new Regulation9 on the Application of Article 81(3) to Vertical Agreements and Concerted Practices (the Regulation). The Commission also published accompanying Guidelines on Vertical Restraints10 (the Guidelines).

Scope of the Regulation The Regulation took effect from 1 June 2000, giving exemption from Article 81(1) to a wide range of vertical agreements, that are defined as agreements between two or more parties which operate, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions of purchase, sale or resale of certain goods or services.

9

No.2790/1999 O.J. [1999] L 336/21

10 O.J. [2000] C 291/1

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Replacement of former Block Exemptions The Regulation replaced the former Block Exemptions that related to exclusive distribution11, exclusive purchasing12 and franchise agreements13. It also, importantly, for the first time rendered agency agreements subject to legislation.

Style of the Regulations By repealing certain Block Exemptions, the Regulation rendered all vertical agreements subject to the same regime. It also marked a departure from the previous ‘formalistic’ approach that provided for certain ‘black’ clauses to be prohibited and certain ‘white clauses’ to be included in agreements. The Regulation approaches the question of whether a vertical agreement breaches competition law by looking at the effect of the agreement, rather than its form. The Guidelines are not of legislative effect.

The exemption Parties not competitors The Regulation provides that the exemption shall be available to: •

parties who are not competitors; or

•

competing parties who enter into a non-reciprocal agreement where either: i)

the buyer has a total annual turnover not exceeding EUR 100 million; or

ii)

the supplier is a manufacturer and distributor of goods and the buyer is only a distributor; or

iii)

the supplier is a provider of services at several levels of trade while the buyer does not provide competing services at the level of trade where it purchases the contract services.

11 1983/83 12 84/83 13 4087/88


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Market share Having satisfied the ‘competitor’ requirement, the next point to consider is the market share of the relevant party. Generally, the market share held by the supplier must not exceed 30% of the relevant market in which it sells the contract goods or services. If the agreement contains ‘exclusive supply obligations’, the market share held by the buyer must not exceed 30%. ‘Exclusive supply obligations’ are defined as any direct or indirect obligation causing the supplier to sell the goods or services only to one buyer inside the Community for a specific use or resale. The Commission Notice on the definition of the market14 provides guidelines on market definition.

Exceeding market share limits One of the most important changes introduced by the exemption is that there is to be no need to notify vertical agreements not containing ‘hardcore’ restrictions (see below) but falling outside the scope of the exemptions due to the market share limit. This is because an individual exemption may be declared retrospectively to the date of the agreement and there is no presumption of illegality purely because the market share test is exceeded. In calculating a company’s market share, market share in the preceding calendar year should be considered. If the market share is initially not more than 30% but subsequently rises above that level, without exceeding 35%, the Exemption will continue to apply for two consecutive years following the year in which the 30% threshold was first exceeded. If originally the market share is not more than 30% but subsequently rises above 35% the Exemption may continue to apply for one calendar year.

14 O.J. [1997] C 372 p5

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Hardcore restrictions In any event, the Regulation shall not exempt agreements which have certain anti-competitive objects, namely: •

resale price restrictions – but recommended and maximum prices can be applied;

•

the restriction of the territory into which, or of the customers to whom, the buyer may sell the contract goods or services. However, the following limited restrictions on resale are permitted: i)

the restriction of active sales into another buyer’s exclusive area or exclusive customer group, or a territory or customer group reserved to the supplier;

ii)

the restriction of sales to end-users by a wholesaler;

iii)

the restriction of sales to unauthorised distributors by selective distributors; and

iv)

the restriction of the buyer from selling components to the manufacturer’s competitors

•

the restriction of active or passive sales to end-users by selective distributors operating as retailers;

•

the restriction of cross supplies between distributors within a selective distribution system; and

•

the restriction between a supplier of components and a buyer who incorporates those components, which limits the supplier to selling the components as spare parts to independent repairers not entrusted by the buyer with the repair or servicing of its goods.

Parallel networks The exemption can be withdrawn by the Commission where parallel networks of similar vertical restraints have an appreciable effect on competition with the European Community.


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Non-compete obligations The Regulation effectively outlaws the following non-compete obligations in vertical agreements: a)

most non-compete obligations which are indefinite or exceed 5 years;

b)

most non-compete obligations effective for more than one year after termination of the agreement; and

c)

an obligation on members of a selective distribution system not to sell the brands of particular competing suppliers.

This means that non-compete obligations in indefinite agreements will cause the agreement to fall outside the Regulation and potentially be in breach of competition law. Parties are in practice dealing with this issue either by entering into only agreements for a fixed term of five years, or by making non-compete covenants in indefinite agreements subject to the proviso that they last only for five years.

Severability The Regulation does not allow hardcore restrictions to be severed from an agreement. This means that if there are one or more hardcore restrictions, the benefit of the exemption is lost for the entire vertical agreement. The rule of severability does however apply to the non-compete obligations listed above, or any obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers. In this case the benefit of the Regulation is only lost in relation to the rest of the agreement. Care should be taken to ensure that a severance clause is valid and effective according to the law applicable to the agreement.

Active and passive sales It is noteworthy that the Regulation refers only to restriction of ‘active sales’ into exclusive territories or to exclusive customer groups, and not to ‘passive’ sales. The Guidelines explain that passive sales should always be permitted to exclusive territories or customer groups. They define ‘active’ and ‘passive’ sales as follows: •

‘Active’ sales mean: i)

actively approaching individual customers inside another buyer’s exclusive territory or exclusive customer group by, for instance, direct mail or visits; or

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ii)

actively approaching a specific customer group or customers in a specific territory allocated exclusively to another buyer through advertisement in media or other promotions specifically targeted at that customer group or targeted at customers in that territory; or

iii)

establishing a warehouse or distribution outlet in another buyer’s exclusive territory.

•

‘Passive’ sales mean responding to unsolicited requests from individual customers, including delivery of goods or services to those customers. General advertising or promotion in media or on the Internet that reaches customers in other distributor’s exclusive territories or customer groups, but which is a reasonable way to reach customers outside those territories or customer groups, are passive sales.

Internet selling It follows that, generally, sellers must be free to use the Internet to advertise or to sell products. The Guidelines state that a restriction on the use of the Internet could only be compatible with the Regulation to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other seller’s exclusive territories or customer groups. It would appear that this might be the case where a website is specifically targeted at reaching customers outside the exclusive territory, for instance, with the use of banners or links in pages of providers specifically available to those customers. Further, sending unsolicited e-mails to customers outside the territory would be considered active selling.

No bans of Internet selling The Guidelines state that an outright ban on Internet or catalogue selling is only possible if there is an objective ‘justification’. The interpretation of such ‘objective justification’ has not been determined by the Courts. In any case, the supplier cannot reserve to itself sales and/or advertising over the Internet.


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Methodology of analysis of the Regulation In view of the above, assessment of whether a vertical agreement is in breach of competition law is as follows: 1.

Does the agreement contain a hardcore restriction? If so, and if the agreement has an appreciable affect on trade and competition, it will violate Article 81(1), will not obtain the benefit of the Regulation and is unlikely to be granted an individual Exemption under Article 81(3). The whole agreement will be in breach of competition law and void.

2.

Does the agreement contain any non-compete obligations? If so, that restriction would not be covered by the Regulation. It could however be severed leaving the remaining provisions that could benefit from the Regulation if the 30% market share is not exceeded.

3.

If the answer to the above two questions is no, the parties to the agreement need to define the relevant market in order to establish the market share of the supplier or the buyer as appropriate.

4.

If the relevant market share is below 30%, the agreement is exempted by the Regulation.

5.

If the relevant market share is above 30%, it is necessary to assess whether the vertical agreement falls within Article 81(1). The factors to be taken into account in this assessment include the market positions of the supplier and competitor, entry barriers, buying power, maturity of the market, level of trade and nature of the products.

6.

If the agreement falls within Article 81(1), will it be eligible for an exemption under Article 81(3)?

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Specific vertical agreements The following sectors remain covered by specific measures and are not covered by the Regulation: •

the automobile sector are currently covered by the Motor Vehicle Block Exemption Regulation No. 1475/9515. (A new draft Regulation is currently under discussion).

•

agreements covered by the Technology Transfer Block Exemption Regulation No. 240/96 (currently under review) (see below).

•

sub-contracting agreements16.

•

vertical agreements concluded in connection with horizontal agreements (see below).

Agreements dealing with intellectual property rights In general, intellectual property rights are protected by national systems of law. They confer upon their owners an exclusive right to behave in a particular way. It follows that there will always be a tension between intellectual property rights on the one hand and competition law rules that seek to restrict the operation of exclusive rights and open up markets in general on the other. There is a further tension between intellectual property rights and the rules relating to the free movement of goods contained in Articles 28-30 of the EC Treaty.

Competition and parallel imports There have been few significant developments in competition law relating to intellectual property rights in the past few years. The most significant development has been the consideration by the courts of the extent to which a trademark owner may prevent parallel imports from entering the European Union (see overleaf).

15 O.J.[1995] ALL 145 (currently under review) 16 See the notice of 1978 O.J. C1


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Typical licence of technology agreements In view of the relatively low costs of manufacture outside the EU, many producers are seeking to have their goods manufactured in whole or in part outside the community by a third party. In order to do so, they need to enter into a licence of technology that may typically be a licence of patent, registered and unregistered designs, copyright including computer software, trademarks and know-how. Often the licensor will grant to the licensee an exclusive right to manufacture and sell the goods in a particular territory and to refrain from granting similar rights to anyone else there. This gives the licensee a degree of comfort that it is worth investing the capital in exploiting the intellectual property.

The Technology Transfer Block Exemption The Commission has for many years held that manufacturing and sales licences granting territorial exclusivity to the licensee infringed Article 81(1). It also considered that export bans and provisions having similar effects such as maximum quantity clauses were outlawed. This resulted in the Commission issuing separate regulations for different types of intellectual property licences. These were replaced in 1996 by the Block Exemption on certain Technology Transfer Agreements (the Technology Transfer Block Exemption)17. The Block Exemption entered into force on 1 April 1996 and will apply until 31 March 2006.

Scope The Technology Transfer Block Exemption exempts from Article 81(1) certain bilateral licences of patents and know how, including mixed licences. It lists certain “white clauses” which normally do not infringe Article 81(1), but which are granted Block Exemption if they do. There is also a list of “black clauses”, the inclusion of which will prevent the Block Exemption from applying to the licence. The European Commission has adopted a report to evaluate the operation of the Technology Block Exemption. In it, it questions the current treatment of software licences and licensing pools which have become increasingly important for the development and dissemination of new technologies. At the time of writing it is expected that new rules will be proposed by the Commission to deal with these issues.

17 Regulation 240/96 O.J. [1996 L 31/2]

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Ancillary provisions Intellectual property other than patents and know-how As stated above, many intellectual property licences will be in respect of other types of intellectual property than patent and know-how. There are no Block Exemptions that relate specifically to such other rights. However, the Technology Transfer Block Exemption is specifically stated to cover licences of other intellectual property rights when the additional licensing contributes to ‘the achievement of the objects of the licensed technology’ and contains only ancillary provisions.

The Vertical Agreements Regulation The other way that an exemption may be gained for ancillary provisions is if the agreement falls within the Vertical Agreements Regulation (see above). In this case, the exemption will be granted to provisions which relate to the assignment or use by the buyer of intellectual property rights, provided the provisions are not the primary object of the agreement and are directly related to the use, sale or resale of goods or services by the buyer or its customers.

The protection of trademarks and the free movement of goods The Trademark Directive The law relating to trademarks within the European Union was unified by virtue of the Trademark Directive18. The Trademark Directive sets out the criteria for marks to be validly registered in respect of goods or services. The exclusive rights bestowed on a trademark owner allow a trademark owner to prevent another party from using a mark that is identical or confusingly similar to the owner’s mark on identical or similar goods. These rights may in turn be licensed to others.

18 Directive 89/104 O.J. [1989] L40/1


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Exhaustion of rights Article 7 of the Trademark Directive seeks to limit the protection afforded to a trademark holder by providing that the exclusive right applies only to putting, or allowing to be put, products protected by the trademark into circulation for the first time. The intellectual property right is said to be ‘exhausted’ by the first act of marketing, whether by the trademark owner or with their consent. Although it has generally been accepted that the ‘exhaustion of rights’ applies within the European Community, the courts have for a number of years considered the question as to whether the putting, or allowing to be put, products protected by a trademark into circulation outside the European Union will also lead to an ‘exhaustion of rights’ (i.e. international exhaustion). The European Court came down in favour of trademark owners by resisting the application of ‘international exhaustion’ in Levi Strauss & Co v Tesco Stores Limited19. The Court held that a trademark owner that puts, or consents to put, trademark goods on the market outside the European Union must consent to their subsequently being placed on the market within the European Economic Area. Although such consent may be implied, it must unequivocally demonstrate that the proprietor has renounced his right to oppose placing of goods on the market within the European Economic Area. Implied consent cannot be inferred from the fact that: •

the trademark owner has not communicated to all subsequent purchasers of the goods placed on the market outside the EEA his opposition to marketing within the EEA;

•

the goods carry no warning of a prohibition of their being placed on the market within the EEA;

•

the trademark owner has transferred the ownership of the products bearing the trademark without imposing any contractual reservations.

It follows that a trademark owner selling goods outside the EEA need not include in the sale agreement a restriction from the goods re-entering the EEA and that it can rely on its basic trademark rights to prevent parallel imports of grey market goods appearing on the market in the EEA.

19 Decision of the ECJ 20 November 2001 in joint cases C414/99 to C416/99

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Horizontal agreements Competition law also regulates the extent to which parties operating at the same level in the market may enter into co-operation agreements. The extent of cooperation will vary greatly. The parties may merely wish to exchange information in relation to research and development or they may actively share out research work and pool the results. They may jointly establish a committee to oversee the research and development, or they may go further and establish a joint venture company. In the case of the last option, the creation of a separate company may bring the transaction within the EC Merger Regulation (see below).

Block Exemptions for Specialisation Agreements and Research and Development Agreements The Commission has generally held that horizontal co-operation agreements may be in breach of Article 81(1). At the end of 2000 the Commission adopted two Block Exemptions, namely Regulation 2658/2000 for Specialisation Agreements20 and Regulation 2659/2000 for Research and Development Agreements (R&D)21. It also adopted Guidelines on Horizontal Co-operation agreements22 that are not of legislative effect but in practice carry considerable weight.

Scope of Guidelines on Horizontal Co-operation Agreements The Guidelines consist of seven chapters. In the first, the analytical framework for the most common types of agreement is set out. Then follow chapters on each of the following six types of agreement: 1.

R&D;

2.

production agreements (including specialisation agreements);

3.

purchasing agreements;

4.

commercialisation agreements;

5.

agreements on standards; and

6.

environmental agreements.

20 O.J. [2002] L 304/3 21 O.J. [2001] L 304/7 22 O.J. [2001] C3/2


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Each of these are considered below.

Analytical framework Actual and potential competitors The guidelines apply to agreements entered into between actual and potential competitors. A party is an actual competitor when it is active in the same relevant market as the other, or it is able immediately to switch production to the other’s products and market them in the short-term in response to a small permanent increase in relative price. A party is a ‘potential’ competitor when there is evidence it could, or would, undertake the necessary investments or changes to enter the market in response to a small permanent increase in relative price.

Prohibited agreements The Guidelines state that agreements between actual competitors with the main object of fixing prices, limiting output or sharing markets or customers will almost always be prohibited. In these instances, there is no need to examine the actual market effects of these agreements. The result of such an agreement being prohibited is that the parties will be subject to a fine.

Permissible agreements According to the Guidelines, the following types of co-operation agreements normally do not raise concerns: •

co-operation between non-competitors;

•

co-operation between competitors that cannot independently carry out the project or activity covered by the co-operation;

•

where the co-operation concerns an activity that does not influence the relevant parameters of competition.

Other agreements Co-operation agreements that do not fall within either the generally prohibited or generally permissible headings need further analysis. The first point to consider

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is the market share of the parties in the markets affected by the co-operation23. Market concentration may also have to be taken into account as an additional factor to assess the impact of the co-operation on market competition.

Exemption under Article 81(3) If the co-operation agreement is found to be in breach of Article 81(1), it is automatically null and void unless it is covered by an Article 81(3) Exemption. It may gain automatic exemption pursuant to one of the Block Exemption Regulations. If no such Block Exemption applies, the Commission has generally been willing to grant individual exemptions to co-operation agreements involving new or improved products or new technology. It has also been favourable towards joint ventures where no investor on its own could reasonably be expected to finance the project or assume the substantial risk of technical or commercial failure.

Ancillary restraints Frequently co-operation agreements contain individual provisions that are restrictive of competition. If such provisions are directly related to the co-operation and necessary for the co-operation to occur, they will be considered to be ‘ancillary’ and will stand or fall with the rest of the agreement. If they are not ancillary to the co-operation then they need separate analysis under Article 81(1) and (3).

Research and Development Agreements Most R&Ds do not fall under Article 81(1). According to the Guidelines, the further removed that the research is from the exploitation of the possible results, the less likely it is to fall foul of competition law. Co-operation agreements that relate to theoretical R&D are therefore unlikely to be caught.

Joint exploitation and market share Even if an R&D co-operation includes the joint exploitation of the possible future results, it is not necessarily restrictive of competition. In order to ascertain whether it will infringe Article 81(1), it is necessary to examine the market. This is particularly necessary where the co-operation is set up between competitors on either the existing product or technology markets or on the new markets and the product

23 See Commissions Notice on Market Definition O.J. [1997] C 372


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is close to market launch. If the combined market share of the parties exceeds 25%, it is necessary to analyse the restrictive effects of the agreement. However, merely exceeding the market share of 25% does not necessarily mean a breach of Article 81(1).

The R&D Regulation Where the combined market share of the parties is 25% or less, R&D co-operation may benefit from the R&D Block Exemption Regulation. The R&D Regulation follows the trend of the Vertical Restraints Regulation by abandoning the list of ‘white clauses’ that are permissible. Instead, it defines the categories of agreements that are not exempted and specifies ‘hardcore’ restrictions that may not be included. The R&D Regulation clearly states in Article 4 that if the participant companies are not competitors, the exemption will apply for the duration of the research and development. Even if there is joint exploitation of the results, the exemption will continue to apply for seven years from the time that the products that result from the R&D are first put on the market within the EC. If the parties are competitors, the Block Exemption will apply for the same period above provided the combined market share of the participants does not exceed 25% of the relevant market for the products capable of being improved or replaced by the products that are the subject of the R&D project.

Comparison with previous Block Exemption The R&D Regulation continues the ‘market share cap’ approach under the former R&D Block Exemption but raises it from 20% to 25%. The 10% market share cap that applied under the former Block Exemption Regulation to full function joint ventures has been dropped. The conditions for exemption under the new R&D Regulations are very similar to those under the former Block Exemption Regulation, except it is no longer necessary for the work to be carried out within the framework of a programme. Further, ‘know-how’ now appears as a clearly defined term. The ‘opposition procedure’ of the former R&D Block Exemption has been dropped.

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Production agreements Production agreements may take one of the following forms: •

a joint production agreement, where the parties agree to produce certain products jointly;

•

a unilateral specialisation agreement, where one party agrees to cease production of a product and to buy it from the other party;

•

a reciprocal specialisation agreement, where each party agrees to cease production of a product to be produced by the other party and to buy that product from the other party;

•

a sub-contracting agreement, where one party (the contractor) entrusts to the other party (the sub-contractor) the production of a product.

Many production agreements, whether between competitors or non-competitors, will not necessarily restrict competition. This is particularly the case if the co-operation is the only commercially justifiable and possible way to enter a new market, to launch a new product or service or to carry out a specific project. It will also not restrict competition if the input only accounts for a small proportion of the production costs of the final product.

Analytical framework The Guidelines supplement the Block Exemption Regulations. They apply to a whole range of types of competitor collaboration not covered by the Block Exemptions, in addition to R&D and production agreements. They set out the basic methodology for analysing whether or not an agreement is restrictive of competition. The same hardcore restrictions apply to production agreements, namely price fixing, limitation of output, market sharing or customer group sharing provisions are outlawed and will almost always be caught by Article 81(1). However, this does not apply to cases where the parties agree on the output directly concerned by the production agreement or where a production joint venture also distributes the manufactured products and sets the sale prices for the product.

The Block Exemption and market share Production agreements that cannot be characterised as clearly restrictive or nonrestrictive on the basis of the above may fall under Article 81(1) and need further analysis. The first point to consider is the combined market share of the parties. If the combined market share of the parties does not exceed 20% in the relevant markets and the other conditions of the Specialisation Block Exemption Regula-


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tion are fulfilled, the agreement will not fall under Article 81(1). If on the other hand the combined market share of the parties exceeds 20%, market concentration will also be taken into account. The higher the combined market share of the parties, the higher the concentration in the market concerned, and the more likely it is that the agreement will restrict competition.

Specific Exemption for non-qualifying agreements If an agreement is found to be caught by Article 81(1), the next question is whether it can gain a specific exemption pursuant to Article 81(3). Most common types of production agreements can be assumed to generate some economic benefits in the form of economies of scale or scope or better production technologies unless they are an instrument for price fixing, output restriction or market and customer allocation. To gain a specific Article 81(3) exemption, the parties have to demonstrate improvements of production or other efficiencies. Efficiencies that only benefit the parties or costs savings that are caused by output reduction or market allocation cannot be taken into account.

The Specialisation Block Exemption Regulation As stated above, the Commission adopted with effect from 1 January 2001 the Specialisation Block Exemption Regulation 2658/2000 that replaced Block Exemption Regulation 417/85. The following are the principal modifications provided in the Specialisation Block Exemption: •

extension of the scope of the Regulation to cover unilateral specialisation agreements (that is, one party outsourcing its requirements to the other);

•

the possibility to include exclusive supply or purchase obligations among the parties;

•

elimination of the former accumulative turnover cap of EURO 1 million; and

•

application of a 20% market share threshold in all cases (previously the threshold was limited to 10% in cases of joint distribution and 20% in all other cases).

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Relationship with the Vertical Restraints Regulation Agreements that are entered into between companies operating at a different level of the production or distribution chain, that is to say vertical agreements, are in principal excluded from the Horizontal Guidelines, the R&D and Specialisation Block Exemption Regulations and are dealt with by the Vertical Restraints Regulation. However, to the extent that vertical agreements, e.g. distribution agreements, are concluded between competitors, the effects of the agreement on the market and the possible competition problems can be similar to horizontal agreements. Therefore, such agreements have to be assessed according to both the Horizontal Guidelines and the Vertical Guidelines24.

Purchasing agreements A purchasing agreement is one concerning the joint buying of products. Such agreements may affect two markets: the relevant purchasing market and also the selling market (i.e. the downstream market where the participants of the joint purchasing arrangement are active as sellers).

Analysis of joint purchasing agreements Article 81(1) will rarely apply where joint buying agreements are concluded between parties who are not competitors in the downstream market (for example where they are active in different geographic markets). On the other hand, purchasing agreements that in practice are a means for the parties to engage in a disguised cartel will be caught by Article 81(1). Purchasing agreements that fall between these two extremes need to be analysed to see whether they fall under Article 81(1). The starting point is the examination of the party’s buying power. Buying power can be assumed if a purchasing agreement accounts for a sufficiently large proportion of the total volume of a purchasing market so that prices can be driven down below the competitive level or access to the market can be foreclosed to competing buyers. The primary concern is that lower prices may not be passed on to customers further downstream and that it may cause cost increases for the purchasers’ competitors on the selling markets because either suppliers will try to recover price reductions for one group of customers by increasing prices for others or competitors have less access to efficient suppliers.

24 Horizontal Guidelines Recital 11


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Purchasing agreements between parties with more than 15% market share It is unlikely that market power exists if the parties to the agreement have a combined market share of below 15% in each of the purchasing market(s) and the selling market(s). This percentage is a guideline only. A market share above 15% does not automatically cause the agreement to be in breach of Article 81(1). A more detailed assessment is necessary, involving factors such as market concentration and possible counter-veiling power of strong suppliers. However, if the combined market share is significantly above 15% in a concentrated market, joint buying is likely to be caught by Article 81(1). If an Exemption under Article 81(3) is to be sought, it must be shown that the purchasing agreement can bring about economic benefits such as economies of scale in ordering or transportation. Costs savings that are caused by the mere exercise of power and which do not benefit consumers cannot be taken into account.

Commercialisation agreements Commercialisation agreements involve co-operation between competitors in the selling, distribution or promotion of their products. The most important of these agreements, namely distribution agreements, are generally covered by the Vertical Restraints Regulation. However, the Vertical Restraints Regulation only covers non-reciprocal vertical agreements between competitors who are smaller than a specified size. It follows that competitors that agree to distribute their products on a reciprocal basis, or non-reciprocal agreements between competitors exceeding a certain size, may fall to be assessed under the Horizontal Guidelines and the Specialisation Block Exemption Regulations.

Relevant market For the purposes of assessing whether or not a co-operation agreement breaches competition law, the product and geographic market(s) directly concerned by the co-operation have to be defined. These are the markets to which the products, the subject to the agreement, belong. Secondly, a commercialisation agreement in one market may also affect the competitive behaviour of the parties in a closely related neighbouring market.

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Commercialisation agreements and non-competitors Commercialisation agreements between non-competitors will not fall under Article 81(1) from a horizontal agreement’s perspective. On the other hand, agreements between competitors that have the object and effect of co-ordinating the pricing policy of competing manufacturers will almost always fall under Article 81(1). This will be the case whether the agreement is exclusive or non-exclusive.

Commercialisation agreements and market share Agreements that fall outside these two extremes need further consideration. This will be the case particularly if they either allow the exchange of sensitive commercial information or if they influence a significant part of the party’s final cost. The starting point for the analysis is the combined market share of the parties. If it is below 15%, the agreement is unlikely to be caught by Article 81(3). If it exceeds 15%, the likely impact of the joint commercialisation agreement on the market must be assessed. In this respect market concentration, as well as market shares are considered. The more concentrated the market, the more useful information about prices or marketing strategy will be and the greater the incentive for the parties to exchange such information.

Commercialisation agreements and specific exemption If a commercialisation agreement is to be exempted under Article 81(3), claimed efficiency benefits must be demonstrated. An important element would be the contribution by both parties of significant capital, technology or other assets. Costs savings through reduced duplication of resources and facilities can also be an indication. If, on the other hand, the joint commercialisation represents no more than a sales agency with no investment, it is likely to be a disguised cartel and as such will not be eligible for a specific exemption.


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Agreements on standards Standardisation agreements define technical or quality requirements for current or future products, production processes or methods. Where participation in standard setting is unrestricted and transparent, standardisation agreements which set no obligation to comply with the standard do not restrict competition. On the other hand, agreements that use a standard as a means of excluding actual or potential competitors will almost always be caught by Article 81(1). Other types of standardisation agreements may fall under Article 81(1) if they grant the parties joint control over production and/or innovation, thereby preventing the parties from either developing alternative standards or commercialising products that do not comply with the standard. The Commission generally takes a positive approach towards standardisation agreements, provided the necessary information to apply the standard is available and a significant proportion of the industry is involved in the setting of the standards.

Environmental agreements Environmental agreements are those by which the parties undertake to achieve pollution abatement or environmental objectives. Agreements that place no precise individual obligation upon the parties will not be caught by Article 81(1). Equally, agreements setting the environmental performance of products or processes that do not appreciably affect product diversity will not fall under Article 81(1). Further, agreements which give rise to genuine market creation, such as for instance recycling agreements, will not generally restrict competition. Environmental agreements however, that serve as a tool to engage in a disguised cartel and do not truly concern environmental objectives will almost always come under Article 81(1).

Environmental agreements and market share Environmental agreements covering a major share of an industry at national or EC level are likely to be caught by Article 81(1) where they appreciably restrict the party’s ability to devise the characteristics of their products or the way in which they produce them. Equally, environmental agreements where the parties hold a significant proportion of the market may fall under Article 81(1) if they phase out or significantly affect an important proportion of the party’s sales. Also, where a party holding a significant market share appoints an undertaking as exclusive provider of collection and/or recycling services may be caught by

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Article 81(1). The agreement may be granted an Article 81(3) exemption if the expected economic benefits outweigh the costs, there are no feasible and less restrictive alternatives, and competition is not eliminated.

MERGERS AND JOINT VENTURES Notification to the commission Under European competition law, mergers of previously independent undertakings must be notified to the European Commission for clearance if they significantly impact on competition in the EU. As a general rule, clearance by the Commission means that there is no need for national competition authorities to be involved.

The Merger Regulation The main provisions relating to the clearance system are contained in the Merger Regulation25. There is a further Commission Regulation26 that lays down the procedure for notifications, time limits and hearings pursuant to the Merger Regulation. It also exhibits the Form CO Notification Form.

Review of the Merger Regulation The Commission has initiated a review of merger control law. In its Green Paper it asked whether more mergers should be subjected to the ‘one-stop-shop review’ rather than being filed with several national competition authorities. It also suggests an easier referral system for transactions which have their main centre of gravity in one Member State. The Green Paper questioned the merits of the ‘dominance’ test enshrined in the Regulation. Of the 1,850 deals notified to the Commission over an 11 year period, the overwhelming majority received unconditional clearance; only 18 were prohibited. At the time of writing, the Commission is expected to adopt a proposal for revision of the Merger Regulation.

25 4064/89 O.J. [1989] 395 as amended in 1997 O.J. L 180 page 1 26 Regulation No. 447/98


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Community dimension The Merger Regulation applies only if the concentration has a community dimension. This is the case if: •

the combined worldwide turnover of all undertakings concerned exceeds ECU 5 billion; and

•

the EU turnover of each of at least two undertakings concerned exceeds ECU 250 million; and

•

all undertakings concerned do not achieve more than two-thirds of their respective EU turnovers within one and the same Member State.

The two thirds rule If one or both of the first two tests are not met, but the third test (known as ‘the two-thirds rule’) is, a second set of tests is applied as follows: •

the combined worldwide turnover of all undertakings concerned exceeds ECU 2.5 billion;

•

the EU turnover of each is at least ECU 100 million;

•

in each of at least three Member States, the combined turnover of all undertakings concerned exceeds ECU 100 million;

•

in each of those same three Member States, the turnover of each of at least two undertakings concerned exceeds ECU 25 million.

If all of these four tests are met, plus the two-thirds rule, the concentration will have a community dimension.

Consequence of community dimension It is vital that any concentration with a community dimension is not put into effect until clearance has been obtained. Failure to comply may lead to fines and daily penalty payments. Indeed, there is an obligation to notify the Merger Task Force (MTF) within one week of the agreement’s conclusion, the announcement of a public bid or the acquisition of a controlling interest, whichever is the sooner. In the case of a merger or agreement where the parties are to have joint control, the parties must notify jointly. If it is a sole control acquisition, the acquiring company must notify. Failure to notify, late notification or the supply of incorrect or misleading information may result in fines. Notification must be made on a special Form CO. This Form is onerous and time consuming to complete. It requests large amounts of detailed technical infor-

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mation plus supporting documentation. The parties may have a pre-notification meeting with the Merger Task Force that may result in a reduction of the information required. A short form notification is available where joint control is acquired and the transaction is relatively minor.

Timetable The Commission is under an obligation to decide within one month of receiving the notification as to whether it has serious doubts that the concentration will affect competition within the common markets. If there are no serious doubts, the Commission must clear the concentration. If there are serious doubts, the Commission must begin proceedings within the one month period and then has a second phase of four months in which it may carry out a more detailed review. At the end of the second stage, the Commission must either grant clearance or a prohibition. If a prohibition is ordered, the Commission may order the parties to undo the concentration if it is already operating.

Offer of commitments During either the first or the second phase, the notifying parties can seek to give comfort to the Commission by offering commitments aimed at ensuring fair competition within the EU.

Dominance In reaching its decision, as to whether to grant a clearance or a prohibition, the Commission must consider whether the concentration creates or strengthens a dominant position significant in impeding competition in all, or a substantial part of, the common market (dominance test). In doing so, the Commission must determine the relevant product and geographic markets. It will then look at the combined market shares of the parties and their main competitors. A combined market share of 25% or less for the concentrated entity is presumed to be compatible with the common market. Generally, the Commission will find that a combined market share of less than 40% will not raise concerns of dominance. A market share of 40-70% may indicate dominance, particularly if it is more than twice the size of the next largest competitor. A combined market share of over 70% would generally show dominance.


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Restrictions in merger agreements A clearance decision also covers any restrictions of competition in the merger agreements that are directly related and necessary for the implementation of the concentration. In this case, the Notice on Ancillary Restraints 200127applies.

Full-function joint ventures Full-function joint ventures are joint venture companies that perform on a lasting basis all the functions of an autonomous economic entity. Since 1 March 1998, full-function JV’s are scrutinised not only under the dominance test described above, but also under Article 81. In doing so, the Commission looks at the combined market share of the parent companies, particularly where they will continue to be competitors. If the combined market share is below 20%, the agreement is unlikely to fall under Article 81. If the parent combined market share is over 20%, the Commission will carry out further analysis relating to the degree of competition in the market and the relative size of the JV’s market.

Mergers in the UK Concentrations that do not have a community dimension within the test described above may need consideration under national law. In the UK, the relevant legislation is the Fair Trading Act 1973 (FTA), as amended by the Companies Act 1989 and the Contracting Out and Deregulation Act 1994.

Mergers qualifying for investigation under the FTA A merger situation qualifying for investigation under the FTA arises where: a)

Two or more enterprises ‘cease to be distinct’ and

b)

Either: •

as a result of the merger the combined enterprise will have a market share of 25% or more in the UK (or a substantial part of the UK) or an existing market share of 25% or more will be enlarged; or

•

the gross value of the worldwide assets to be taken over exceeds £70 million.

22 O.J. 2001 C188/5

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While there is no formal requirement to notify a merger in advance to the Office of Fair Trading, it is sensible for the parties to do so, since if a merger is not pre-cleared it may subsequently be referred to the Competition Commission that could prohibit it, or subject it to conditions. Currently, the Office of Fair Trading will conduct a first stage, preliminary investigation into a merger. The Competition Commission will carry out a second stage, in depth inquiry if merited.

Changes to UK merger control The Government is in the process of introducing fundamental changes to the system of merger control in the UK by way of the Enterprise Bill that is currently being debated by Parliament. The Bill includes reforms to merger and monopoly regimes with decisions taken by independent competition authorities, new duties for OFT to promote competition, and criminal penalties for those involved in cartels.

The UK Competition Act 1998 The Competition Act 1998, the main provisions of which entered into force on 1 March 2000, radically reformed the domestic law of the UK on restrictive agreements and anti-competitive practices. As a result, anti-competitive conduct is dealt with by the Competition Act 1998, while issues of market structure can be investigated under the Fair Trading Act 1973.

UK competition law based on EU law The Competition Act 1998 brought UK competition law broadly in line with EC competition law. Part 1 of the Act introduced the ‘Chapter I Prohibition’ that is modelled upon Article 81 EC and the ‘Chapter II Prohibition’ that is modelled upon Article 82. The Act confers substantial powers of investigation and enforcement on the Director General of Fair Trading and the sector regulators such as the Director General of Telecommunications, and establishes a new Competition Commission with a variety of roles, including the hearing of appeals against decisions of the Director General of Fair Trading and the regulators. A key aim of the Competition Act is the eradication of cartels, which are treated more harshly than under the old Restrictive Trade Practices Act 1976.


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UK guidelines The Competition Act 1998 required the Director General of Fair Trading to publish general advice and information as to how the law will be applied. Numerous such guidelines have been published, including in relation to the following: •

the major provisions;

•

the Chapter I Prohibition;

•

the Chapter II Prohibition;

•

market definition; and

•

restraints.

The UK Competition Law The Chapter I Prohibition Section 2(1) provides that: “Subject to Section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which: •

may affect trade within the UK; and

•

have as their object or effect the prevention, restriction of distortion of competition within the UK, are prohibited unless they are exempt in accordance with the provisions of this part.”

Section 3 provides for a wide range of agreements to be excluded from the Chapter 1 Prohibition. These include for example the exclusion for vertical agreements by way of the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order28. This Order does not however exempt vertical agreements from the Chapter II Prohibition.

28 CJ 2000/310

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The Exclusion The Vertical Agreements Exclusion Order deals with the exclusion of vertical agreements in the following way: Article 3 provides that ‘the Chapter I Prohibition shall not apply to an agreement to the extent that it is a vertical agreement’. The use of the words ‘to the extent that’ limits the exclusion, so that it may apply to some provisions of an agreement but not to others. The definition of a vertical agreement largely mirrors the one contained in the EC Vertical Restraints Regulation and Guidelines. However, the UK law does not include a specific provision covering agreements between competing undertakings. Article 4 allows suppliers to impose a maximum sale price or recommend a sale price, provided these do not amount to a fixed or minimum sale price. Again, this mirrors the Vertical Restraints Regulation and Guidelines. Provisions within the vertical agreement that relate to the assignment or licence to the buyer of intellectual property rights will largely be excluded from the Chapter I Prohibition, provided they are not the primary object of the agreement. If they are the primary object, the Chapter I Prohibition will apply but they may benefit from parallel exemption, where they satisfy the terms of the Technology Transfer Block Exemption Regulation. Again, this mirrors the EC position.

Relationship between the UK and EC treatment of vertical agreements Agreements that benefit from the European Commission individual or Block Exemption, or would do so if the agreement had an effect on trade between Member States, are automatically exempt from the Chapter I Prohibition under the Competition Act without the need for notification of the Director General. Such agreements benefit from a ‘parallel exemption’. An exclusion (or exemption) from the Chapter I Prohibition does not, however, preclude the application of Article 81(1). The most significant differences between the scope of the UK Exclusion Order and that of the EC Vertical Agreements Block Exemption are that: •

the EC Vertical Agreements Block Exemption applies only to agreements where the market share of the supplier (or buyer, in the case of an agreement with an exclusive supply obligation) does not exceed 30% of the relevant market. There is no market share cap in order to benefit from the Exclusion Order; and


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•

the EC Vertical Agreements Block Exemption contains a number of hardcore ‘restrictions’ which if included in the vertical agreement, have the effect of taking the agreement outside its scope. The only equivalent restriction in the Exclusion Order relates to price fixing vertical agreements.

The definition of a vertical agreement in the Competition Act does not appear to cover agency agreements. It would therefore seem that the Exclusion Order does not give exclusion to agency agreements. It is submitted that agency agreements that might breach UK competition law could obtain the benefit of exemption by way of the Vertical Restraints Regulation by virtue of the parallel exemption.

The Chapter II Prohibition This covers conduct by one or more undertakings which amount to the abuse of a dominant position in a market in the UK or a part thereof which may affect trade in the UK. The UK law in this regard is based on and is very similar to that contained in Article 82 of the Rome Treaty set out in more detail above.

Effect of breach of the Competition Act 1998 By adopting domestic prohibitions based on Articles 81 and 82 of the EC Treaty, the UK Government hopes to keep the burden on business to a minimum. A prohibition based approach is intended to be a more effective deterrent to anticompetitive behaviour. Companies breaching the prohibitions are liable to fines of up to 10% of turnover during the last three years and third parties affected by anti-competitive behaviour in breach of the prohibitions are entitled to seek damages for breach of the Act. The prohibition approach of Articles 81 and 82 of the EC Treaty directly affects Member States where there is an impact on trade between Member States. The UK legislation, however, applies in local or regional markets even if these do not form a substantial part of the UK.

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Conclusion Competition law plays a major role in numerous types of company and commercial agreements, both at European and domestic law level. It is vital at the outset to categorise the agreement being entered into so that the relevant competition law or laws can be applied. Probably the hardest task in so doing is to determine what is the market and what is the market share of the relevant parties. This has become more critical in view of the Commission’s tendency to move away from a formalistic based analysis towards a substantive “effects based” analysis. Frequently economists will be instructed to work alongside lawyers in ascertaining market statistics. A practical point for companies to bear in mind is that statements as to their success and power in the market place while on the one hand desirable from a marketing and public relations perspective, may be damaging in the eyes of the Commission.


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Chapter 6 Techniques for drafting common clauses Introduction........................................................................................104 1. Interpretation .................................................................................107 2. Indemnity........................................................................................116 3. Force Majeure ................................................................................118 4. Change of control ..........................................................................121 5. Severability.....................................................................................121 6. Notices ............................................................................................123 7. Waivers ...........................................................................................124 Conclusion..........................................................................................125

Chapter 6 Techniques for drafting common clauses ‘Drafting is a science, not an art; it lies in the province of mathematics rather than of literature, and its practice needs a long apprenticeship.’ SIR ERNEST GOWERS

Introduction The role of boiler-plate clauses Boiler-plate clauses are a vital part of every contract. They deal with the way in which the contract itself operates, as opposed to the rights and obligations of the parties of the commercial transaction that are embodied in the main part of the agreement. They are also used to interpret the contract. In heavily negotiated contracts, boilerplate clauses are frequently only considered at the very end of the drafting process. Frequently, the parties and their lawyers are short of time and energy and boiler-plate clauses are not discussed in detail. Indeed, it is common for standard boiler-plate clauses to be transposed from a precedent without consideration or amendment. It is always a dangerous practice to be a slave to precedents and not to tailor them to meet the parties’ needs. This is particularly true for boiler-plate clauses, since they regulate and control the parties’ rights. If certain boiler-plate clauses are omitted from the contract, the general principles of interpretation of the law applicable to the contract will govern. Civil law jurisdictions typically have a more developed body of law in this area than common law jurisdictions. However this is a complex area in both common and civil laws. The inclusion of boiler-plate clauses therefore gives greater certainty to the parties as to how their carefully negotiated contracts will be interpreted.

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6 TECHNIQUES FOR DRAFTING COMMON CLAUSES

Basic principles of drafting The following points should be borne in mind when drafting a commercial contract, including boiler-plate clauses: 1.

2.

A draftsperson should aim to create a document which: •

Succinctly and unambiguously records the agreement of the parties;

•

Protects against the likely risks;

•

Creates/preserves the realistic opportunities;

•

Deals with applicable legal requirements;

•

Contains effective remedies; and

•

Is a practical working tool.

Rules of interpretation as embodied in the law applicable to the contract should be borne in mind. In English law and common law generally, the overriding rule is that the intention of the parties is discovered from the document. All else is secondary to this rule. Words are interpreted in their plain ordinary meaning unless they are words of special meaning (e.g. technical words, or due to custom), or another meaning is required to give effect to the intent. Civil law on the other hand takes a teleological approach, and looks at the spirit behind the agreement. It is more willing to ‘fill in’ terms and conditions that have been omitted. English law also recognises the concept of ‘eiusdem generis’. This means that if several specific words of a class precede a general word, only those items specifically mentioned will come within the class. For example, ‘pens, pencils, ballpoints, fibretips, crayons and any other implements’ would not include a ruler. This rule can be counteracted with words such as ‘including without limitation’, ‘whatsoever’ or ‘howsoever’. If preferred, the more general statement may be made at the outset, such as: “Any phrase introduced by the words ‘including’ shall be construed as illustrative and not limit the sense of the words preceding those terms.”

3.

Good drafting benefits from careful preparation. Before beginning to draft a clause, it is necessary to analyse, dissect and understand: •

What is intended to happen.

•

What are the consequences.

•

What might go wrong.

•

What are the opportunities.

•

The proposal at different levels, from the broad strategic issues to the minor details.


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4.

Draftsmen typically reach for precedents when considering boiler-plate clauses. The following points should be borne in mind: •

Choose a relevant precedent.

•

Scan for relevant provisions.

•

Use for lateral thinking.

•

Do not adopt blindly.

•

Think of the particular circumstances.

•

Delete inapplicable provisions.

•

Understand what you use; if you do not understand it, it could be dangerous!

5.

At all times strive for clarity. Occasionally, one party may seek to rely on a clause that is ambiguously drafted. This is particularly common in international commercial contracts where the contract is drafted in a language other than the mother tongue of at least one party. Any ambiguity in a clause is nearly always construed by a court against the person who is trying to rely on it, particularly if that person instructed the draftsman (contra proferentem rule). The end result is often a stale-mate, where neither party has achieved its objectives. Use punctuation sparingly. Try to ensure that the sentences are clear without the use of punctuation. If it is really necessary to use commas, consider using brackets instead.

6.

Do not get carried away with drafting to the point that you are actually seeking to re-write the law. It is vital to keep in mind all relevant laws, including competition law and regulatory issues. The draft contract must not in any way conflict with the applicable laws.

7.

Try to build in time in the negotiating process for, at the very least, the first and last draft of the agreement to be reflected on by both parties. Ideally, when preparing a first draft agreement, the draftsman should prepare a first draft, leave it for a few hours and then re-visit it with a fresh mind. Good commercial agreements evolve slowly and the time spent around the negotiating table discussing the interpretation of clauses and possible outcomes of practical situations will lead to a better understanding between the parties. This enhanced understanding will frequently prevent time-consuming litigation in the future.

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The following are examples of some common general definitions; an appropriate choice should be made for the particular document and amendment made to suit the circumstances. Clause 1.1 contains a glossary of words and phrases that are to have a particular meaning in a specific document. These words are usually listed at the beginning of an agreement, in alphabetical order. They are written with capital letters so they can be readily identified as defined terms.

1. Interpretation 1.1 Definitions In this Agreement {including its {Recitals and} Schedules}: “this Agreement”

means this Agreement as from time to time amended by written agreement amongst the parties to this Agreement {in accordance with the provisions for variation contained in this Agreement};

“Associate”

means any person firm or company: a) which is a subsidiary of or controlled by the person concerned; or b) of which or by whom the person concerned is a subsidiary or is controlled; or c) who or which is a subsidiary of or controlled by a person, firm or company who or which controls or is the holding company of the person concerned; or d) in which the person concerned has a direct or indirect financial interest (disregarding any interest in shares in a company quoted on a recognised stock exchange representing less than one per cent (1%) of its issued share capital and investments in independently managed pension schemes, unit trusts, managed funds or any similar investments); or e) of which one is an officer of the other; or f)

of which one is the spouse, parent, issue, brother or sister of the other; or


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g) of which one is trustee or nominee for the other or for any associate of the other (whether sole or joint trustee or nominee and whether the other or the associate is sole or one of several beneficiaries); or h) who or which is acting on behalf of that other; or i)

with which or with whom the person concerned is acting in concert within the meaning of the City Code on Takeovers and Mergers;

This definition is vital to many agreements. For example, a restrictive covenant may be sought from a vendor of a business and its associates by a purchaser. In this case, the definition might be amended to include persons firms or companies that in the future fall within the definition. If a warranty is being given as to past performance, such as in a joint venture agreement, the definition should be extended to include persons firms or companies that in the past fell within the definition. “aware”

means that the person concerned is actually aware or that it might reasonably be considered that he should be aware having given the matter his careful consideration and made such enquiries as would be made by a responsible and diligent person properly considering the matter;

This definition is often heavily negotiated in common law agreements. The parties seek to agree at the outset the degree of awareness a person should be attributed to have, and the extent to which they may be able to plead ignorance if facts subsequently come to light. It is particularly relevant to the drafting of warranties in business acquisition agreements. Parties coming from civil law jurisdictions are unlikely to be familiar with this issue since the question is already indirectly determined in most civil codes. Such codes usually impose upon a director a duty to act in good faith and diligently, which is interpreted as imposing upon them a duty to make all reasonable enquiries. The lowest duty to be placed on a person is to state that they are merely “actually aware”. A company is assumed to know what the persons responsible within it know. It follows that if the definition is limited to actual awareness, it may exclude archived information, for example. It may be desirable to seek to limit the group of persons in a company whose knowledge is attributed to it by listing them. This reduces the number of people involved, the number of people who need to be consulted, and assists confidentiality should this be an issue.

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The inclusion of facts of which the person “should be aware” means that they cannot plead ignorance. This turns the test into a subjective one, that involves giving the particular person and the circumstances due consideration. However, the inclusion of the words “such enquiries as would be made by a responsible and diligent person …” turns the subjective test into a partially objective test, and makes it easier to prove should the matter go to litigation. This is because the duty to make enquiries is imposed as a general, objective requirement rather than a subjective one that is tailored according to the ability, time, energy and resource of an actual person with whose knowledge the case is concerned. In practice, even if the words requiring an objective test relating to the enquiries are omitted, the English courts are likely to imply them. “Confidential Information” means technical, financial, commercial or other information of any kind, in any form and howsoever (if at all) manifested which is of a private, confidential or proprietary nature; “Intellectual Property”

means patents, trademarks, service marks, designs, design rights, copyright (including all copyright in any designs and computer software and any databases), inventions, trade secrets, know-how, confidential information, registrable business names and all other intellectual property rights and rights of a similar character in any part of the world (whether or not the same are registered or capable of registration) and all applications and rights to apply for protection of any of the same;

Intellectual property rights are frequently referred to collectively in commercial agreements and it is vital that they are accurately defined to ensure that none are omitted. Future intellectual property rights are protected by the reference to applications and rights to apply for protection. This is frequently important since commercial agreements are ongoing and further intellectual property rights may arise after the agreement is entered into. “Interest”

means interest upon the relevant sum (as well after as before judgment) calculated at a rate equal to {one} percentage points above the base rate from time to time declared by {

} Bank PLC

The words “as well after as before judgment” are included since without them, English law interprets interest as applying only after a judgment has been given.


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“month”

means a calendar month;

OR “month”

is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last day in that calendar month;

The first definition of “month” under English law means that the period may start on any given day and will end on the corresponding day of the following month. The second definition takes account of the differing number of days in the month. If targets or payments are to be calculated on a monthly basis, it should be borne in mind that the division is not as equal as if it were calculated by reference to weeks in view of the differing number of days in a month. “North America”

means Canada, the United States of America and Mexico (as those states are constituted at the date of this Agreement) and any other country which at the relevant time is a member of the North American Free Trade Association (as such countries are constituted at the relevant time) but excluding any country in South America even if it joins the said Association;

This definition gives an example of the accuracy with which a given territory should be delineated. Territorial borders of countries may be subject to change from time to time and this should be taken into account when drafting the definition. If it is intended that the actual territory allocated to a party should not change even if the national border should change, it is desirable to delineate the given territory in red on a map and annex it to the agreement. Care should also be taken to stipulate whether or not colonies and dependencies of a country are included. The Internet may also be included in the territory, for example, in an agency or distribution agreement.

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“Products”

means the Products listed in Schedule 1;

It is vital that the products the subject of an agreement are accurately defined, particularly for example in a distribution agreement. They may be listed in a schedule, together with product codes for ease of identification. The disadvantage of this method is it allows no flexibility to change the products covered by the agreement without amending the agreement. This disadvantage is to some extent alleviated by the use of a schedule. If it is necessary to amend the list of products, it is easier for the parties simply to agree to a new schedule rather than opening up discussions in relation to the main body of the agreement. Alternative methods of defining products include referring to all products covered by a particular trademark, to define the products generically or to refer to all products manufactured now or in the future by the principal. The definition may also address whether the category of products will also cover enhancements and improvements made to those products included in the definition at the date of the agreement. This is a sensitive area and the boundary line between what constitutes an improvement or an enhancement to an existing product on the one hand and an entirely new product on the other hand needs to be considered carefully depending upon the facts and reflected in the wording in the definition or the relevant clause in the main agreement. “Retail Prices Index” means the General Index of Retail Prices published in the United Kingdom by the Central Statistical Office in the Monthly Digest of Statistics or if that Index ceases to be published such index as the Central Statistical Office declares as its successor or if none be so declared then the nearest equivalent index to have like effect provided that if after the date of this Agreement a change occurs in the reference base used to compile the Retail Prices Index such adjustments shall be made to the figures as if the reference base current at the date of this Agreement had been retained; Price increases may be calculated by reference to the Retail Prices Index. Under English law, an agreement to agree prices from time to time is unenforceable since it is merely an agreement to agree.


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“Sterling” and “£”

means Pounds Sterling, the lawful currency of the United Kingdom at the date of this Agreement;

Which country’s currency is to apply to the agreement needs to be stipulated. The country is an important element of the definition bearing in mind, for example, that Irish pounds differ to UK pounds, US dollars differ from Australian dollars, etc. This point is now simplified in the European Union with the adoption of the Euro. “Value Added Tax & VAT” means United Kingdom Value Added Tax or any similar tax from time to time replacing it or performing a similar fiscal function; The agreement needs to specify whether prices are quoted exclusive of VAT. “working day”

means any day not being a Saturday Sunday or public holiday {in England};

OR “working day”

means a day (other than a Saturday or Sunday) on which banks are generally open for business in London {and (in relation to a transaction involving a currency other than Sterling) the principal business centre of the country of that other currency};

In view of the lack of harmonisation of bank holidays in the EU and globally, this definition needs to be included. The second alternative is appropriate for occasions when international banking transactions are to be made. “writing”

means any method of permanently reproducing words in legible form, including without limitation {telex} {facsimile transmission} and {electronic mail};

English law is still adapting to the introduction of E-Commerce and has not made any general changing to the wording of its legislation such that a reference to “in writing” includes writing in electronic form. For this reason, it is open for the parties to agree whether or not they are willing to accept notices given by e-mail. Some EU countries have made the blanket change to the wording of all existing legislation by providing that a reference to “writing” includes writing in electronic form. “year”

means calendar year;

OR “year”

means a period of twelve months commencing on {

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}



The first definition means the year is presumed to commence on 1 January. If this is not desired, the second definition should be used. The following clauses may be appropriate for inclusion in clause 1 INTERPRETATION after the Definitions. They assist with the general interpretation of the document and the expressions in it.

1.2 Headings Clause headings shall be ignored in interpretation. This makes it clear that headings do not limit interpretation.

1.3 Clause References References in this Agreement to clauses, sub-clauses, paragraphs, schedules, annexes and appendices are to clauses, sub-clauses, paragraphs, schedules, annexes and appendices (as the case may be) of or to this Agreement unless otherwise specified

1.4 Statutory References References to any statute, statutory provision or regulation include a reference to all statutory instruments or orders made pursuant to it and are references to that statute, provision, regulation, instruments or orders as from time to time amended, extended, re-enacted or consolidated [provided that this sub-clause shall not have the effect that any of the parties would have any greater obligation or liability than it would have had under the enactment quoted in this Agreement as in force at the date of this Agreement] The interpretation rules set out in the first part of this clause up to the proviso are already contained in English law in the Interpretation Act 1978. The proviso in square brackets is optional. The advantage of its inclusion is that it ensures that no amending legislation may have a significant impact on the agreement. The disadvantage is that the words “greater obligation or liability” may be difficult to interpret and may lead to litigation. In long term agreements, it may be appropriate for a party to be given the right to terminate the agreement if their rights or obligations are materially affected by any changes to the law.


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1.5 Gender and Number Unless otherwise expressly stated each gender includes each other gender, words denoting the singular number include the plural and vice versa

1.6 Persons References to persons include individuals, bodies corporate, unincorporated associations and partnerships however organised and also include a reference to that person’s legal personal representatives, successors and permitted assigns (if any) Under English law, section 61 of the Law of Property Act 1925 provides that a “person” includes a corporation. It maybe desirable to give a wider meaning as specified in this clause.

1.7 Obligations Obligations undertaken by more than one party shall be joint and several. A party that waives any right (arising under this agreement or the law) in relation to one party jointly and severally liable with another or who takes or fails to take any action against that party does not affect its rights against any other party. This clause, that provides for joint and several liability, means that each party has assumed the obligations collectively and individually. This means that a third party may proceed against any of the co-obligors for full performance. Performance by one party will discharge the rest vis-à-vis a third party. The co-obligors may then have recovery rights against each other. Joint and several liability is most desirable for third parties. The limitation on waiver is important to preserve the third party’s rights. OR Where obligations are expressed to be undertaken by more than one party no party shall be liable under this Agreement for performance of the obligations of any other party or for any failure of any other party to perform his obligations. Where more than one party is liable in respect of the same loss or damage, they each shall only be liable for: [Either] an equal share of the total [or] that proportion of the total sum specified against their respective names in [Schedule A].

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This clause, which provides that each party is liable solely for their own performance, gives rise to several liabilities. Proceedings must be brought against individual co-obligors for their share of the obligations. This solution is the most desirable one from the point of view of a co-obligor. The second sentence deals with the fact that in the case of several liability, a third party may recover more than they are entitled to. This is because domestic laws vary in interpreting the obligations of co-obligors in the absence of a specific provision. For example, an obligation, undertaken severally, to pay Euro 100 can mean either that: a)

Each co-obligor is responsible for only part of the total obligation, usually an equal share; or

b)

Each will be obliged to pay Euro 100. Payment by one will not discharge the others. The total liability of three co-obligors will therefore be Euro 300.

1.7 Time Reference to a time of day is a reference to that time in London, England.

1.8 General Words The words and phrases “other”, “including” and “in particular” shall not limit the generality of any preceding words or be construed as being limited to the same class as the preceding words where a wider interpretation is possible.

1.9 English Language Version to Prevail This Agreement is made only in the English language. If there is any conflict in meaning between the English language version of this Agreement and any version or translation of this Agreement in any other language, the English language version shall prevail. In international agreements, specifying the language of the agreement can have a number of advantages. If the agreement is drawn up in versions in different languages, it is desirable to state which is the authoritative version, if a difference in meaning between different versions arises. It may also be desirable to state that any amendments to the agreement should be in the same language as the original. In some jurisdictions the language of the agreement may influence the court when deciding under which country’s laws the agreement is made, and which country’s courts should have jurisdiction. Ideally the agreement should state these matters specifically.


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2. Indemnity 2.1 Undertaking to Indemnify {X} shall indemnify {Y} {on demand} against all losses, liabilities and costs which {Y} may incur arising out of {specify event to be indemnified against} (including, without limitation, all losses, liabilities and costs reasonably incurred as a result of defending or settling any claim (a “Relevant Claim”) alleging any such liability) An indemnity is an express obligation to compensate, in money, for a defined loss or damage. This is to be contrasted with a warranty that is essentially a contractual promise, the breach of which will give rise to damages. An indemnity is a stronger remedy than damages for breach of contract. This is because an indemnity entitles the claimant to recover the loss suffered on a pound for pound basis, whereas damages must be assessed. Under English law, a person claiming under an indemnity is under no duty to mitigate their loss; whereas such a duty does apply in a claim for contractual damages. It is noteworthy that the terms “indemnity” and “damages” are terms of art under English law and their use in the context of recovery pursuant to a litigation is entirely separate and distinct from their use in the context of an agent’s entitlement to compensation upon termination (see chapter 3.1). Reference is often made in an indemnity to “claims, expenses, actions, proceedings, demands etc”. It is usually sufficient to refer only to “losses, liabilities and costs”. It is possible to incur a loss without incurring a liability e.g. an indemnity given in relation to the loss in value of an asset. The wording “{X} shall indemnify {Y} on demand” is intended to allow the indemnified party to bring an action on the indemnity before payment has been made (in exercise of the equitable right of the indemnified party to obtain relief as soon as the liability or cost has arisen but before payment has been made) which would not otherwise be available under common law. The terms of the indemnity may expressly forbid use of this equitable right.

2.2 Condition of Entitlement {Y} shall have no right to an indemnity under sub-clause 2.1 for any Relevant Claim if it fails {in a material respect} to act in accordance with sub-clause 2.3.

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2.3 Procedure If {Y} becomes aware of any matter that might give rise to a Relevant Claim, the following provisions shall apply: 2.3.1

Notice: {Y} shall immediately give written notice to {X} of the matter {stating in reasonable detail the nature of the matter and, so far as is practicable, the amount claimed and shall consult with {X} with respect to the matter If the matter has become the subject of proceedings {Y} shall deliver the notice within sufficient time to enable {X} to contest the proceedings before any final judgment;

2.3.2

Access: {Y} shall provide to {X} and its professional advisers reasonable access to premises and personnel and to any relevant assets, documents and records within {its} possession or control for the purposes of investigating the matter and enabling {X} to take such action as is referred to in sub-clause 0;

2.3.3

Right to take Copies and Photographs: {X}, at its expense, shall be entitled to take copies of any of the documents or records, and photograph any premises or assets, referred to in sub-clause 0;

2.3.4

Legal Proceedings: {Y} shall: a)

take such action and institute such proceedings, and give such information and assistance, as {X} may reasonably request to: i)

dispute, resist, appeal, compromise, defend, remedy or mitigate the matter; or

ii)

enforce against any person (other than {X}) the rights of {Y} in relation to the matter; and

b)

in connection with any proceedings related to the matter (other than against {X}) use professional advisers nominated by {X} and, if {X} so requests, allow {X} the exclusive conduct of the proceedings,

in each case on the basis that {X} shall fully indemnify {Y} for all reasonable costs incurred as a result of any request or nomination by {X} 2.3.5

No Admission or Settlement: {Y} shall not admit liability in respect of or settle the matter without the prior written consent of {X}, such consent not to be unreasonably withheld or delayed}


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Sub-clauses 2.2 and 2.3 are drafted in favour of the giver of the indemnity: compliance with sub-clause 2.3 is a condition to the right to indemnification. If the indemnified party is to be favoured, they should be deleted. Sub-clause 2.3 is illustrative of the provision for notification of claims and affording the giver of the indemnity the conduct of claims. It should be adapted as appropriate. Sub-clause 2.3.4 (b) allows total control of the proceedings to the indemnifier. This may not always be appropriate, in view of the local court practice. For example, some jurisdictions limit the ‘locus standi’ (right to bring a claim) to certain classes of holders of intellectual property rights (e.g. only the registered owner or user may bring a claim). This clause therefore needs to be drafted in the light of local legal advice. From the point of view of the indemnified party, there are risks of allowing another person the conduct of claims on its behalf (e.g. if the claim is against a creditor or debtor of the indemnified party, litigation may affect the business relationship between the parties).

3. Force Majeure 3.1 Suspension of Performance A party may delay performance of an obligation under this Agreement if it: 3.1.1

cannot perform the obligation because of an event that is beyond its reasonable control and was not reasonably foreseeable when the Agreement was made. This event includes but is not limited to the following{include/delete as appropriate }: a)

{act of God:

b)

outbreak of hostilities, acts of terrorism or civil commotion;

c)

the act of any government or authority (including a failure to grant any licence or consent needed or a change in the law or the interpretation of the law);

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d)

fire, explosion or other accidental damage;

e)

loss at sea;

f)

adverse weather conditions;

g)

failure of plant, machinery, equipment, computers or vehicles;



h)

any industrial action;

i)

non-performance by suppliers or sub-contractors {other than by companies in the same group as the party seeking to rely on the clause};

3.1.2

j)

power failure, failure of telecommunications lines;

k)

any criminal action}

could not have taken any reasonable steps to avoid or mitigate the consequences of the event;

3.1.3

serves notice in writing on the other parties giving full details of the event within two months of becoming aware of it;

3.1.4

promptly provides any further information in relation to the delay that any other party reasonably requires;

3.1.5

uses reasonable endeavours to continue to perform the obligation {(without being obliged to incur any {significant} expenditure)};

3.1.6

promptly takes any steps reasonably required by any other party to avoid or mitigate possible losses to that party arising from the delayed performance {(without being obliged to incur any {significant} expenditure)};

3.1.7

has not defaulted in performing the obligation before the event occurs.

3.2 Resumption of Performance The party must resume performance of the obligation as soon as reasonably possible after the event preventing performance has ceased.

3.3 Termination of Performance If performance is delayed for a continuous period of over three months, any party {OR: the party to whom performance is owed} may terminate this Agreement by written notice to all the other parties, following which no party shall have any liability other than in respect of those accrued prior to termination. Under English law, if a force majeure clause is not included in the Agreement, the doctrine of frustration may operate to discharge the Agreement if subsequent events make it impossible or illegal to perform the Agreement. Frustration is difficult and uncertain in law and would not cover many circumstances regarded commercially as force majeure events.


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Under English law, ‘force majeure’ has no recognised meaning, and needs to be defined clearly. Certain civil law countries such as France, Germany, the Netherlands and Italy, have provisions in the civil Code that to some extent define and regulate the operation of force majeure. A Force Majeure clause under English law needs to have a regulatory framework so that there is certainty in its application. In particular: 1.

should the Force Majeure clause extend to all or only part of the obligations of a party?

2.

should the clause be mutual or unilateral?

3.

consider whether the party seeking to rely upon the clause will be able to notify the others (some force majeure circumstances may make notification extremely difficult if not impossible).

4.

consider what the effect of claiming force majeure will have on the Agreement. Should it give the claiming party the right to delay performance until the force majeure event subsides or confer on either or both parties a right to terminate? The consequences of delay of performance or termination of the Agreement upon the rights and obligations of the parties needs to be established.

5.

should there be an obligation on the claiming party to take all reasonable steps to mitigate the effects of force majeure and to resolve the impediments to performance?

6.

what should be the events of force majeure?

It is generally desirable to make the list of events constituting force majeure inclusive, rather than exhaustive. This is because it is difficult to predict the events that may occur. The inclusion at 3.1.1 (h) of ‘any industrial action’ may be contentious, since it could be arguable that the party relying on the clause could have avoided a force majeure situation arising by giving in to wage demands. It is important to include a reference to non-performance by suppliers or subcontractors in 3.1.1 (i) to avoid the argument that the force majeure would not have occurred if sub-contractors had been properly supervised. It is also good practice to include the same force majeure clauses in upstream and downstream contracts relevant to the agreement i.e. with suppliers and sub-contractors. Certain force majeure events may be insurable. If the damage is insured, a party may not wish to terminate the agreement. The clause needs to be drafted so as to accord with insurance policies.

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4. Change of control 4.1 Change of Control {X} shall be entitled to terminate this Agreement forthwith upon giving written notice if a third party acquires control of {Y} (and for the purposes of this subclause “control” has the meaning given to it by section 840 of the Income and Corporation Taxes Act 1988)

4.2 Effect of Termination Termination of this Agreement pursuant to sub-clause 4.1 shall not affect the accrued rights of the parties arising under this Agreement as at the date of termination and such provisions of this Agreement as are expressed or intended to survive termination of this Agreement shall remain in full force and effect. It is necessary to consider carefully what is meant by a “change of control” and ensure the appropriate definition is included. Whether the parties require an express provision relating to “change of control” will depend on the type of agreement they are contemplating. It should also be checked whether any rights or obligations under the agreement would be adversely affected by any “change of control”. If so, the parties might wish retain the right to terminate the Agreement and include any appropriate provisions for the consequences of such termination.

5. Severability 5.1 Severability If any provision of this Agreement is wholly or partly invalid or unenforceable then: 5.1.1

if by applying to it a restrictive interpretation it would not be so invalid or unenforceable, that restrictive interpretation shall be applied to it; and

5.1.2

subject to sub-clause 0 the part of the provision which is so invalid or unenforceable shall be severed from the remainder and shall not affect the validity of the remainder of this Agreement


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Where a contract contains a provision which is or becomes illegal or void, it is sometimes possible for the offending clause to be “severed” from the contract by the court, leaving the remainder of the Agreement enforceable. If the contract is silent, most jurisdictions in the EU have a concept of severance, albeit in limited and varying forms. Severance clauses are common in England and Wales, Germany and Sweden. They are less common in France, Italy, the Netherlands and Spain. As a general rule the court: •

will only sever a provision where it is possible simply to strike it out without further modification or re-writing of the Agreement; and

•

will not do so if severance would completely alter the scope and intention of the Agreement or would remove one of the essential components of the Agreement (“the blue pencil test”). For example, an agreement for the global supply of computer equipment may be void due to the exportation to one country being illegal. The buyer may resist severance of that country from the scope of the agreement on the grounds that it will defeat the object of a global network.

In certain circumstances this provides that if the offending words are struck from the clause and if the remaining words of the clause make sense as a contractual provision the remaining words will be allowed to stand; otherwise the entire clause containing the unlawful provision will be struck out. The civil approach is more flexible, allowing the parties to substitute an equivalent provision that is legal and valid. The question of severance arises commonly in connection with restraint of trade clauses and in contracts which include anti-competitive term. It is for this reason that restrictive covenants are typically repeated in a contract, each one being for a different time period (e.g. one, two and three years). It is also relevant to other types of unlawful terms (e.g. a provision requiring the performance of a criminal act). The express intention of the parties will be an important factor in any subsequent proceedings and it is customary for the parties to attempt to avoid the whole contract (or the whole clause) being nullified by inserting an appropriately worded “severance clause”.

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6. Notices 6.1 Notices Any notice under this agreement must be given in writing and will be deemed to have been given properly by either party: a)

if sent by registered post to the other at the address given above (or any other address from time to time notified to the other in writing) [seven] days after the date of its proper posting;

b)

if sent by effective facsimile upon the business day following the date of transmission in each case to such number notified to the other. Any such transmission shall be confirmed in writing sent by post forthwith

c)

if sent by e-mail or other electronic means to an authorised address of the addressee and shall be deemed given {on the same day as/12 hours after} the time the transmitting machine generates an indication of a successful transmission to the addressee

A notice clause needs to set out the place at which notice is to be served, the method by which it is served and when service is deemed to take place. Under English law, the ‘postal rule’ is the general rule, namely a notice is deemed to be given when it is posted, or at a given time after it has been posted. This is not the case in all continental countries, some of which adopt the ‘receipt rule’ i.e. a notice is deemed received when it has actually been received by the recipient. The E-Commerce Directive adopts the receipt rule in respect of electronic notices. It states that in the business to business context, if the parties do not otherwise agree, an e-mail is deemed to be received when the person to whom it is addressed is able to access it.


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7. Waivers 7.1 Effective waiver A waiver by a party of any right arising under this agreement or the law is only effective if it is in writing and shall not be implied by taking or failing to take any other action.

7.2 No waiver of other rights A party that waives a right does not waive any of its other rights.

7.3 No waiver against other parties A party that waives a right in relation to one party or takes or fails to take any action against that party does not affect its rights against any other party.

7.4 General Unless specifically provided otherwise: 7.4.1

rights are cumulative, and

7.4.2

rights arising under this agreement do not exclude rights provided by law.

7.4.3

[A party that waives a right may subsequently enforce it].

A waiver may be inferred from the repeated failure to enforce an obligation. Under English Common law, a waiver may at any time be withdrawn and no consideration is necessary for the waiver or its withdrawal. This is to be contrasted with a variation that needs the consent of the other party and consideration. In some jurisdictions, there are statutory rules that govern the use of waivers. On occasions, the courts have ruled that such clauses are unfair, unenforceable or ineffective. In practice, in order to avoid unintentionally waiving a right, it is desirable to put the other party on notice of a recurring breach and require them to remedy them or to vary the contract. Sub-clause 7.4.3 does not operate successfully in most continental jurisdictions. It does however frequently operate successfully under English law.

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Conclusion The above clauses comprise a selection of clauses commonly included in commercial agreements governing law, choice of jurisdiction and dispute resolution clauses should also be included (see chapters 2.1 and 2.2). As will be seen from the commentaries, the law applicable to the contract will impact upon the interpretation and operation of such clauses and needs to be considered carefully.


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Chapter 7 Negotiating and entering into e-contracts Introduction........................................................................................128 Pre-contract considerations .............................................................130 Who are the parties? .........................................................................135 Forming valid e-contracts ................................................................138 Using standard terms........................................................................141 Website design and hosting agreements........................................141 The Distance Selling Directive 1997/EC..........................................144 The Database Directive .....................................................................145 Conclusion..........................................................................................148

Chapter 7 Negotiating and entering into e-contracts

Introduction E-commerce is booming The advent of the Internet has presented enormous opportunities for businesses and consumers around the globe. E-commerce enables trading at low cost across regions and national frontiers. To reap its full benefit, efficient logistics services need to be developed so that speed of delivery can be compatible with speed of placing orders. The lion’s share of Internet generated revenue is taken by business to business transactions. The business to consumer turnover on the Internet remains paltry by comparison. Trading on the Internet is in essence no different to trading using the more conventional means of face-to-face meetings, telephones, letters and faxes. The general rule is that a business person should conduct themselves in cyberspace as they would in any other medium. Difficulties and uncertainties arise largely because in view of the relatively recent accessibility of the Internet, the legislators have not been able to keep apace of developments and promulgate specific laws. It will be of some comfort to those planning to trade on the Internet that the common law (found for example in England, the US and former British Commonwealth countries), with its flexible approach, can largely be interpreted to give a solution to almost any issue raised by e-commerce. Civil law systems (such as are found, for example, in most of Continental Europe and South America), are less flexible. This leads to a lacuna in these civil laws in respect of e-commerce, and greater uncertainty as to how a cyberspace situation might be viewed.

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7 N E G O T I AT I N G A N D E N T E R I N G I N T O E - C O N T R A C T S

Global developments in e-commerce policy and law There has been a general move around the world in the last decade to legislate for the electronic commerce sector. The UN General Assembly adopted on 16 December 1996 a UNCITRAL model law on electronic commerce. Since then, several of the major trading states of the world have adopted e-commerce legislation.29 The European Commission has also taken several initiatives. The most important pieces of legislation from the European perspective are: •

The E-Commerce Directive 2000/31/EC of 8 June 2000;

•

The E-Signatures Directive 1999/93/EC of 13 December 1999;

•

The Distance Selling Directive 97/7 of 20 May 1997 (applicable only to business to consumer transactions); and

•

The Data Protection Directive 95/46 of 24 October 1995.

The adoption of these Directives signifies a major step in the creation of e-commerce legislation. However, it is by no means the final solution for two reasons. First, the Directives by their very nature are limited to the European Union in their scope and application. Although as a general rule they are broadly in harmony with legislation emanating from other major trading nations, they do not replicate it. Second, the Directives had to be implemented into national laws by domestic legislation. The Directives themselves frequently give national governments discretion as to the terms of such domestic legislation. This means that divergencies are preserved and created between national laws within European Member States. It is noteworthy that the E-Commerce Directive only applies to the activities of service providers established within the European Union. The place of establishment of a company providing services by an Internet website is not the place at which the technology supporting its website is located or the place at which its website is accessible but the place where it pursues its economic activity. The Directive does not apply to information society services supplied by service providers established outside the European Union. However, the E-Commerce Directive specifies that in view of the global dimension of electronic commerce, it is appropriate to ensure that the Community rules are consistent with international rules. The E-Commerce Directive is therefore without prejudice to the result of discussions within international organisations (amongst others, WTO, OECD and UNCITRAL).

29 Most notably, the Uniform Electronic Transactions Act in the United States


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Difficulties are caused by the fact that almost no e-commerce is purely domestic and that there is no European, let alone global harmonisation of e-commerce legislation. By definition, the use of the Internet raises the question of the application of overseas laws and the even harder question of how any conflicts between these various national laws will be resolved. Each country has its own set of ‘private international laws’ which seek to resolve such conflicts (see chapter 3). These private international laws are largely unharmonised from a global perspective and therefore leave many questions unanswered. There is as yet no ‘law of cyberspace’ and there is unlikely to be any for the foreseeable future. There is however a body of common practice developing and which it is expected will be refined as trading on the Internet increases. For example, the introduction of the ICANN Arbitration System has greatly simplified disputes in respect of certain domain names. This chapter seeks to deal with the principal issues facing those wishing to contract on the Internet, namely: •

Pre-contract considerations.

•

Who the parties are.

•

Forming valid e-contracts.

•

Using standard terms.

•

Website design and hosting agreements.

•

The Distance Selling Directive.

•

The Database Directive.

Pre-contract considerations Several points need to be borne in mind before a contract is entered into, as follows:

Pre-contractual liability Many civil law countries have a relatively developed doctrine of ‘pre-contractual liability’, which imposes a legal obligation on both parties to negotiate in good faith. Under English law, either party may generally withdraw without liability from negotiations at any stage before the contract is signed (see chapter 2). Trading internationally on the Internet highlights the different approaches taken on this point across the globe. An English business person, unaware of the

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existence of this doctrine overseas, could easily be caught out if they engage in a series of e-mails and then decide not to go ahead. Equally a continental European could be surprised to find they have no recourse against an English counterpart if discussions subject to English law terminate. To some extent, pre-contractual liability can be prevented from accruing by applying a common law, such as English, to all negotiations. This method is not entirely watertight, since the private international laws of the civil law country may apply the domestic law irrespective of the chosen English law.

Advertising and marketing There is currently no international unanimity as to which law governs advertising and marketing on the Internet. In some countries, it is believed that the law of the country where the advertising originates will apply; in others, it would appear that the country where the advertising and marketing is accessed by users apply. The safest, but expensive course to follow when setting up a website is to ensure the advertising used complies with the rules applying in the relevant jurisdictions. The E-Commerce Directive has to some extent relieved businesses of the burden of ensuring that they comply with individual Member States’ advertising rules. Article 3 (1) requires that information society services provided by a service provider established on a given territory shall comply with the national provisions applicable in that Member State. In other words, the principle of ‘host rule’ will apply. However, it is likely that conflicts will arise between national legislation implementing the E-Commerce Directive and pre-existing advertising laws of other Member States. Some such national advertising laws, particularly when they have been promulgated to protect consumers and children, are likely to be ‘mandatory’ and applied by their national courts to any advertising that may be accessed by nationals, irrespective of the E-Commerce Directive. This means that businesses will still, to be on the safe side, need to check the advertising laws of other countries, albeit they could limit their search to mandatory advertising laws. Further, it should be checked that the advertisement does not constitute a unilateral contract or standing offer that can bind the seller without any further action on the seller’s part (see below). The website should be prepared carefully so as not to make any misrepresentations (untrue statements which induce a purchaser to enter in to a contract) in relation to the goods or services being offered.


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Global self-regulation The International Chamber of Commerce issued revised guidelines on advertising and marketing on the Internet in April 1998. These guidelines are not binding and are always subordinate to existing national law. However, ICC Codes and Guidelines are frequently used, particularly in the Member States of the EU, as providing the core of domestic codes, or as offering guidance on the interpretation of the laws dealing with unfair trade practices. The ICC Guidelines cover all advertising and marketing on the Internet, including text, pictures, animation, video and audio, and they also include software. Its principal provisions are as follows: •

All advertising and marketing should be legal, decent, honest and truthful. ‘Legal’ is presumed to mean legal in the country of origin of advertising and marketing messages.

•

Advertisers and marketers of goods and services should always disclose their own identity.

•

Advertisers and marketers should clearly inform users of the cost of accessing a message or a service where the cost is higher than the basic telecommunications rate.

•

Advertisers and marketers should respect the role of particular electronic newsgroups, forums or bulletin boards as public meeting places which may have rules and standards as to acceptable commercial behaviour.

•

Users’ rights should be protected, in particular there are provisions governing the collection, use, disclosure, correction and blocking of data and also ensuring data privacy. Unsolicited commercial messages must not be sent on-line to users who have indicated that they do not wish to receive such messages.

•

Measures safeguarding the interests of children to ensure that they are not exploited or harmed are included.

The ICC has also issued draft guidelines for presenting advertising online that await finalisation.

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Invitation to treat/offer It is vital that websites are prepared so that no unintentional offers are made by an unwitting seller, to which they may be bound in the event of an on-line consumer accepting them. The law already provides that when a shopkeeper displays goods for sale, he is merely making an invitation to treat, which is the stage before making an offer. It is the prospective purchaser who makes the offer to purchase by taking the goods to the counter. The shopkeeper may then accept to sell the goods. The important distinction between invitations to treat and offers is that a party can be bound by an offer but not by an invitation to treat. It is generally preferable for statements on websites to be invitations to treat so that stock supplied and identities of purchasers can be controlled. It is unclear whether the laws of different jurisdictions will generally treat websites as invitations to treat or offers. To be on the safe side, it is best to state specifically that statements on websites are invitations to treat and not offers and the seller will not be bound by orders placed by customers until they are accepted.

Information The E-Commerce Directive provides that a service provider shall render at least the following information to recipients of the service: •

The name of the service provider;

•

The geographic address at which the service provider is established;

•

The details of the service provider, including their electronic mail address;

•

Where applicable, the trade register in which the service provider is entered and its registration number;

•

Particulars of any relevant supervisory authority;

•

Any professional body with which the service provider is registered, the professional title of the service provider and the Member State where it has been granted, and a reference to the applicable professional rules in the Member State where the service provider is established and the means to access them;

•

The VAT number.

Further, the E-Commerce Directive stipulates that prices must be indicated clearly and unambiguously and must state whether they are inclusive of tax and delivery costs.


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Unsolicited e-mails The E-Commerce Directive partially legislates for unsolicited e-mails. It provides in Article 7 (1) that Member States which permit unsolicited commercial communication by electronic mail, shall ensure that such communication by a service provider established in their territory, shall be identifiable clearly and unambiguously as soon as it is received. Article 7 (2) further provides that Member States shall take measures to ensure that service providers undertaking unsolicited commercial communications by e-mail, consult regularly and respect the optout registers in which natural persons not wishing to receive such e-mails can register themselves. The E-Commerce Directive therefore only deals with the matter insofar as Member States have already set up opt-out registers. It does not require Member States to set up opt-out registers and those that had not were under no obligation to provide protection against unsolicited e-mails.

The Data Protection in Electronic Communications Directive 2002 The Data Protection in Electronic Communications Directive (The Electronic Data Protection Directive) introduced further rules in relation to unsolicited e-mails, and also addressed the use of ‘cookies’. Member States have until October 2003 to implement the provisions of the new Directive in their domestic laws. The Electronic Data Protection Directive provides that a consumer must have indicated that he or she is willing to receive unsolicited commercial e-mail, text messages, faxes or telephone calls from automated calling systems before these communications can be legally sent. In other words, the ‘opt-in’ approach has been adopted. This will change the current position in the UK when it is implemented into UK law, although it reflects the current position in some other Member States. Where a business obtains from its existing customers their e-mail addresses in the context of sales or services, that business can use the address for direct marketing of its own similar products or services, provided the customer is given the opportunity to opt-out. The use of mobile phone location data must be subject to the explicit consent of the individual phone user and users should have the possibility temporarily to block the processing of location data at any time.

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Cookies are small text files that can be sent to an Internet user’s computer to store certain information about that user for later use by the website. The Electronic Data Protection Directive limits storing information on an Internet user’s computer or accessing such information by stating it is only allowed: “…on condition that the subscriber or user is provided with clear and comprehensive information in accordance with [the Electronic Data Protection Directive about] the purposes of the processing and is offered the right to refuse such processing.”

Who are the parties? Buyer Businesses may not wish to sell goods and services to everyone on the Internet. For example, there may be trade embargoes blocking sales to certain countries. Local laws may prohibit the sale of certain substances, such as tobacco, to minors. Companies do not wish to sell to a child who is unable to pay for the goods. There may be strong consumer protection laws in force in certain countries which could lead a company to be on the receiving end of a writ which will be hard to defend. Electronic signatures and smart cards may be used to ascertain or control with whom a contract is made on the Internet. The following methods may also be used by businesses to control to some extent with whom they are about to contract. Although they are not water-tight, their operation would be taken into account by a court when determining whether digitised services were intended to be sold in a particular jurisdiction: •

If a company is to deliver goods or services, request the delivery address at an early stage and reject the customer if the address is within a vetoed country.

•

Carry out a web server check to ascertain the purchaser’s country of registration of their domain name if it is a national one (this will not necessarily be the same as the place of incorporation or trading activity but will at least give some indication).

•

Utilise a ‘cookie’ to obtain a general geographical location by detecting the time zone offset used by the customer and reject customers outside the time zone in which it is intended to trade.

•

Consider including a disclaimer on the website whereby the website is stated as intended only for certain nationals or groups of people.


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Seller It is important to ascertain who is the seller in any given e-commerce transaction. The position is clear in the case of a wholly owned, designated, website. However, the flexible nature of trading on the Internet has led to a number of emerging Internet business models whereby one business is affiliated to another and the two share a common website. In such instances, it is vital that the parties agree between themselves whether they are to be joint sellers (and potentially jointly liable) and for the website to make it clear if this is the case. Similar issues may arise when parties agree to revenue sharing advertising which links through from one interactive site to another where transactions for products are entered into on both. It is important to ascertain whether the original site, or the linking site is a ‘retailer’ for implied warranty and product liability purposes.

Contracting is easy on the Internet Having set up a website and placed advertising material on it, the next step is hopefully to receive orders for goods. One of the advantages for sellers, and disadvantages for purchasers, is it is easy to enter into a legally binding contract. Few formalities are required under the laws of most EU Member States. There are exceptions (for example, sales of land and agency contracts, if requested by one of the parties, must be made in writing) but most everyday contracts will be enforceable provided there has been an offer, acceptance and an intention to create legal relations. Some countries’ laws require consideration (i.e. value) to pass between the parties. It follows that contracts can in principle be validly made either by e-mail or the World Wide Web. Even outside the remit of the Internet, businesses often form contracts without realising they have done so. Commencing work on the basis of oral negotiations or a draft contract will rarely mean there is no contract, only that its details will be less certain than if standard terms were used or a signed agreement was in place. The ease and speed with which communications can be made by e-mail creates its own set of problems. This, coupled with its informality, means that users are more likely to contract on the basis of communications which are less precise or considered than might be the case with a carefully drafted letter or fax.

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Usual sales laws apply The general legal rules governing the type of contract to be entered into will apply to online contracts as well as offline contracts. In order to ascertain which laws apply, it is necessary first to decide which law governs the contract (see chapter 2.1). Then, the transaction must be categorised as to whether it is a sale of goods or services, and whether the sale is to a business or consumer, in order to ascertain which category of domestic laws will apply. The supply of products in digital form over the Internet rather than in hard copy form, has given rise to uncertainty as to whether this constitutes goods or services. The position is still unclear, but it would appear to be regarded as goods by the laws of most countries and therefore subject to Sale of Goods legislation.

Which law governs contracts made on the Internet? In view of the international nature of most e-contracts, it is vital that a governing law clause is included. THE LAW WITH WHICH THE CONTRACT IS MOST CLOSELY CONNECTED

If a governing clause is not stated, in the EU, the Rome Convention provides that the law with which the contract is most closely connected shall apply. There is a rebuttable presumption that the law shall be the law of the ‘characteristic performance’, being the law of the place where the party who has to effect the characteristic performance has his seat of business. The application of this rule to contracts made on the Internet may on occasions unfortunately apply a law which has little connection with the reality of the contract, particularly where, for example, the seller may have set up business in one country with a favourable tax regime and the goods never physically pass through that country. In such a case, the law of the country where the seller has set up business would nevertheless apply. The Rome Convention provides special rules relating to consumer contracts and individual employment contracts. Whichever law is applicable by choice of the parties or otherwise, consumers and employees will remain protected by the mandatory rules of their country of habitual residence. In the case of consumers, this will apply if the purchases are made in their home country (the most obvious example being via the Internet), or on the strength of local advertisement or a direct offer. This provision opens the floodgate to overseas consumer protection laws applying to Internet transactions. This important consumer protective provision is unaffected by the E-Commerce Directive.


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Forming valid e-contracts Which law governs the execution of a contract made on the Internet? In international contracts, it is vital to check that the parties purporting to sign the contract are duly authorised to do so. The law governing this question will be the law of the place of registration of the Company or the domicile of the individual. Indeed, the wording of the signatory clause will also be governed by that law. Technology has now developed so that computers can ‘talk’ to each other without human intervention. This raises the question of whether computers can validly contract, without human intervention. It is submitted that the question will in each case fall to be determined most probably by the law of the country where the computer resides at the time of entering into the contract. Most countries require an intention to create legal relations as a pre-requisite to entering into a valid contract. It would seem that if a computer has been programmed by a duly authorised individual with the intention of such programme enabling a computer to enter into a contract, such ‘duly authorised computer’ can enter into a legally binding contract.

The E-Signatures Directive 1999/93 The E-Signatures Directive has now been implemented throughout the EU. It follows the US and UNCITRAL lead by adopting a hybrid approach to e-signatures. It provides that all electronic signatures will have legal effect and be enforceable. It further allows for a hierarchy of electronic signatures by stating that those which are based on a qualified certificate issued by a certification service provider which meets certain criteria will be recognised as satisfying the requirement of a handwritten signature and be admissible in evidence in legal proceedings as if they were handwritten. It further provides that those who provide certification services need not be authorised, but that national voluntary accreditation schemes may be implemented. It follows that businesses will have a free choice as to whom they choose to certify their signatures. However, if they wish to rely in law on the certificate, they should choose a service provider who meets the specified criteria. The extent to which uncertified electronic signatures may be admissible as evidence in courts is unclear. In practice the courts usually accept computerised evidence and have continued to do so following the implementation of the E-Signatures Directive. However, uncertified e-signatures carry less evidential weight.

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The UK has implemented the E-Signatures Directive by way of the Electronic Communications Act 2000 and the Electronic Signatures Regulations 2002.

The E-Commerce Directive The law relating to contracting on-line has to some extent been harmonised within the EU by the E-Commerce Directive. Although Member States were given until 17 January 2002 to enact implementing legislation, many have not yet done so. The UK has carried out a public consultation on implementation of the Directive. As a result of the consultation, a draft Statutory Instrument was promulgated, namely the draft Electronic Commerce (EC Directive) Regulation 2002. This is being debated by the UK Parliament. It is not within the scope of this paper to deal with all aspects of the Directive; the commentary below is confined to its provisions relating to e-contracts. SCOPE OF THE DIRECTIVE

The E-Commerce Directive covers ‘information society services’, i.e. most ecommerce activities. ELECTRONIC CONTRACTS

Article 9 makes it clear that it must be possible to contract electronically. The laws of Member States must not deprive such contracts of legal effect and validity simply because they have been made electronically. This does not apply to contracts requiring a notary, to be registered with a public authority, or those governed by family law or the law of succession. Article 10 provides that a service provider must explain clearly and unequivocally how a contract shall be formed by electronic means, prior to the conclusion of a contract. The exception to this requirement is when B2B contractors agree otherwise. In particular, information must be given as to: •

the different stages to follow to conclude the contract;

•

whether or not the concluded contract will be filed by the service provider and whether it will be accessible;

•

how input errors will be identified and corrected. (The Directive is silent on what is understood to be such an error);

•

the languages offered for the conclusion of the contract; and

•

relevant codes of conduct to which the service provider subscribes.


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The requirement to give this information does not apply when contracts are concluded by exchange of e-mail or equivalent individual communications. Contract terms and conditions provided to the recipient must be made available in a way that allows him to store and to reproduce them. This Article intends to ensure that parties will give their full and informed consent to electronic contracts.

Placing orders The E-Commerce Directive gives parties in a B2B situation freedom to contract. However, if the businesses do not agree how contracts are to be entered into, the provisions of Article 11 that apply to sales to consumers will also apply. Article 11 establishes that when a purchaser places an order through technological means, the service provider must acknowledge receipt of the order without undue delay and by technological means. This provision is qualified by Recital 34 that provides that the acknowledgement of receipt by a service provider may take the form of the on-line provision of the service paid for. Further, the electronic order and acknowledgement are taken to be received when the party to whom they are addressed is ‘able to access it’. This provision marks an unusual departure from the general rule as to the time when a contract is formed. Generally, a contract is formed when the acceptance of the offer is effective. The laws of the countries in the EU generally apply either the ‘postal rule’ or the ‘receipt rule’ to determine when the acceptance is effective. According to the ‘postal rule’, a contract is made when the communication is sent. The theory is based upon the premise that acceptance of the offer takes place when the offeree loses control over the risk of mis-communication or nondelivery. In the Internet environment, the equivalent moment would be when the offeree clicks the send button in order to send an e-mail. Control over the message is lost but the message has not yet been received by the offeror. The application of the ‘postal rule’ to e-contracts has not yet been decided by any court. It would have seemed appropriate that the ‘postal rule’ should apply equally to e-mails as to letters and faxes, since the methods of communication are inherently similar. However, the provision of Article 11 of the E-Commerce Directive, which opts for the ‘receipt rule’ in consumer transactions and business transactions where the parties do not otherwise agree, will prevail. It is important that parties to a B2B transaction agree at the outset whether the ‘postal rule’ or ‘receipt rule’ is to apply.

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Using standard terms Parties using e-mail to sell goods or services should take care to ensure all the terms of the contract are as clearly agreed as in off-line circumstances. Electronic standard terms and conditions, whether in digital form or otherwise, are subject to the usual rules and must be incorporated into individual contracts. On the Internet this is often done by making readers scroll through them before acknowledging they have been read and accepted by means of a hypertext link (known as ‘click wrap’). Since the website will usually comprise a mere invitation to treat, it is important that not only does it list the terms and conditions in such a way that the purchaser has to read them before moving through the site, but also that the document constituting the offer by the purchaser refers to the terms and conditions and accepts them. The purchaser should have no means of altering the terms of the invitation to treat when they come to making an offer. The most obvious example of this is the price: the customer should be presented with fixed prices, no blank boxes, and only the possibility to confirm the offer by clicking a button. It is generally not possible to assume acceptance from silence. It is therefore advisable for the seller to state at the outset in the terms and conditions how acceptance can take place.

Website design and hosting agreements Businesses are increasingly realising that a website is a vital element of their marketing strategy. It is, after all, a virtual shop window that can be seen by interested parties all around the globe. That, coupled with the desire to protect the goodwill built up in the company name and/or trademark or service mark by registration of a domain name, has prompted a proliferation of websites to be set up over the past few years. Businesses have naturally grown on the back of this development, principally web designers and web hosters. Although the two services may be provided by the same party, they are more usually provided separately.


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Web Designer Agreements The following points should be agreed and confirmed in the written agreement: WHO OWNS THE INTELLECTUAL PROPERTY IN THE DESIGN OF THE SITE?

If the contract is silent, a consultant web designer will own the intellectual property in the designs they create on behalf of the company. It is therefore desirable to obtain: •

an assignment of intellectual property rights from the consultant to the business;

•

a warranty from the web designer that the website will not constitute an infringement of any other party’s intellectual property rights; and

•

consents of any third parties in respect of the use of any intellectual property rights owned by any such third party.

EXCLUSIVITY

The business may seek to impose upon the web designer an agreement that they will not design a website for any competitor and that they will work exclusively for the particular business in relation to their particular sector of activity. This will be difficult commercially to obtain, and in any event may be anticompetitive. CONFIDENTIALITY UNDERTAKING

The web designer will need to be privy to certain confidential information relating to the strategic plans of the business. It is desirable that such plans are protected by way of a confidentiality undertaking. WEB TERMS

Place the onus on the web designer to ensure that the on-line and off-line business of the company are in harmony, from both a marketing and legal perspective. It may be that the standard terms and conditions of the company are amended for use on-line. This should only be done with extreme caution since otherwise questions of evidence may arise in the event of a dispute, as to which set of terms apply to any given contract. SUB-CONTRACTS

The web designer should agree that they will enter into sub-contracts upon similar terms to the main contract if they sub-contract any part of the design or the graphics.

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Web Hosting Agreements It is important that the ‘shop window’ is kept on permanent display insofar as possible. Accordingly, the following clauses should be included in a web hosting agreement: THE LOCATION OF THE HOST

This will have an impact on liability and also regulatory issues. DETAILS OF UPTIME AND DOWNTIME

These should be calculated and specified in detail. In particular, the business should seek to ensure that the website will be available during the normal trading hours of its principal trading partners. DISASTER RECOVERY

Provisions for the website to be transferred to another site should the web host fail completely. In order to do so, it is vital that the business be given the object and source code of the website. Liability of the web host for content and for damages for lost business due to the website not being available. INSURANCE

Who shall take out and pay for insurance to cover the site being down for more than a specified period?

Liability of ISPs This is a very sensitive area as intellectual property rights holders wish to ensure that their property rights, such as logos and brand names, are not undermined by imitators on the Internet. The area is regulated by the E-Commerce Directive, that seeks to create a balance between the interests of rights holders and Internet service providers. Rights holders want to ensure that if an infringement is brought to their attention, it can be swiftly rectified with the offending material removed. On the other hand, service providers are adamant that it is impossible to monitor the Internet for content. Liability for intermediary service providers is contained in Articles 12 to 15. This exonerates the service provider from liability for mere conduit (Article 12) or caching (Article 13) provided that the service provider does initiate the transmission, select the receiver of the transmission and does not select or modify the information. Article 14 exonerates the service provider from liability for


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hosting provided the provider has no actual knowledge of illegal activity and is not aware of facts or circumstances from which an illegal activity is apparent, or upon gaining actual knowledge acts expeditiously to remove or disable such information. Article 15 makes it clear that there is no general obligation actively to seek facts or circumstances indicating illegal activity. However, Member States may impose obligations on intermediary service providers to inform competent authorities of alleged illegal activities.

The Distance Selling Directive 1997/EC Principle provisions The Distance Selling Directive, which has been implemented by all Member States, has made an important impact on Internet sales to consumers. The object of the Directive is to harmonise Member States’ laws on contracts between suppliers and consumers for goods and services concluded at a distance as part of a sales or service provision scheme. It applies to most contracts entered into as a consequence of an organised distance sales or service provision scheme – i.e. Internet as well as mail order, telephone selling, and selling through radio or television. It will not apply to classified advertising in newspapers and periodicals. THE MAIN PROVISIONS OF THE DIRECTIVE ARE:

•

Prior information: Detailed specified information must be given to a consumer before a distance contract is concluded. The information should include the identity of the supplier, the main characteristics of the goods or services, delivery costs where appropriate, the price of the goods or services including taxes, the existence of a right of withdrawal (where appropriate), and the arrangement for payment, delivery, or performance of the contract. If the consumer does not receive the information in writing (or in some other durable medium) at the time of solicitation, it must be confirmed in writing at a later stage. In the case of goods this is no later than delivery, except when the goods are ordered for delivery to third parties, in which case the supplier may send confirmation to the consumer at a later stage.

•

Cooling off period: The consumer is given a general right – subject to certain exclusions – to a 7 day cooling-off period during which he may withdraw from a distance selling contract without giving reasons

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and without penalty. The introduction of this significant right is viewed by many as a major obstacle to selling consumer goods on the Internet. If the price of the goods or service is fully or partly covered by credit granted by the supplier (or granted to the supplier by a third party) the credit agreement is cancellable, without penalty, if the consumer exercises his right of withdrawal. •

Delivery: The supplier must deliver the order within a maximum of 30 days from the day following that on which the consumer forwarded his order to the supplier, unless the parties have agreed otherwise.

•

Fraudulent use of credit card: Member States must ensure that measures exist to allow the consumer to request cancellation of a payment where fraudulent use has been made of his payment and to be reaccredited with the sum paid or have them returned.

•

Use of distance communication: The prior consent of the consumer is needed when a fax or ‘automated calling system without human intervention’ (automatic calling machine) is used.

•

Governing law: Member States must ensure that the consumer does not lose the protection granted by the Directive by virtue of a choice of law of a non-EU Member State if the consumer has a ‘close connection’ with one or more Member States.

The Database Directive Introduction The European Parliament and Council have recognised that making databases requires the investment of considerable human, technical and financial resources while such databases can be copied or accessed at a fraction of the cost needed to design them independently. In order to redress this imbalance, they have issued a Directive30 (the Directive) which is now law throughout most of the E.U. This law is a very welcome addition to the welter of laws that emanate from Brussels, since it provides greatly enhanced protection to information, such as market research data which is held in databases. It also ensures that the maker of a database is properly paid if it is used by someone else.

30 Directive 96/9/EC of the European Parliament and of the Council


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GENERAL RIGHTS IN MARKET RESEARCH DATA

Before the Directive was issued, data may have been protected by copyright, and also by the law of confidentiality. The computer programs used in the making or operation of a database are protected by an entirely separate directive31.There is also a directive dealing with renting and lending databases32. These measures remain unaffected by the new Directive.

The new rights under the Directive SUI GENERIS RIGHT FOR DATABASES

The most important right created by the Directive is the so-called ‘sui generis’ right, which allows the maker of a database who can show that there has been qualitatively and/or quantitively a substantial investment in producing the contents (substantial investment) to prevent others from transferring the contents elsewhere or making them available to the public. The really significant aspects of this right are that it applies irrespective of whether the database would otherwise be protected by copyright or any other legal principle, and it is obtained automatically, without the need for any further steps, such as registration, to be taken. Further, the right can be transferred by way of a licence. HOW LONG DOES IT LAST?

The sui generis right begins to run when the database is completed, and expires 15 years from the 1st January of the year following completion. If the database is made available to the public during this time, the period of protection is extended to 15 years from the 1st January when the database is made available to the public. The law also recognises that databases are frequently updated and amended and provides that if the alterations result in the database being considered to be a substantial new investment, a new period of protection shall start to run. It follows that data which continues to be substantially updated will probably enjoy protection of the most recent version for approximately 15 years. WHAT ABOUT DATABASES CREATED BEFORE 1ST JANUARY 1998?

The Directive is retrospective, and provides that any databases completed on or after 1st January 1983 which fulfil the ‘substantial investment’ test on 1st January 1998 shall be protected until 15 years from the date of completion.

31 Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs 32 Council Directive 92/100/EEC of 19 November 1992 on rental and lending right

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COPYRIGHT IN DATABASES

The Directive also attempts to harmonise national EU copyright laws in so far as they relate to the selection and arrangement of databases. It provides that if an author makes an ‘intellectual creation’ by selecting or arranging the contents of a database (the ‘expression’ of a database), it will be protected by copyright. This copyright will attach solely to the selection or arrangement of the research data, and will not attach to the contents themselves. This is an important development of copyright, since previously copyright only attached to the contents of a database, rather than the methodology by which they were put together. This is often the hardest, most skilful, and time-consuming part. As stated earlier, this part of the law has no effect on the existing national and Community laws relating to copyright in the contents of databases. The owner of the copyright in the ‘expression’ of the database will have the exclusive right to reproduce, translate, adapt, and distribute it, among other acts. They will also be the only person able to authorise others to do so. HOW LONG DOES THE COPYRIGHT PROTECTION LAST?

The copyright in the ‘expression’ of the database lasts for the usual period of copyright, namely for 70 years from the date of death of the author of the work. The Directive again makes these rights retrospective by providing that if a database was created before 1st January 1998, and fulfils the ‘expression’ requirement on that date, copyright shall accrue. It does not specify the date from when the copyright should be deemed to run, but it is assumed to be the date of creation rather than 1st January 1998. INTERNATIONAL EXHAUSTION

An interesting point raised by the drafting of the Directive is whether the owner of sui generis rights or copyright in a database will lose those rights by selling the database, or permitting it to be sold, outside the Community (the so-called ‘international exhaustion of rights’ principle). In a landmark case, the European Court has held that in the field of trademarks, a similarly worded law does not create international exhaustion, thereby allowing, for example, manufacturers of branded clothes to sell their goods to distributors in the USA and then prevent these goods from re-entering the Community for sale on the ‘grey market’ at greatly reduced prices. By analogy, it would seem likely that the same interpretation would apply to the Directive.


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The effect of this is that an owner of sui generis rights or copyright in a database, who sells or allows another to sell their database in the Community will lose the right to control any resales of the database. If an owner sells or permits a sale outside the Community, they can probably legitimately restrict a purchaser from reselling the database in the Community.

Practical steps The effect of the Directive is that new rights are accorded to creators of databases. These rights are not registrable, and accrue without any action being taken. The most important steps to be taken to ensure that the rights are preserved, and can be used effectively against others, are to: •

keep records of when, how, and by whom databases are created and amended;

•

agree with the individual creating or amending the database in whom the rights will vest (if an employee, they will be deemed to vest in the employer);

•

contractually bind employees (and, where appropriate any third parties) to keep databases and their contents confidential;

•

protect computer software by passwords, encryption of material or other means; and

•

enter into carefully drafted agreements if others are permitted to see, use or alter the database or any part of it.

Conclusion Electronic Commerce is already revolutionising the way business is done. It is changing the way businesses, of all sizes, work internally and interact with their customers and suppliers. The opportunities to trade using the Internet are immense, whether business to business or business to consumer. Many national laws are applicable to trading on the Internet and they should be borne in mind by those engaged in e-commerce. Although there are a number of grey areas where it is unclear whether such laws will apply to e-commerce, it is safer to assume, insofar as practicable and commercially viable, that they will do.

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There are a number of initiatives at EU level which are in the course of being implemented into national laws, most notably the E-Commerce Directive. Those embarking upon e-commerce trade for the first time would be well advised to set up their practices and procedures to accord with this legislation, to avoid incurring adaptation costs when they are implemented. In fields such as advertising and marketing where there are currently no specific laws relating to the Internet, it is good practice to follow the international codes or guidelines that are available. Sellers may also wish to avail themselves of certain computer techniques to limit the categories of people with whom they may contract. The bottom line is that cyberspace is no paradise where no laws apply; businesses who contract on the Internet as they would when using any other means of communication are unlikely to go far wrong. This includes considering carefully the relevant laws that apply to their proposed contracts, and entering into detailed contracts which comply with those laws. Further information on European electronic commerce directives and policies can be found at: http://europa.eu.int/comm/internal market


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Chapter 8 Drafting agency and distribution agreements Introduction........................................................................................152 Types of arrangement .......................................................................153 Distributor and agent contrasted ....................................................153 Sole and exclusive agents contrasted..............................................154 Franchise ............................................................................................154 Commissionaire .................................................................................154 The two classic forms of agency ......................................................155 Tax issues ............................................................................................155 Competition law and agency agreements ......................................156 European law .....................................................................................156 Sale of goods by agents in the EU ...................................................160 Applicable law....................................................................................162 Who does the directive not apply to?..............................................162 Regime under the directive ..............................................................163 Rights and obligations ......................................................................163 Remuneration.....................................................................................164 Creation of agency agreements .......................................................165 Notice for termination.......................................................................165 National breach of contract provisions...........................................166 Non competition clauses...................................................................166 Damages and indemnity payments .................................................166 Practical points for agents and principals ......................................169 Sale of goods by agents outside the EU – relevant laws ...............170 Global overview of agency laws ......................................................171 English Common Law of Agency ....................................................174 Checklist of points to consider including in an agency agreement....175 Distribution agreements: type, form and key considerations ......175 Common clauses in distribution agreements .................................179 Competition law distribution agreements ......................................185 The Regulation applies to vertical agreements ..............................186 The exemption....................................................................................186 Guidelines...........................................................................................189 Practical steps ....................................................................................189 Laws of distribution around the world ...........................................190 Conclusion..........................................................................................192

Chapter 8 Drafting agency and distribution agreements

Introduction Most developed countries have their own domestic agency laws, which differ significantly. Those countries with civil law jurisdictions (such as most of those in continental Europe, Asia, parts of Africa and South America) have either included a series of specific agency law provisions in their Civil Code or enacted a separate Commercial Code which deals with commercial agreements, such as those of agency. Common law countries (such as England, USA, Canada (other than Quebec) and former British Commonwealth countries) have largely relied upon jurisprudence developed by court decisions, coupled with certain provisions found in sale of goods legislation. Within the EU, this changed as a result of the EC Commercial Agents Directive 1986, which required all countries to enact specific agency legislation. The Directive gave agents greater rights than existed previously under many EU national laws. In particular, it introduced a concept new to many domestic laws, namely, the right for the agent to receive a termination payment from the principal. Distribution law tends to be less codified or specifically legislated for than agency law in both civil and common law jurisdictions. Usually, there is no enactment dealing with distribution agreements, and the matter falls to be dealt with by general sale of goods legislation. There are no international conventions which relate specifically to agency or distribution agreements. However, the Vienna Convention 1980 and the Hague International Sales Conventions 1964 may be relevant to certain aspects of the international sale of goods pursuant to an agency or distribution contract if the parties are domiciled in countries which have acceded to any of these conventions. In view of the lack of global harmonisation, parties entering into an agency or distribution agreement should seek to agree at the outset which law will govern the contract and make reference to the relevant legislation, if any. Such an express

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8 DRAFTING AGENCY AND DISTRIBUTION AGREEMENTS

choice of law will not prevent the application of any mandatory laws of the country of domicile or operation of the agent or distributor. For this reason, local legal advice should ideally always be sought in those countries. Parties should also be aware that the competition laws of their own countries, and the countries where the agreement is to operate, should also be considered. This is particularly important when an exclusive distribution agreement is entered into. (See chapter 5).

Types of arrangement With the increase in international trade, more and more businesses are appointing agents overseas. The advantages of entering a foreign market in this way are that it does not usually involve a large initial expenditure, it is relatively flexible, and, perhaps most importantly, the appointment of a local agent means the company acquires knowledge and understanding of the way business is done in the particular country. By contrast, the establishment of a subsidiary company will usually involve greater expense and is a less flexible way of entering a foreign market.

Distributor and agent contrasted Distributor The principal appoints a representative to distribute his goods. The principal sells the goods to the distributor who then sells those goods on his own account. The distributor’s profit is the difference between the price at which he has purchased and the price at which he has sold the goods, less his expenses.

Agent The principal appoints an agent who then acts for and on behalf of the principal. The agent may enter into a direct contract with the buyer, or introduce the buyer to the principal. The usual remuneration of the agent is commission.


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Sole and exclusive agents contrasted Sole agent The principal is prevented from appointing another agent in the agent’s agreed territory. However, the principal may obtain orders direct from the agent’s territory and supply customers there without paying the agent commission on those orders.

Exclusive agent The principal is again prevented from appointing another agent in the agent’s agreed territory. However, the principal is also barred from taking orders direct from that territory, or if he does would have to compensate the agent.

Franchise The principal grants to a suitable party the franchise to produce goods according to the specification of the principal and often bearing the principal’s trademark. The principal will usually exercise strict control over the goods produced under the franchise, often requiring the franchisee to use specific ingredients or components and insisting on rigorous quality control.

Commissionaire A commissionaire is a person who acts in his own name for the account of a principal. The principal is continually bound to the commissionaire to deliver (through the commissionaire) the goods sold to the customer and the commissionaire is continually bound to the principal to remit the price received from the customer. No relationship is created between the principal and the customer. The customer does not have a delivery claim against the principal, nor can the principal sue the customer for the price. The commissionaire is remunerated by a commission paid by the principal. A commissionaire agreement is most commonly found in civil law jurisdictions.

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The two classic forms of agency Agents with authority to bind the principal An agent may be given authority to conclude contracts on behalf of the principal, although often limits will be imposed upon the value or quantity of orders which may be concluded. In this type of agency the agent has greater control over his remuneration (usually commission) for his efforts.

Introductory agents An agent may be given authority only to introduce business to his principal. The principal is then left to decide whether he accepts that introduction or not. As the agent is only entitled to commission on concluded contracts this is a less satisfactory form of arrangement from the agent’s point of view. However, after the principal has accepted the introduction and contracted, then the agent becomes entitled to the commission whether the principal performs the contract or not.

Tax issues Agency Where a principal appoints an agent to operate in another country, there is a risk that such appointment will constitute the creation of a ‘permanent establishment’ and the principal will be liable to taxation at the rates applicable in that local country on all the profit generated through that permanent establishment. This risk is reduced where there is a double tax agreement between the two countries based on the OECD model treaty.

Distributor Where the principal appoints a distributor who buys and sells on his own account, there is little risk of the principal being taxed by being decreed to have set up a permanent establishment in the distributor’s territory. The principal will thus be taxed on the profits of his trade with the distributor at his home tax rates.


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Commissionaire Where a commissionaire is appointed in a situation where there is an OECD model tax treaty in place, there is little risk of the principal being deemed to have constituted a permanent establishment and thus the commissionaire combines the low cost advantage of an agent with favourable tax treatment at home rates (assuming home rates are lower than in the agent’s territory). Thus, where practicable, commissionaires should be used where local tax rates are higher than home rates. The exception to this is where the goods sold are imported into the EU with a high customs rate. Here, disadvantages may arise as the customs value is taken as the price charged to the customer, not the net value of the goods after payment of commission to the commissionaire.

Competition law and agency agreements In the past where agents and their principals negotiated their agreements, they had to pay little regard, if any, to Competition law. Agency agreements were largely regarded as being outside its scope. This, however, changed as a result of: •

Changes in the European Competition law relating to agents that came into force on 1st June 2000; and

•

The United Kingdom having adopted a new Competition law with effect from end of March 2000.

Set out below is an overview of how Competition law may affect agency agreements. For a detailed analysis of Competition law generally, see Chapter 5.

European law Basic prohibitions The basic EU prohibitions on anti-competitive practices are contained in Articles 81 and 82 of the Treaty of Rome, which provide as follows: “Article 81(1) prohibits agreements or concerted practices between undertakings which may effect trade between Member States and which have as their objective or effect the prevention, restriction or distortion of competition within the Common Market.

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Article 82 prohibits the abuse by one or more undertakings of a dominant position within the Common Market or a substantial part of it insofar as it may effect trade between Member States.” The exemptions and comfort provisions detailed below apply only in respect of Article 81 (1). In practice, it is highly unlikely that an agency agreement will breach Article 82.

Minor agreements exempt By virtue of a Notice on Minor Agreements, agreements considered not to have an appreciable effect on competition are generally outside the prohibition of Article 81(1), provided they do not include certain prohibited hardcore restrictions.

Agency agreements – previous law In the past, agency agreements were thought to be outside the scope of Article 81(1). This is because the prohibition was not considered to apply to agreements between undertakings which form a single economic unit. For most practical purposes, principals and agents usually operate as one economic unit. A Notice issued in 1962 by the Commission set out non-binding guidelines on how to ensure that an agent was not an independent trader, and therefore an agency agreement was not caught by Article 81(1). In practice, most exclusive agency agreements complied with this Notice. This Notice was replaced by Chapter 2 of the Guidelines to the EU Vertical Restraints Regulation (see below).

Comfort from the Commission If there is doubt as to whether an agency agreement may have breached Article 81(1), comfort may be applied for from the Commission. The comfort applications can be lengthy and expensive. It is better, if at all possible, to ensure that agency agreements are drafted so as to comply with the law to obviate the need for such comfort.

Regulation applies to agents The Commission issued in 1999 Regulation No. 2790/1999 (the Regulation) on the application of Article 81(3) of the EC Treaty to categories of vertical agreements and concerted practices. This Regulation replaced the former Block Exemptions that related to specific types of agreement. It took effect from 1 June 2000, giving exemption from Article 81(1) to a wide range of ‘vertical agreements’,


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including, notably, agency agreements. This was an important development for agents and principals since the former non-binding, uncertain Notice on Exclusive Agents was replaced by a specific binding Regulation giving exemption to exclusive agency agreements drafted in accordance with its terms.

The exemption – parties not competitors The Regulation provides that the exemption shall be available to: a)

Parties who are not competitors; or

b)

Competing parties who enter into a non-reciprocal agreement where the agent has a total annual turnover not exceeding EUR 100 million.

MARKET SHARE

Having satisfied the ‘competitor’ requirement, the next point to consider is the market share of the relevant party. Generally, the market share held by the supplier must not exceed 30% of the relevant market on which it sells the contract goods or services. If the agency agreement contains exclusive supply obligations, the market share held by the agent must not exceed 30%. ANTI-COMPETITIVE OBJECTS

In any event, the Regulation does not exempt agreements which have certain anti-competitive objects. These objects are drafted in general terms and appear largely to cover restrictions found in distribution agreements. It remains to be seen whether the wording will be interpreted and strained to apply to agency agreements. NON-COMPETE OBLIGATIONS

The Regulation effectively outlaws the following non-compete obligations in agency agreements: a)

Any non-compete obligation which is indefinite or exceeds 5 years,

b)

Any non-compete obligation effective for more than one year after termination of the agreement.

As will be seen in the section relating to the Agency Directive later in this Chapter, the Agency Directive permits non-compete obligations for up to two years after termination. It is submitted that this conflict should be interpreted by allowing a non-compete clause only for up to one year after termination if the EU Competition law regime applies.

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Guidelines The Commission issued Guidelines as to how to interpret and apply the Regulation. The Guidelines state that the Regulation applies: •

To agency agreements where the agent has the power to negotiate and conclude contracts on behalf of the principal for the purchase or sale of goods or services.

•

Where the agent bears some of the financial or commercial risk in relation to the activities for which he has been appointed agent by the principal. This risk can be divided into two types. First, there are the risks which are directly related to the contracts concluded and/or negotiated by the agent, such as financing of stocks. Second, there are the risks related to market-specific investments, which are usually sunk if the particular field of activity is abandoned. Risks related to agency activities in general, such as the agent’s income being dependent on his success as an agent, are not material. The agent will be considered to bear a risk where, for example, he has to: a)

contribute to the costs related to the supply/purchase of goods or services including transport costs;

b)

make an investment in sales promotion such as a contribution to advertising budgets;

c)

keep his own stocks of products so that it cannot, for example, return unsold goods to the principal without charge;

d)

create and operate a sales and after-sales service or a warranty service;

e)

make market specific investment in equipment, premises or people;

f)

take responsibility to third parties for harm caused by the product sold (product liability); and

g)

take responsibility for customers’ non-payment of goods except for del credere guarantees.

The following restrictions on an agent, most of which are characteristic of the principal/agent relationship, or the circumstances set out below, will generally not be considered to be anti-competitive: •

Limits on the agent’s territory.

•

Limits on the customers to whom the agent may sell.

•

The price at which the agent must sell or purchase goods or services.

•

The terms or conditions of sale or purchase.

•

Exclusive agency provisions during the term of the agreement.


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Provisions restricting the agent from acting on behalf of competing principals during and after the term of the agreement concern inter-brand competition and may infringe Article 81(1) if they lead to foreclosure on the relevant market where the goods or services are sold or purchased. An agency agreement may also fall within the scope of Article 81(1), even if the principal bears all the risks, where it facilitates collusion. This may occur, for example, when a number of principals use the same agents while collectively excluding others from using these agents. It may also arise when principals use agents to collude on marketing strategy or to exchange sensitive marketing information between the principals.

Practical steps Principals and agents should review and keep under review their current and proposed agreements to ensure that they are not in breach of European Competition law. It should be remembered that the provisions of the Regulation do not affect agents’ rights under the EU Commercial Agents Directive.

Sale of goods by agents in the EU EC Directive 86/653 18 December 1986 (the Directive) All EU Member States had to implement legislation to accord with the EC Commercial Agents Directive 86/653. National legislation of Member States had to apply at least to contracts that came into force after 1 January 1990 and applied to all contracts in operation by 1 January 1994 at the latest. The Directive was adopted in 1986 after some 10 years of discussion. Its purpose was to harmonise the laws of the Member States. It sets out basic rules regulating the main aspects of an agency contract. As a result of the Directive, many important terms are automatically implied into an agency agreement, irrespective of how the agreement is drafted or the terms privately agreed between the parties.

The English Commercial Agents (Council Directive) Regulations 1993 S1 1993 No 3053 (the Regulations) These Regulations gave effect to Directive 86/653 in England, Wales and Scotland on 1 January 1994 thereby bringing about substantial changes to English Agency Law. Separate regulations in similar form apply to Northern Ireland.

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Legislation in other EU countries Every other EU country has now enacted legislation implementing Directive 86/653 and under the EEA agreement which came into full force on 1 January 1994 the terms of Directive 86/653 came into force in Iceland, Norway, Sweden, Finland and Austria. These national laws are not identical. This is partly because the Directive allowed Member States certain options when drafting implementing legislation and partly because certain countries have not completely accurately transposed the Directive into their national laws. For this reason, the law of agency is still not completely harmonised within the EEA, and the parties should carefully consider which law will apply to their agreement.

Who does the directive apply to? AGENTS DEALING IN GOODS

Self-employed intermediaries who have a continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal) or to negotiate and conclude such transactions on behalf of, but not in the name of, the principal subject to certain specific exclusions. AGENTS WHOSE ACTIVITIES AS AGENTS ARE ‘PRIMARY’

The Directive allowed Member States to provide, if wished, that it shall not apply to those agents whose activities are considered as secondary by the local law. For example, Great Britain took up the option and provided in the Regulations that they shall only apply to agents whose activities as agents are ‘primary’, that is to say: •

the business of the principal is the sale or purchase of goods of a particular kind and the goods concerned are such that: –

transactions are normally individually negotiated and concluded on a commercial basis and

–

procuring a transaction on one occasion is likely to lead to further business in the goods with the customer in future or to transactions in the same geographical area or among the same group of customers

•

accordingly it is in the commercial interests of the principal to develop the market in those goods to appoint a representative to such customers with a view to the representative devoting effort, skill and expenditure from his own resources to that end.

The Regulations contain in a Schedule further detailed provisions for ascertaining whether an agent’s activities are ‘primary’ or ‘secondary’.


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Applicable law It is open to the parties expressly to agree upon a choice of law in the agreement. Provided the chosen law is one of an EU Member State, that choice will usually be valid as between EU principals and agents.33 Insofar as no express choice of law is made, the activities of commercial agents in Great Britain are regulated by the Regulations. In each other EU Member State, the law of that country applies the Directive to contracts entered into for agents to act in that State. Irrespective of whether there is an express choice of law or not, the mandatory laws of any country connected with the agreement may override the principle governing law of the contract in certain specific instances in order to protect one of the parties (usually the agent). For example, the appointment of an agent in Italy will be invalid if the agent has not registered itself with the local commercial Registry.

Who does the directive not apply to? Excluded types of agents: •

Agents for the supply of services.

•

Unpaid agents and agents on commodity exchanges.

•

Agency agreements regulating the activities of principals and agents outside the EEA.

It follows that, for example, an agency agreement governed by English law in respect of an agency to be carried out in a non-EU country will be made subject to the English common law in respect of agency agreements. The terms of the Directive as implemented by the Regulations will not apply unless the parties specifically incorporate them into the contract. General principles of the laws of agency from an international, non-EU perspective are considered later in this chapter.

33 This point was clarified in relation to the choice of the law of any part of the United Kingdom where the agent’s activities are carried out elsewhere in the EU by the Commercial Agents (Council Directive) (Amendment) Regulations 1998 (S.1.1998 No.2868). These amending Regulations provide that such a choice should be upheld provided that the law of the other Member State so permits.

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Regime under the directive The Directive, which was largely modelled on pre-existing German agency law, brought about significant changes to certain EU national laws. For example, from an English law perspective, the position for agents vis-à-vis their principals became considerably more favourable. In other countries, such as Italy, where agents already had very strong rights, almost akin to that of an employee, the Directive reduced those rights. The Directive introduced a number of detailed provisions which must automatically apply to all agency contracts within its scope, whatever their terms say. There are also several optional provisions, which the parties may agree to include. The effect of the Directive is that agency agreements within the EEA are more regulated, and the parties have less freedom to negotiate their terms than previously. The most significant areas of regulation are the payment of commission and a sum on termination. These, together with the other main articles of the Directive, are considered below. References to articles are to the articles of the Directive.

Rights and obligations Duties of the agent Article 3 provides that the duties of the agent are: •

generally to look after his principal’s interest;

•

to act ‘dutifully and in good faith’;

•

a positive duty to make proper efforts to negotiate such business as his principal has entrusted to him; and

•

to communicate all necessary information to his principal and to comply with his reasonable instructions.


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Duties of the principal Article 4 provides that the duties of the principal are: •

to provide to the agent the necessary documentation and information for the performance of the agency contract;

•

to notify the agent as soon as it is anticipated that the volume of business will be significantly lower than the agent could normally have expected; and

•

to inform the agent of his acceptance, refusal and any non-execution of the business the agent has arranged.

This would require a principal to keep the agent informed of any omissions on his part in completing a transaction. NB: Articles 3 and 4 are mandatory and cannot be excluded.

Remuneration Articles 6-12 deal with the agent’s remuneration. An agent’s remuneration shall: •

be reasonable and not less than any local minimum remuneration (Article 6);

•

be paid in respect of the agent’s concluded transactions AND transactions concluded with third parties whom the agent has previously acquired as a customer (Article 7.1);

•

be paid in relation to all transactions in the agent’s entrusted or exclusively34 designated area or with the agent’s entrusted or exclusively designated group of customers whether negotiated by him or not (Article 7.2);

•

be paid on transactions concluded after the agency contract has ended if it resulted mainly from the agent’s efforts during the agreement (Article 8);

•

be paid by apportionment between incoming and outgoing agents when it is ‘equitable because of the circumstances’ (Article 9);

34 The Directive allowed Member States to choose between commission paid in respect of ‘entrusted’ or ‘exclusive’ geographical areas or groups of customers. The British Government opted in the Regulations for the exclusive category (Clause 7(2))

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•

become due when the principal or the third party has or should have executed the transaction (Article 10);

•

not be paid only if the contract will not go ahead for circumstances for which the principal is not to blame (Article 11). Thus if a customer delays payment the principal will still be liable to pay the commission although if the customer fails to pay at all, the agent shall be obliged to refund any commission paid;

•

be specified in a statement provided by the principal who shall also make all necessary information and books available for the purposes of checking (Article 12).

N.B. Articles 6, 10, 11 and 12 are mandatory. Articles 7, 8 and 9 are optional.

Creation of agency agreements Articles 13 and 14 provide for the creation of agency agreements, and entitle each party to receive a signed contract. They also provide that after any fixed period the contract will become indefinite if the parties continue to perform it. The Directive also allows Member States to opt to provide that an agency contract shall not be valid unless evidenced in writing. In line with general common law principles, Great Britain has not chosen to make this provision in the Regulations.

Notice for termination Under Article 15 minimum periods of notice to terminate agency contracts of indefinite term are specified in all EU countries: one month in the first year, two months in the second year, and three months in the third and subsequent years. If the parties do not agree otherwise, the notice must expire at the end of a calendar month, (Article 15 (5). Member States had the right to introduce legislation providing for greater notice for longer contracts and Italy has provided that four, five and six months’ notice should be given in the fourth, fifth and sixth year of the contract respectively. Shorter notice can be agreed in Italian law in years 4, 5 or 6 provided the principal pays an indemnity.


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National breach of contract provisions The Directive does not affect existing Member States’ laws relating to immediate termination where one party fails to carry out its obligations (Article 16).

Non competition clauses Article 20 provides that a non-competition clause cannot be valid for more than two years after termination of an agency contract. Such a clause must be concluded in writing, and relate to the territory or group of customers allocated to the agent and to the kind of goods covered by the contract. However, if EU Competition law may apply, see the section relating to Competition Law and Agency Agreements above.

Damages and indemnity payments Indemnity or damage provisions in EC law35 Under the Directive Member States must legislate for an agent to receive either a lump sum indemnity (Article 17(2)) or compensation for damage on termination of the contract (Article 17(3)). This was a new concept to some Members States’ laws including Great Britain. The Regulations give parties the option to decide whether they want damages or indemnity payments to be made on termination of the Agency contract. If no provision is made, damages will apply. Under the law of all other EU countries, except France and Ireland, indemnity payments arise. In France, damages payments arise. Ireland has not implemented Article 17 and therefore agents do not have either a right to compensation or an indemnity. Under the Irish common law, an agent may have a claim for damages. Although Italian law implemented the indemnity system, the Commission has opened infraction proceedings against the Italian Government for incorrectly wording its law. There is also uncertainty as to whether the old system of collective agreements under Italian law continues to apply.

35 For a detailed analysis on the application of Article 17 in Member States, see the Report on the application of Article 17 of Council Directive relating to self-employed commercial agents (86/653/EEC) Doc. Com (96) 354 final 23.07.1998.

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Damage payments The Directive gives two examples of where damage may arise: •

a deprivation of any commission which proper performance of the agency contract would have earned; and

•

substantial benefit (in terms of goodwill) to the principal, or unrecovered expenses incurred by the agent on the principal’s encouragement.

Recent case law Since under English Law, the parties have the right to choose between an indemnity or damages, this has given rise to significant debate as to which method is more favourable to a principal. Recent case law has muddied the debate further. The first major case was Tunnock, where a Scottish Judge held that the agent was entitled to approximately two years’ commission by way of damages. The Judge was largely influenced by the French law that existed before the Directive was implemented into national French law, that provided for damages to be payable to an agent equal to approximately two years’ annual commission. This decision was criticised in an English High Court decision, Escada 36. Here, the Judge held that account should be taken of the nature of the particular case rather than by a tariff approach of awarding two years’ worth of gross agent’s fees. The agent was awarded approximately one year’s net commission. The decision of Escada has now been cast into doubt by a further recent English High Court decision, Ingmar v Eaton Leonard Technologies Inc 37. In this case, the Judge was more persuaded by the Tunnock approach and criticised the Escada case. The agent was awarded approximately two years’ commission by way of damages. It follows that an exporter appointing an agent under English Law wishing to have some financial certainty as to the amount that may be payable upon termination, is better advised to opt for the indemnity method of payment. It is hoped that greater clarity will be given by the Appellate Courts to the First Instance decisions.

36 Barett McKenzie & Co Limited v Escada (UK) Limited, The Times 15.5.01 37 Ingmar GB Limited v Eaton Leonard Inc, Case No: HQO No: HQO 101282 31 July 2001


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EU indemnity and damage payment exceptions An indemnity or compensatory payment is not payable where the agent: •

is guilty of repudiatory breach; or

•

has given contractual notice; or

•

has assigned the benefits and obligations of the contract to a third party with the principal’s consent.

It is however, payable where the agency contract is terminated as a result of the commercial agent’s illness or death.

Indemnity payments The Directive lists three conditions for entitlement to an indemnity payment: •

a contribution by the agent to the principal’s goodwill by either:

•

a significant increase to business with existing customers, or

•

the introduction of new customers;

•

substantial continuing benefits to the principal; and

•

that it is equitable in all the circumstances and in view of the commission the agent has lost.

The method of calculating such a payment is to take the average annual remuneration calculated over the preceding 5 years (or shorter period if the agent has not been engaged for 5 years), and is subject to a maximum of one year’s remuneration. An indemnity payment will still be due: •

if the principal is in breach of the agreement;

•

where the agreement has been frustrated;

•

where the principal gives notice terminating a fixed term contract, i.e. a break clause;

•

when a fixed term contract comes to an end by effluxion of time.

The grant of an indemnity does not prevent the agent claiming damages.

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Payment where the agent gives notice A compensation payment will be due notwithstanding the agent giving notice if termination is justified: •

by circumstances attributable to the principal; or

•

on grounds of the age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities.

Time limits for claims If the agent intends to pursue his entitlement to indemnity or compensation for damages he must notify the principal of this intention within one year following termination of the agency contract.

Practical points for agents and principals As a result of the developments in Agency law in the EU, agents and principals should be taking certain practical steps.

Review contracts Review all your current agency, representative and distribution agreements to ascertain whether they are actually agency agreements, and if so, consider: •

whether they are governed by English law, the law of another EU country or the law of a country outside the EU;

•

the terms of those agreements and the changes that have been brought about to those agreements if they are governed by the law of an EU country whose law has been changed by the Directive;

•

the cost of and/or benefit and consequences of termination of any existing agency agreements including the amount of any likely indemnity or damage payment that may be received and/or paid.

Re-negotiate contracts Redraft and/or renegotiate existing agency agreements to take into account the commercial effect of the changes in agency law. Consider the legal and/or commercial consequences of renegotiating existing agency agreements so as to turn them into distribution agreements.


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Sale of goods by agents outside the EU – relevant laws Most countries outside the EU have their own domestic agency laws, which differ significantly. When entering into international agency agreements, it may also be necessary to consider whether any international conventions may apply, such as the Vienna Convention 1980 and the Hague International Sales Convention 1964. In addition to domestic laws and international conventions, it will also be necessary to consider the Private International laws of all relevant countries. These Private International laws will determine which law will govern the contract and which courts may have jurisdiction to hear any dispute arising under the contract (see chapter 3). It should further be borne in mind that, notwithstanding that one particular law may be held to apply to the contract, pursuant to the relevant Private International Laws, certain mandatory laws of the country of domicile or operation of the agent may apply and override the general applicable law of the contract in certain instances. Mandatory laws usually relate to areas where it is thought to be in the public interest that agents be protected. For example, the requirement in certain Civil Law countries for an agency agreement to be registered with the local commercial Registry may be a local mandatory provision. The concept behind such a mandatory provision is that the public registration of the fact of the agreement puts all parties on notice that they are dealing with an agent and reduces the scope of third parties seeking to render the agent personally liable for contracts in fact entered into by the principal. A further strata of laws to be considered are the Competition Laws of the country where the agency agreement is to operate (see chapter 5). The Competition Law of the domicile or seat of the parties may also, in certain circumstances, be relevant.

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Global overview of agency laws The table below reflects how certain countries deal with specific aspects of agency law.

Country

Basis of law

Formalities

Main obligations of parties

Consequences of termination

Restraint of trade clauses

Argentina

Civil Law No specific provisions.

Need written agreement.

Principal: To pay commission.

Indemnity payable under the following heads of loss:

Invalid if period of restraint is ‘excessively long’.

Agent: To comply with Principal’s instructions.

• expectancy damages • expenses incurred by the agent particularly in reducing/ winding up its business • publicity and promotion expenses • diminution of client base • insufficient prior notice • goodwill • moral (pain and suffering) damages to repair damage caused to image of agent where agent is physical person.

Australia

Common law. No specific provisions.

Oral or in writing. Common to use power of attorney.

Principal: To pay commission, to indemnify agent if loss suffered during course of agency.

No indemnity or damages payable, provided no breach of contract.

Valid provided reasonable.

Agent: To comply with Principal’s instructions. To use reasonable care and skill.


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Country

Basis of law

Formalities




Brazil

Civil Law: Law No. 4-886/65, amended by Law No. 8.420/92.


Principal: May not amend the contract so as to reduce the average commission attained by the agent during the last 6 months.

If contract terminated without just cause, indemnity payable which must be at least 1/12 total compensation received by agent.

Valid. Enforceable only by claims for damages, not an injunction.

Agent: Due to an anomaly in the law, it is advisable to specify whether exclusivity is granted.

If just cause for termination, indemnity payable equal to monthly average commission multiplied by 1/2 number of months remaining on term of agreement.

Principal: To deliver the products on time, to pay commission, to provide technical support and to indemnify the agent for claims by third parties. Agent: To establish a market and solicit orders for the products, to assist in collecting payment, to assist with after-sales service and to inform the Principal of any trademark infringements.

No indemnity or damages if no breach. Can provide liquidated damages clauses specifying amount payable if no or inadequate notice given.

Almost always upheld provided for one year or less.

N.B. Federal and Provincial law.

Can be oral or written. In Quebec, if contain pre-printed standard clauses (such as standard terms and conditions) must be in French.

Common law

Can be oral or written.

Principal: To supply goods, pay commission and ratify acts of the Agent within the scope of the agency.

No indemnity or damages if no breach.

Void under S.27 Indian Contract Act.

Canada

Quebec: Civil Law Rest: Common Law.

India

Contract Act 1872.

Agent: To comply with Principal’s instructions, not make any secret profits or allow his personal interests to conflict with those of the Principal.

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Country

Basis of law

Formalities




Japan

Civil Law.


Principal: To honour obligations undertaken by the Agent.

Indemnity payable upon termination. Tends to be less than that paid upon termination of a distribution agreement.

Void if for unreasonable duration.

Agent: To promote sales of the products, collect payment and provide customerrelated information to the Principal.

Russia

Civil Law.

Written contract necessary.

Principal: To pay the Agent commission and indemnify him for expenses incurred whilst acting for the Principal. Agent: Act in accordance with Principal’s instructions.

South Africa

Common Law.

Oral or written contract.

Principal: To pay the Agent’s remuneration and to indemnify the agent in respect of losses incurred in the execution of his duties:

Damages payable if contract terminated by Principal. Agent may not terminate fixed term contract except if specifically allowed.

No indemnity or damages provided no breach of contract.

Agent: To perform the mandate, obey instructions, exercise due care, show good faith and act personally.

USA

Common Law (except Louisiana) Federal and State law.

Written or oral agreement.

Principal: To pay commission; to honour the obligations incurred by the agent within the scope of its authority. Agent: To increase sales to existing accounts, service products previously sold, and seek new customers.

No indemnity or damages unless breach of contract.

Depends upon state law, but usually enforceable if reasonable. In California, only enforceable posttermination if principal has purchased agent’s business.

Table 1: Overview of agency laws of certain countries outside the EU


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English Common Law of Agency As stated above, an agency agreement governed by English law in respect of an agency to be carried out in a non-EU country will be made subject to the English Common Law in respect of agency agreements. The Regulations will not apply unless the parties specifically incorporate them into the contract. The following points should be borne in mind when the English Common Law, rather than the Regulations apply:

Formation of the agreement Many agreements are validly concluded under common laws, such as English law, with a word or a handshake. Such arrangements work well until there is a dispute. A duty to act in good faith and to pay reasonable remuneration would be implied into such a contract. A comprehensive document detailing each parties’ rights and obligations is desirable. Such a contract would typically provide clarification of the terms of appointment, entitlement to commission, specify whether a minimum quantity of orders were to be introduced and would also provide for the consequences of termination.

Notice for termination Under English common law the question of the amount of notice required to terminate an agreement of indefinite term can be difficult to resolve unless it is specified in a written agreement.

Termination for breach Under English common law breach of contract will depend upon the circumstances and/or any written agreement. On breach of contract by one party the other has the right to sue for damages and may also have the right to treat the contract as repudiated and so cancel it. If the contract is frustrated both parties may be released from their obligations under it. There is no obligation for the principal to pay any damage or indemnity to the agent under a contract under English common law if the contract is terminated in accordance with its terms.

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Checklist of points to consider including in an agency agreement •

full name, address and registered office of parties;

•

main terms of contract;

•

sole/exclusive/non-exclusive agency;

•

goods or services the subject of the contract;

•

terms of contract and commencement date and extensions;

•

precise geographical area of agent’s territory and precise class of customers to be supplied;

•

scope of agent’s authority to solicit orders or to conclude contracts and limits to authority;

•

duties of agent;

•

restrictions on competition during the agreement or after its termination;

•

remuneration and expenses;

•

principal’s duties;

•

termination provisions including whether damages or an indemnity will be paid;

•

law, jurisdiction and language of contract.

Distribution agreements: type, form and key considerations The nature of the distribution agreement The appointment of a distributor is one of the most common forms of commercial arrangement entered into between business enterprises. A distributor is someone who takes title to goods supplied and resells them either to a retailer, another wholesaler or the final consumer. The profit made from the margin of difference between purchase and sale price is the distributor’s ‘remuneration’. The distributor is essentially an independent contractor. His actions do not create contractual relationships between the third party customer and the exporter.


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The agent acts as a channel of communication between the principal and the third party abroad. In a distribution arrangement, the principal has no contact with the third party purchaser in the overseas country. The distributor has rights of distribution with respect to the exporter’s goods in his territory. It is, therefore, of the utmost importance that the exporter’s contract with a distributor should make it clear that the distributor is not entitled to act for, on behalf of, or in the name of, the exporter. If in the hands of the ultimate customer, the goods proved to be defective, the customer would have a claim only against the distributor (unless the exporter extends a warranty). There may be a direct claim by the overseas customer against the exporter on the grounds of product liability and the wise exporter will insure against that contingency.

Suitability of a distributorship A distributorship is suitable for products of a standard type, normally produced in large numbers and without numerous variations to suit individual customer requirements. If the market is unfamiliar to the manufacturer, it may be preferable to appoint a distributor familiar with it and prepared to take the risk of operating as a principal within it.

Forms of distribution agreement Distribution agreements cover a host of contracts between a manufacturer or supplier and the distributors or re-sellers who are at different stages of the production and marketing process. The normal course of business is for the exporter to enter into a framework contract with the distributor and on the basis of that framework contract, to enter into individual contracts of sale. The framework contract will, for example, indicate the total amount of goods which the distributor will buy from the exporter each year and will also lay down the conditions of delivery and payment. In performance of this framework contract, the distributor will then place orders with the exporter who will in turn accept the orders and such individual contracts of sale will be made usually pursuant to the exporter’s standard terms and conditions. A distributorship may take any one of the following forms: SOLE DISTRIBUTION

Where a ‘sole’ distributor is appointed to sell products in a territory or to a customer group, it will be a condition of the governing agreement that no other distributor is appointed in that territory or for that customer group. However, the manufacturer will be entitled to sell the products in the territory or to that customer group.

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EXCLUSIVE DISTRIBUTION

In an exclusive distributorship the manufacturer is precluded from selling the contract goods direct to the territory or the customer group and may not appoint another distributor to do so. NON-EXCLUSIVE DISTRIBUTION

A ‘non-exclusive’ distributorship allows the manufacturer to sell directly and to appoint further distributors within the territory or to the customer group of the non-exclusive distributor. SELECTIVE DISTRIBUTION

Selective distribution agreements are those in which a network distribution system is established through outlets that meet certain minimum requirements as regards premises, ability to provide proper sales and after-sales service, levels of staff training etc. Selective distribution agreements are often used for hi-technology goods where specialisation is important. EXCLUSIVE PURCHASING

Exclusive purchasing agreements are those in which the distributor or re-seller agrees to purchase certain goods for re-sale only from the supplier.

Principal considerations In preparing a distribution agreement, the principal considerations will include: PROBATIONARY PERIOD

It is desirable to provide for a probationary period of say three months to one year in order to see whether the distributor will make full use of the rights granted to him. TERMS OF SUPPLY AND PAYMENT

Consider who will deliver, when does risk in the products pass, the method of payment, the general terms of sale. SALES PLANS AND TARGETS

Consider what targets to set, when to review them, what happens if they are not met.


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CUSTOMER SUPPORT AND SALES PROMOTION

Consider what stock should be held, quality control and product liability issues, sales literature and marketing, and the training of distributors’ personnel. ADVERTISING

Consider whether the supplier is to provide advertising material and, if so, which of the parties should take responsibility for ensuring that it complies with local law and standards. INTELLECTUAL PROPERTY AND CONFIDENTIALITY

Consider protection of trade secrets, confidential information, know-how, trade names and marks, copyright and design rights. DURATION OF AGREEMENT

The agreement may be for an initial probationary period of say three months. Thereafter automatically annual renewals provide both parties with certainty, but not too onerous a long-term commitment. DEFINE THE PRODUCTS

Consider whether products should be defined generically, in which case new products will be included, or by reference to specifications, in which case new products will only be included if the agreement is amended. DEFINE THE LIMITATIONS OF SALE

Consider whether the distributor’s scope is to be limited geographically, by reference to customer types or even a list of named customers. PRODUCT LICENCES

Some products, such as medicines, need to be licensed in the country of sale. It is usual for the distributor to be responsible for obtaining and maintaining all such licences. TERMINATION

Consider the notice period required to terminate the agreement. If no specific provision is made, according to many national laws, the contract is for an indefinite duration and can be terminated by reasonable notice. Under some laws, this period of notice may be deemed to be as long as twelve months.

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ENSURING THE AGREEMENT IS NOT ANTI-COMPETITIVE

This aspect is not always appreciated despite being of the utmost importance and is particularly important in the cases of exclusive and selective distribution agreements.

Common clauses in distribution agreements The following describes clauses which are frequently used in distribution agreements.

1. Statement of the parties to a distribution agreement This clause consists of the typical ‘heading statement’ stipulating the names of the parties to the distribution agreement and their respective addresses. The addresses are likely to be either the address of their registered office or their principal place of business. In exclusive distribution agreements, following each name, the respective parties will be designated as ‘supplier’ (or ‘principal’) and ‘distributor’.

2. Purpose of the Agreement – the appointment of a distributor This clause contains a statement whereby the principal agrees to appoint the distributor and whereby the distributor agrees to such appointment, subject to the terms and conditions of the contract. The appointment clause will state the purpose of the agreement, namely, that the principal grants the distributor a licence to distribute and sell certain defined products within a defined contract territory or to a defined customer group. In an exclusive distribution agreement, this appointment will be made on an exclusive basis with respect to the relevant territory or customer group.

3. Description of the goods which are the subject of a distribution agreement The clause identifying the products (or the product ranges) which form the subject matter of the contract (‘the contract goods’) usually makes the identification by way of reference to a schedule of goods. Identification of the contract goods may also be made by reference to all or some of the goods which sell under a certain trademark. Any rights which the principal reserves to discontinue manufacturing and supplying goods to the distributors, and any rights the principal seeks for requiring the distributor to deal in new products, should be stated clearly.


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4. The distributor’s geographical territory The relevant geographical territory in which the exclusive or selected distributor operates must be clearly defined. As with agency agreements, the territory may be confined to the precincts of a single town, be wholly included within, or entirely cover, the boundaries of a single country, or state, or an entire trading block such as the European Union. Furthermore, the distributor’s territorial sphere of operation may be defined by latitude and longitude.

5. The duties of the principal – supplier In exclusive distribution agreements, the principal agrees not to appoint any other distributor with respect to the geographical area. The principal will also agree to refrain from competing directly with the distributor within the relevant geographical area. The following obligations are likely to appear in an exclusive distribution agreement: •

The principal agrees to appoint all other distributors on a uniform basis. The principal agrees to supply the distributor with the equipment, knowhow, technical and support service, training, promotional and other literature etc which are necessary to enable the distributor to perform properly.

•

The principal agrees to supply the distributor with adequate stocks and spare parts. The principal agrees to maintain for a certain period after the termination of the agreement adequate spare parts and service facilities.

•

The principal agrees to act in good faith and with due diligence under the terms of the contract.

6. The duties of the distributor A general clause will usually require that the distributor acts in good faith and with due diligence under the terms of the contract. Distributors will be required to refrain from hindering in any way the sale of the contract goods within their territory, and may be prohibited from dealing with or being interested in (whether directly or indirectly) any competing goods or activity, without the principal’s advance consent. Such a prohibition may extend to operations in, and the active solicitation of orders, outside the distributor’s geographical area. Furthermore, the distributor may be required to refer to the

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principal all business enquiries which originate outside the distributor’s territory. Alternatively, a distributor will be able to sell to persons outside its own geographical area where the order is not solicited by the distributor. The distributor may also be prohibited from manufacturing or assisting in the manufacture of the contract goods or any part of the contract goods. The distributor will usually be prohibited from altering or interfering in any way with the contract goods or their packaging. Distributors will also be obliged to conform with the local laws of the territory in which they operate. The distributor may undertake to achieve certain sales targets for the contract goods. Such quantitative provisions are currently permitted in exclusive distribution agreements under EC Competition Law. The distribution agreement may require that the distributor must obtain all its stocks of the contract goods only from the supplier/principal. In selective distribution agreements, distributors may also be permitted to purchase the stocks from other authorised dealers within the distribution network. The distributors may be obliged to maintain at all times a certain minimum quantity of stock of the contract goods, and also full ranges of certain products. Distribution agreements may impose certain obligations upon the distributors as regards promotional activities and advertising. Qualitative requirements may be imposed on distributors, such as, for example, to maintain proper storage facilities. Finally, the distributor may undertake to indemnify the principal for any breach.

7. Confidentiality under the distribution agreement A distribution agreement would usually provide that confidential information as defined or specified in the agreement, especially that concerning industrial property rights as defined, is reserved to the principal and that the distributor shall only use, disclose, communicate, etc such confidential information in the proper performance of the agreement, and only where necessary. The principal’s advance express written consent may have to be obtained before any such disclosures can be made.


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8. Industrial and intellectual property rights The distribution agreement may specify that the distributor shall not register, use, or permit the use of, any industrial property rights owned by the principal without the principal’s prior consent. The use of intellectual property rights may also raise important issues regarding compliance with EU Competition Law.

9. Clauses prohibiting the distributor from engaging in any competing activity The distribution agreement may require that the distributor shall not engage in any activity which competes directly or indirectly (for example, through related companies) with the sale of the contract goods, both within and outside the distributor’s geographical territory. Examples of such prohibited competing activities are discussed in point 6 above. A related clause which applies after termination of the agreement, namely a restraint of trade provision, is discussed in point 10 below.

10. Restraint of trade clauses A restraint of trade clause may be imposed to prevent the distributor from competing with the principal for a prescribed period following the termination of the agreement. In the United Kingdom, the validity of the restraint of trade agreements will be ascertained under the relevant common laws. In essence, a restraint must be no more than is necessary to protect the principal’s legitimate interests.

11. Records of inspection and communications The distribution agreement usually contains clauses requiring the distributor to maintain for a certain period records of sales and the customer’s identity. The principal may also insist on receiving reasonable rights to inspect the distributor’s records. The parties may formally agree on the appropriate channels and methods of communication of such information.

12. Duration of the agreement and periods of notice of termination The distribution agreement may be concluded for a definite period, or for an indefinite period. In both cases, the required period of notice for a termination of the agreement must be specified. Such period of notice must, however, be reasonable.

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13. Termination of the distribution agreement The distribution agreement will usually provide that either party may summarily terminate the agreement, without prejudice to any right or remedy he may have against the other for breach or non-performance, in the event of any of the following: •

Breach by the other party.

•

The other party fails to comply with any of its duties under the contract and reasonable notice has been given requiring a defaulting party to comply.

•

On insolvency.

•

On assignment without permission.

•

One of the parties experiences a change in control.

•

One of the parties fails to comply with the relevant national law.

•

Other events which justify termination.

Usually, the agreement will provide that no compensation is payable in the event of justifiable termination. However, the laws of certain countries provide for an indemnity or damages to be paid even in the event of justifiable termination. (See Table 2). A distribution agreement often provides that the principal shall take back at a fair price the contract goods held by the distributor in the event of termination.

14. Warranties Clauses in the distribution agreement may govern any warranty that the principal gives to the distributor in respect of the contract goods. Additional clauses may govern the principal’s or the distributor’s obligations regarding warranties extended to end-users of the product. Usually, the principal or all distributors extend a warranty to all end-users irrespective of which distributor or retailer actually sold the specific product.

15. General conditions Certain general provisions may be included in the contract. These are as follows: •

The parties’ failure to enforce rights under the agreement shall not be considered to be a waiver of rights.


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•

Any legal or unenforceable provision of the agreement shall be severable and not impinge on the remaining clauses of the contract (particularly important where, for example, a clause may be held to be anti-competitive and illegal).

•

A statement that the distribution agreement constitutes the whole agreement between the parties and supersedes any prior written agreement between them. Any subsequent amendments to the agreement must be in writing.

•

A guarantee from each party signing the agreement that they possess the requisite authority to do so. This is particularly important in international agreements since the law of the place of incorporation of a company will govern the extent to which individuals in a company may properly be authorised to sign on behalf of the company.

16. Force Majeure Often, unforeseen circumstances arise after the creation of a contract which greatly affect the parties’ ability to perform under the contract. Especially in complex, long term contracts, it is virtually impossible to provide expressly for all the possible contingencies which might occur. A standard ‘force majeure’ clause in a distribution agreement provides that neither the agent nor the principal shall be liable for any failure to perform properly under the agreement if the reason for such failure is a result of an act of God, the act of government authorities, the elements of nature, default or interference caused by others, and other instances which are beyond the reasonable control of the defaulting party.

17. Arbitration clauses Distribution agreements often contain an arbitration clause stating that disputes arising from the contract shall be submitted to an arbitrator. The arbitrator may be identified in advance, shall be appointed by mutual agreement between the parties, or shall be appointed by an identified third party. The clause should also state that the arbitration procedure, which is to apply to the agreement, shall be the arbitration law of a specific jurisdiction. It is important to note that the enforceability of arbitration awards may be difficult. The arbitration award may be challenged by one of the parties. Therefore, legal action may be brought in order to secure enforcement, or to challenge the award. In such an event, many problems concerning suits in foreign jurisdictions can arise.

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Further, it is not always straightforward to enforce an arbitration award obtained in one country against assets situated in another country. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides an effective mechanism for enforcing such awards. It is recommended that international arbitration is only used as a dispute resolution method if the award is to be enforced in countries which have acceded to this Convention. (For further details see Chapter 4)

18. Jurisdiction and governing law It is essential, to reduce the risk of complex technical legal arguments, for clauses whereby the parties submit to the jurisdiction of the courts of a particular country and the applicable law be included. As mentioned in the Introduction to this Chapter, such choices are not entirely watertight and other laws may nevertheless have an impact on the agreement. Nevertheless, the inclusion of such clauses provides a much greater degree of certainty, particularly when overseas’ legal advice has been taken at the time of drafting the clause to ensure that they will be valid and enforceable according to the private international laws of the countries associated with the agreement. (For further details see Chapter 3)

Competition law distribution agreements Exclusive distribution agreements have been strictly regulated by European Competition Law. They are thought to be prima facie anti-competitive and contrary to Article 81 (1) of the Treaty of Rome. In the past, a Block Exemption Regulation EU 83/83 provided that if certain mandatory ‘white’ clauses were included in an agreement and certain prohibited ‘black’ clauses were not, the agreement would be exempt from the prohibition contained in Article 81 (1) of the Treaty of Rome. On 1 June 2000, Commission Regulation38 on the application of Article 81 (3) of the Treaty to categories of vertical agreements and concerted practices was brought into force (The Regulation). The Regulation has brought about important changes to Competition Law relating to vertical agreements and in particular exclusive distribution agreements (See earlier in this Chapter). For a more detailed analysis of Competition law generally, see Chapter 5.

38 (EC) No. 2790/1999 of 22.12.99


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The Regulation applies to vertical agreements The Regulation replaced, inter alia, the former Selective and Exclusive Distribution Agreements Block Exemptions. It took effect from 1 June 2000, giving exemption from Article 81(1) to a wide range of ‘vertical agreements’, that are defined as agreements between two or more parties which operate, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions of purchase, sale or resale of certain goods or services. This definition therefore includes a wide range of distribution agreements.

The exemption Parties not competitors The Regulation provides that the exemption shall be available to: a)

Parties who are not competitors; or

b)

Competing parties who enter into a non-reciprocal agreement where either: i)

the distributor has a total annual turnover not exceeding EUR 100 million; or

ii)

the supplier is a manufacturer and distributor of goods and the buyer is only a distributor.

Market share Having satisfied the ‘competitor’ requirement, the next point to consider is the market share of the relevant party. Generally, the market share held by the supplier must not exceed 30% of the relevant market on which it sells the contract goods or services. If the distribution agreement contains ‘exclusive supply obligations’, the market share held by the distributor must not exceed 30%. ‘Exclusive supply obligations’ are defined as any direct or indirect obligation causing the supplier to sell the goods or services only to one buyer inside the Community for a specific use or for resale.

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Anti-competitive objects In any event, the Regulation shall not exempt agreements which have certain anti-competitive objects, namely: a)

resale price restrictions – but recommended and maximum prices can be applied;

b)

the restriction of the territory into which, or of the customers to whom, the distributor may sell the contract goods or services. However, the following limited restrictions on resale are permitted: i)

the restriction of active sales into another distributor’s exclusive area or exclusive customer group, or a territory or customer group reserved to the supplier,

ii)

the restriction of sales to end-users by a wholesaler,

iii)

the restriction of sales to unauthorised distributors by selective distributors, and

iv)

the restriction of the buyer from selling components to the manufacturer’s competitors

c)

the restriction of active or passive sales to end-users by selective distributors operating as retailers;

d)

the restriction of cross supplies between distributors within a selective distribution system; and

e)

the restriction between a supplier of components and a buyer who incorporates those components, which limits the supplier to selling the components as spare parts to independent repairers not entrusted by the buyer with the repair or servicing of its goods.

Parallel networks The exemption can be withdrawn by the Commission where parallel networks of similar vertical restraints have an appreciable effect on competition within the European Community.


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Non-compete obligations The Regulation effectively outlaws the following non-compete obligations in distribution agreements: a)

most non-compete obligations which are indefinite or exceed 5 years.

b)

most non-compete obligations effective for more than one year after termination of the agreement.

c)

an obligation on members of a selective distribution system not to sell the brands of particular competing suppliers.

Competing undertakings The exemption only applies to vertical agreements between competitors if the buyers’ total annual turnover does not exceed EUR 100,000,000 or the buyer does not manufacture competing goods. It is noteworthy that the Regulation refers only to restriction of ‘active sales’ into exclusive territories or to exclusive customer groups, and not to ‘passive’ sales. The Guidelines which accompany the Regulation (see below) explain that passive sales should always be permitted to exclusive territories or customer groups. The Guidelines define ‘active’ and ‘passive’ sales as follows: ‘Active’ sales mean: i)

actively approaching individual customers inside another distributor’s exclusive territory or exclusive customer group by, for instance, direct mail or visits, or

ii)

actively approaching a specific customer group or customers in a specific territory allocated exclusively to another distributor through advertisement in media or other promotions specifically targeted at that customer group or targeted at customers in that territory, or

iii)

establishing a warehouse or distribution outlet in another distributor’s exclusive territory.

‘Passive’ sales mean responding to unsolicited requests from individual customers, including delivery of goods or services to those customers. General advertising or promotion in media or on the Internet that reaches customers in other distributor’s exclusive territories or customer groups, but which is a reasonable way to reach customers outside those territories or customer groups, are passive sales.

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It follows that, generally, every distributor must be free to use the Internet to advertise or to sell products. The Guidelines state that a restriction on the use of the Internet by distributors could only be compatible with the Regulation to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other distributor’s exclusive territories or customer groups. It would appear that this might be the case where a website is specifically targeted at reaching customers outside the exclusive territory, for instance, with the use of banners or links in pages of providers specifically available to those customers. Further, sending unsolicited e-mails to customers outside the territory would be considered active selling. The Guidelines state that an outright ban on Internet or catalogue selling is only possible if there is an objective ‘justification’. It will be interesting to see whether any such ‘objective justification’ is successfully pleaded. In any case, the supplier cannot reserve to itself sales and/or advertising over the Internet.

Guidelines The Commission has issued Guidelines on Vertical Restraints as to how to interpret and apply the Regulation. They are lengthy and detailed, and give considerable assistance in interpreting the Regulation. They are not, however, of legislative effect.

Practical steps Principals and distributors should review their agreements to ensure that they are not in breach of European Competition law. All new distribution agreements should be prepared to comply with the Regulation.


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Laws of distribution around the world As stated above, there are no international conventions or agreements which relate specifically to distribution agreements. Even within the EU, the matter falls to be dealt with by the national applicable laws. To this extent, distribution agreements are far less regulated than agency agreements. The table below shows, by way of example, an overview of distribution laws of certain countries around the world. From this, it is evident how divergent distribution laws are from one country to another. For this reason, it is particularly important to take detailed local legal advice when entering into an agreement under the law of an overseas country.

Country

Basis of law

Formalities




Argentina

Civil law. No specific provisions.


Principal: To furnish the goods in the quantity, time and manner specified.

No indemnity or damages payable, provided contract terminated in accordance with its terms.

Invalid if period of restraint is ‘excessively long’.

No indemnity or damages payable provided no breach of contract.

Valid, provided reasonable.

Distributor: to maximise sales of the products, including to provide good customer service.

Australia

Common law. No specific provision.


Similar to those found in English law.

N.B. If no notice period stipulated, courts may imply six or twelve months, or even longer

Brazil

Civil law. No specific provisions.


Distributor: Not to sell the products at a price lower than that specified by the Principal.

No indemnity or damages payable unless specifically provided for in the contract.

Valid. Enforceable only by claims for damages, not an injunction.

Canada

Quebec: Civil Law

Can be written or oral.

Rest: Common law.

In Quebec, if contain pre-printed standard clauses (such as standard terms and conditions), must be in French.

Principal: To deliver the products on time and to provide technical support.

No indemnity if no breach. Can provide liquidated damages clause specifying amount payable if no or inadequate notice given.

Almost always upheld, provided for one year or less.

N.B. Federal and Provincial laws.

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Distributor: to order the products regularly and to pay for them on time, to establish a market for the products and to provide after-sales service.


Country

Basis of law

Formalities




India

Common Law Contract Act 1872.


Principal: To supply goods and to set up a scheme of allotment with distributors if the commodity is in short supply.

No indemnity or damages if no breach..

Void under s.27 Indian Contract Act.

Indemnity payable upon termination. Tends to be more than that paid upon termination of an agency agreement.

Void if for unreasonable duration.

Distributor: To promote sales of the products, and to sell at a price no higher than that set by the Principal.

Japan

Civil Law.


Principal: Obligation to accept the order of products and guarantee the products. Distributor: To make payment for the products.

Russia

Civil Law.

Written contract necessary.

Distribution agreements classified as agency contracts. No specific provisions, therefore most usual for principals to contract under their own law.

Damages may be payable if contract terminated by Principal.

South Africa

Common Law.

Oral or written contract.

As agreed between the parties.


USA

Common Law (except Louisiana).

Written or oral.

As agreed between the parties.


Art 2 Uniform Commercial Code Federal and State law.

Depends upon state law, but usually enforceable if reasonable.

Table 2: An overview of distribution laws of certain countries


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Conclusion When considering entering into a distribution agreement, the most important point to be decided is the type of distribution agreement to be entered into: exclusive, sole, non-exclusive or selective. Unlike under the agency laws of many countries, most notably within the EU, the parties have a relatively free-hand when it comes to negotiating distribution agreements. The main constraint is ensuring that the agreement is not in breach of any competition laws. The parties usually enter into a detailed framework agreement setting out their respective rights and obligations. Distribution agreements written under a common law are likely to be more lengthy than those written under a civil law. This is because there is very little legal framework to rely upon and the parties must stipulate all the points agreed, rather than referring to specific legislation. This can cause a cultural difficulty during negotiations when one party originates from a common law jurisdiction and the other from a civil law jurisdiction, since the civil law party will criticise the document for being too long and the common law party will consider the document too short. Unfortunately, there is no easy answer and a compromise must be reached. In attaining such a compromise, it should be borne in mind whether the applicable law is the common law or a civil law and the contract should be tailored and balanced accordingly. The competition laws of all relevant countries should always be borne in mind, particularly when entering into exclusive or selective distribution agreements. A breach of these laws may give rise to substantial penalties and render the agreement, or at least certain clauses of it, unenforceable.

Bibliography •

International Encyclopaedia of Agency and Distribution Agreements by Agustin Jausàs, Kluwer law International 1999 and supplements.

•

Schmitthoff’s Agency and Distribution Agreements, Sweet & Maxwell, 1992.

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Chapter 9 International licensing agreements Introduction........................................................................................194 What may be transferred..................................................................196 Typical clauses....................................................................................201 Jurisdiction and applicable law........................................................202 How much does it cost? ....................................................................203 Computer software licensing agreements......................................204 The Software Directive......................................................................205 The Copyright Directive 2001/29/EC...............................................206 Databases............................................................................................209 Competition law.................................................................................212 Conclusion..........................................................................................214

Chapter 9 International licensing agreements

Introduction Technology may be transferred in a variety of ways. At one end of the spectrum, detailed technical information is disclosed pursuant to a tightly drafted Confidentiality Undertaking and Technology Transfer Licence. At the other end, the relevant technology may be discoverable purely by product examination. It is for this reason that the dis-assembling or de-compiling of computer programmes in object code, for example, is usually expressly prohibited. In most jurisdictions, including England and Wales, licence agreements are not the subject of specific legislation. They have evolved, in common with most other commercial agreements, as a result of practice, doctrine and jurisprudence. It follows that the parties enjoy a reasonably wide freedom to contract. However, this freedom is in most developed countries limited by Competition Law (see below). The transfer of technology may take one of two forms: a)

An assignment, being the most absolute form of transfer, whereby the title to the industrial property right is vested in the assignee; or

b)

A licence, whereby the licensee is permitted to exercise certain rights otherwise reserved to the licensor by virtue of the latter being the owner of the industrial property right.

This chapter will consider the following aspects of licensing agreements: a)

The transfer and licence of information technology,

b)

Specific points relating to computer software licensing agreements, and

c)

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Competition Law aspects of transfer of information technology.


9 I N T E R N AT I O N A L L I C E N S I N G A G R E E M E N T S

Why license? An owner of technology may decide to enter into a licensing arrangement for one or more of the following reasons: •

To enter new markets which the licensor might not otherwise be able to penetrate through direct sales, agency, distribution or direct investment;

•

To comply with local laws in developing countries that aim to expand local industry and reduce dependence upon imported products;

•

To obtain legitimate intellectual property rights overseas and to avoid their cancellation for local non-exploitation;

•

To obtain the benefits of the research and development activities of the licensee – this being the case where the licensee undertakes to license to the licensor improvements made by the licensee in the same technology; and

•

To generate profit.

The licensee may be interested in entering into a licence agreement for one of the following reasons: •

To avoid the costs of research and development and the resources needed to carry it out;

•

To benefit from the experience of a licensor with a proven record of success; and

•

To take the benefit of the name and goodwill of the licensor for the licensee’s own marketing efforts.

How to license In common with most commercial contracts, a licence agreement involves striking a balance between the inherently different interests of the licensor and the licensee. The greatest danger from the point of view of the licensor is that, by appointing a licensee, they are potentially creating a competitor. They will typically seek to protect their interests by restricted provisions, such as export prohibitions or bans on post-termination use. For the licensee, the dangers are there at the beginning. They will often have to spend substantial amounts on lump sum fees, royalties and start up costs. This may lead the licensee to insist on non-restrictive provisions in the agreement regarding, for example, the export of the licensed products and the right to use non-patented technology free of charge after the expiration of the contract term. This will be particularly the case where the licensee is based in a developing country.


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What may be transferred The rights that are transferred pursuant to licence agreements are generally intangible, albeit they may be embodied in tangible written instruments or products. They may be statutory rights, such as industrial designs, patents, and trade and service marks. Unregistrable rights, that accrue automatically, include copyright and ‘know-how’ (technical information and skills). It is vital to ascertain exactly which type, or types, of industrial property rights are to be licensed so that each aspect is set out in full in the licence agreement. Many licence agreements are ‘mixed’ licences involving the licence of a bundle of different, but associated rights. In an international context, it is also important to consider where those rights are registered or reside, and the laws that govern them (see below). This is because the licence needs to transfer the rights in accordance with the appropriate relevant laws.

Patents A patent confers on its holder a legal monopoly, for a limited period, in a commercial exploitation of the patented invention. The owner of a patent may prevent all others from making, using or selling the patented invention. Patents have traditionally been an important form of protection for technical inventions. A patent has to be specifically applied for. This process is frequently labour intensive and expensive and may take several years. Within Europe, it has generally not been possible to obtain a patent for a computer programme invention. Such inventions obtain protection by copyright as a result of their being considered to be literary expressions. This is not the case however in the United States where for several years software related inventions have been registrable as patents. After significant debate, it is now looking likely that the European Commission will follow the US lead. In July 2002, the Commission published an official proposal for a directive that will clarify the rules on obtaining patents for ‘computer-implemented inventions’. It is proposed that a computer-implemented invention is patentable on the condition that it is susceptible of industrial application, is new, and involves an invented step (i.e. it makes a technical contribution). A ‘technical contribution’ is defined as a ‘contribution to the State of the Art in the technical field which is not obvious to a person skilled in the art’. The directive will only create a general framework, and Member States’ patent laws will remain the basis for future developments. Within Europe, the law relating to patents is significantly harmonised as a result of the European Patent Convention. It regulates patentable inventions and the

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basic requirements set for patentability. According to Article 52 (1) of the European Patent Convention, a European patent shall be granted for any inventions that are susceptible of industrial application, which are new and involve an invented step. Further, in accordance with Rules 27 and 29, in order to be patentable, an invention must be of a technical character to the extent that it must relate to a technical field, be concerned with a technical problem and have technical features that can be defined in the patent claim. In view of the fact that patent applications frequently take a significant time to be processed, and once granted, protection is accorded retrospectively to the date of application, licences are frequently granted not only in respect of patent licences but also applications for patent as well as registered patents.

Industrial designs – EU Directive on the Legal Protection of designs Registered Designs protect the aesthetic uniqueness of a creation, rather than a technical invention. In order to obtain registration, it is irrelevant whether the object represents a work of art or is ‘attractive’ in the aesthetic sense. It is sufficient for the object to be unique, differentiating a particular design from a generally known shape, no matter whether it is attractive or not. The protection of the design, unlike that of a patent, is not an ‘absolute’ protection; it only covers the copying of the protected design. The European Commission provided a degree of harmonisation of national laws in respect of design rights by the Directive on the Legal Protection of Designs 39. THE DIRECTIVE

•

Defined what constitutes a ‘design’;

•

Established the criteria for protection (a design has to be new and have an individual character);

•

Fixed the duration of protection (minimum of 5 years and maximum of 25 years);

•

Fixed the scope of protection (the right holder has the exclusive right to use the design and to prevent any third party from using it);

•

Established limits to the design right (for example, it would not normally cover inter-connections between components); and

•

Established rules on the nullity of the registration of a design.

39 No. 98/71


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The UK has implemented the Directive by the Registered Designs Regulations 2001. However, the European Commission is proposing to take proceedings against ten Member States: Belgium, Germany, Greece, Spain, Luxembourg, The Netherlands, Austria, Portugal, Finland and Sweden for failing to implement the Directive. The European Commission issued the EU Design Rights Regulation 6/2002, that came into effect throughout the Community in March 2002. The Regulation established two rights: the Unregistered Community Design right, that came into being immediately, and the Registered Community Design right that needs an implementing regulation to become effective, expected in 2003.

Trade and service marks Within the EU, the protection of trademarks has been harmonised as a result of the Trademarks Directive.

How to protect your brand name A registered trademark is obtained only by registration of the brand name as a trademark at the appropriate national or international registry and the payment of the necessary fee. A patent agent is often engaged to make the registration. It is not generally possible to register a word as a trademark if it is the same as or very similar to a trademark which has already been registered. The word must be distinctive and not merely descriptive of the product. The safest course is to apply for registration before the product is launched in a new export market. If budgets or time do not permit, a manufacturer may be able to take advantage over a period of time of the law relating to unregistered trademarks (see below). However, those unregistered rights do not arise immediately and in any case are considerably weaker than the registered rights. The time to obtain a trademark registration varies from country to country, but generally will be between one and three years. The cost and fees are likely to be in the region of £1,500 per country per mark per class of goods registered. (If a brand name is used in relation to different types of goods, separate registrations will be needed for each application). There is an E.U.-wide system of registration of trademarks that co-exists with the national systems40. Administered from a central office in Alicante, Spain, a single trademark application may be filed for protection throughout the E.U., for renewable ten year periods. 40 By virtue of Council Registration 40/94 of 20/12/1993 on the Community Trade Mark, O.J. 1994 L11/1

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Registered trademarks in the EU The law relating to trademarks within the European Union has been made more uniform by the Trademark Directive 41. This Directive created a system for Community-wide registration and enforcement of trademarks. It sets out the criteria for marks to be validly registered for goods or services. The exclusive rights given to a trademark owner mean they can: •

prevent another party from using a mark that is identical or confusingly similar to their mark on identical or similar goods;

•

prevent the use of an identical or confusingly similar work on goods and services that are dissimilar to their own if their trademark has a ‘reputation’ in the Member State, and

•

licence these rights in whole or in part.

Copyright Copyright includes the exclusive right to control the work by making copies of it and by making it available to the public. This may comprise public performance, the right to distribute copies to the public and the right of public exhibition of a work. Copyright is an unregistered right that accrues automatically. In order to obtain copyright, there must be creativity and originality. Copyright does not protect ideas or general principles. It merely protects the expression of the idea. The law relating to copyright has been harmonised to a large extent by international treaties such as the TRIPS 42 and the Berne Convention43.

Know-how In contrast to registered patents, there are also unregistered rights in the form of trade secrets and know-how. This covers information, particularly of a technical nature, which is not known to the public or is not easily accessible to the public. Typically, any technical invention that fulfils the requirements for patentability, but in respect of which a patent has not been applied for, constitutes secret know-how.

41 Directive 89/104 of 21/12/1988, O.J. 1989 L40/1 42 Agreement on Trade Related Aspects of International Property Rights 43 The Berne Convention for the Protection of Literary and Artistic Works


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Although technical information and skills may be described in documentary form, it is frequently supplemented by oral information, demonstrations or training provided by the licensor’s experts (show-how). This form of know-how transfer may be provided for as part of a licence agreement (in which case it may be paid for separately), or form the subject matter of a separate agreement, in particular where professional experts are to provide such services. In the context of complex technology transfer transactions, the licensor may also provide management services. The licensor may also provide planning, research and development services. Indeed, in certain countries, the laws on transfer of technology require that a licence agreement sets out in considerable detail the particulars of technical services to be rendered and place the licensor under an obligation to render such services on reasonable terms.

Unregistered marks Trademarks or service marks that have not been registered will nevertheless receive limited protection under the laws of most countries as unregistered rights. In the UK, such ‘get up features’ are protected by the law of passing off. Under the laws of certain other countries, they may be protected by the law relating to unfair competition.

Name rights In addition to registrable and unregistered rights in trademarks and service marks, there will also be goodwill associated with the name of an enterprise. In a related field, there are also separate rights that accrue in relation to domain names. It is vital that businesses take steps to protect their business name separately in each of the fields of domain names, trademark law and company registration law.

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Typical clauses A typical licence agreement will contain the following categories of clauses: •

Boilerplate clauses, namely those found in most commercial agreements, such as provisions describing the parties, choice of law, settlement of disputes, notice and force majeure.

•

The clauses unique to intellectual property arrangements, namely those describing the subject matter of the agreement, the licensing of statutory and non-statutory intellectual property rights and the compensation based upon the use of such rights.

•

Clauses which reflect a balance between the conflicting interests of the licensor and licensee, as described above. The most contentious of these are usually: –

The desire on the part of the licensor to part with as little technology as necessary;

–

Each party’s access to, or ownership of, technological advances of the other;

–

Protection from the competitive skills of the other party or third parties.

Where a ‘mixed licence’ is to be entered into that covers several industrial property rights, the length of validity of each of those rights needs to be considered carefully. It is likely that the licensed rights will not all expire on the same day. For example, ‘know-how’ expires when it enters the public domain. Many countries’ laws prohibit agreements that make payments for invalid or expired rights. Ideally, a ‘mixed licence’ should be drafted so that the compensation is broken down and apportioned to each of the various industrial property rights. When one of those rights expires, it would then be relatively easy to make an appropriate deduction from the compensation paid. It should also be considered at what point the remaining part of the deal is of so little importance to the licensee, since all the important rights have been invalidated or expired, that they are given the opportunity to terminate the agreement at this point.


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Jurisdiction and applicable law As mentioned above, two of the standard clauses that should always be included in a licence of technology are jurisdiction and applicable law (See chapter 3). Article 22(4) of the Brussels Regulation 44/2001 provides that in proceedings concerned with the registration or validity of patents, trademarks, designs or other similar rights required to be deposited or registered, the courts of the Member State in which the deposit or registration has been applied for, or has taken place, shall have exclusive jurisdiction. Insofar as proceedings may be concerned with non-registrable industrial property rights and copyright, the Brussels Regulation allows the parties to choose a jurisdiction in the contract, which may be exclusive. It is therefore in the interests of certainty that an international agreement includes a validly incorporated jurisdiction clause. If there is no jurisdiction clause, the Brussels Regulation provides that a defendant may be sued in the Member State where he or she is domiciled. Further, in a contract claim, a plaintiff may opt to sue in the courts for the place of performance of the obligation in question. It is submitted that in a licence of technology, this will be the place where the licensee is to use the technology. This means that if the parties have not included a jurisdiction clause, or if for any reason it may not be upheld, it is important to state in the contract where is the place of performance. Failure to do so may result in licensors unwittingly submitting to the jurisdiction of their licensees. It is important to note however that many claims in relation to breach of intellectual property rights are founded in tort rather than contract. In this case, Article 5(3) of the Brussels Regulation provides that the courts for the place where the harmful event occurred or may occur shall have jurisdiction. This provision can give rise to difficulties in interpretation in the international context. For example, where does the ‘harmful event’ occur if confidential information, owned by a Swedish company, divulged to a licensee in Spain is then inappropriately disclosed to a third party in Portugal? Arguably, the Swedish licensor is harmed in Sweden, and also its business prospects may be harmed in Portugal. In practice, the European Court has interpreted ‘harmful event’ in the widest possible way to refer both to the place where the damage occurred and the place of the event giving rise to it. Accordingly, it seems that where the act occurs in one Member State and damage occurs in another, the plaintiff has the option of suing the defendant in the courts of either State, as well as the state where the defendant was domiciled.

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The question of which law governs a contract has been harmonised within the EU by the Rome Convention on the Law Applicable to International Sales of Goods 1980 (The Rome Convention). The Rome Convention adopts the following two principles in selecting the applicable law as follows: 1.

The law intended by the parties (i.e. an express choice of law clause is included); or, if none,

2.

The law with which the contract is most closely connected.

There is a rebuttable presumption that the law will be the law of the ‘characteristic performance’. This is the law of the place where the party who has to effect the characteristic performance has its seat or business. In a licence, the characteristic performance is effected by the licensor whose country’s law will therefore apply if none is otherwise agreed. It is noteworthy that the Rome Convention deals purely with choice of law in contract. As stated above, many claims for infringement of intellectual property rights may be founded in tort. There is no harmonisation at the EU level in relation to the law applicable to a claim in tort. It therefore currently falls to be determined according to the Private International laws of the relevant countries, which are often complex (see chapter 3)

How much does it cost? Typical licence agreements provide for a down-payment followed by running royalties. The down-payment is an advance payment made by the licensee to the licensor at the time of, or shortly after, the signature of the licence agreement. Certainly, in the case of exclusive licence agreements, such a down-payment is usually considered as indispensable. It is frequently difficult to determine the amount of down-payment. In technology areas where even vague statistical data relating to the cost of research and development are not available, down-payments often are determined on the basis of mere estimation. On occasions, the down-payment may be calculated rather more precisely by reference to a first component that reflects the cost spent by the licensor in protecting the intellectual property rights up to the date of the agreement, and a second component being an accumulated estimated royalty income equivalent to the first year of the product.


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Licence agreements typically then set out running royalty payments, which generally depend on the net turnover achieved by the licensee. Some agreements stipulate minimum royalties, that involve payment of a certain amount independent of whether the licensee has achieved certain sales or profits. They are particularly common in exclusive licences where the licensor wishes to have a measure of financial security since it will not grant another licence and is dependent upon the production and marketing abilities of the licensee.

Computer software licensing agreements Most information technology products comprise a variety of intellectual property rights. Typically, there will be hardware, software, databases and services.

Relevant Directives/Legislation Within the EU, the following Directives are relevant to software licensing agreements: •

The Copyright Directive 2001/29/EC.

•

The Software Directive 91/250/EEC.

•

The Database Directive 96/9/EC.

•

The Semi-Conductor Chip Directive 87/54/EC.

•

Unfair Terms in Consumer Contracts Directive 93/13/EEC.

Domestic Sales of Goods Legislation may also be relevant. This is because most countries’ laws consider software to be goods rather than services.

Copyright Copyright has traditionally been the main form of protection for computer programmes. A computer programme of reasonable complexity will be considered a literary work from the point of view of copyright law. As such, it is protected by copyright. The owner of the copyright in a work has the exclusive right to make copies of it. The nature of software is such that its mere installation (or being downloaded) on a computer is a reproduction of a copy of the work. Consequently, using software requires an authorisation from the rightholder.

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This also applies to making alterations to the software or any other similar act. The exclusive rights of a copyright holder are independent of, for example, the form or on what physical medium the programme is stored. As stated above, copyright does not protect ideas or general principles as such but only the original expression of the ideas and principles. The expression of a computer programme is, for practical purposes, the source code. The ideas, principles, design, concept and structure, which underlie any element of a programme, are not protected by copyright. It follows that copyright does not prevent the creation of a competing programme that uses the same ideas and performs the same functions. In the field of software, only the expression of a computer programme is protected by copyright, and this is, for practical purposes, the source code. The ideas, principles, design, concept and structure are not protected.

The Software Directive The Software Directive was issued with a view to harmonising existing legislation of Member States with regard to the protection of computer programmes. At the cornerstone of the Software Directive is the principle that computer programmes obtain protection on the basis of copyright. It is therefore only the expression of the programme and not the ideas and the principles which underlie the expression that is protected. The author of a computer programme is the natural person or group of persons who has created the programme. If a programme is created by an employee in the execution of his duties or following the instructions given by his employer, the employer is exclusively entitled to exercise all rights in the programme. The owner of the copyright has the following exclusive rights: •

The permanent or temporary reproduction;

•

The translation, adaptation, arrangement or alteration of the programme; and

•

Distribution to the public.

The licensee has the right to: •

Reproduce, install, use, run and store the programme, provided it is necessary for the use of the computer programme.


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•

Translate, adapt, alter the programme and correct errors, again provided these acts are necessary for the use of the computer programme.

•

Make a back-up copy insofar as it is necessary for that use.

•

Study, observe or test the functioning of the programme in order to determine the ideas and principles which underlie any element of the programme (i.e. limited reverse engineering).

•

Reproduce the code and to translate its form (de-compilation), if it is indispensable to obtain the information necessary to achieve the interoperability of an independently created computer programme with other programmes.

The Copyright Directive 2001/29/EC The Directive establishing pan-EU rules on copyright and related rights in the Information Society was adopted on 9 April 2001. It is an essential building block for the Information Society. The Directive is due to be implemented by Member States in national law by November 2003. The UK is behind schedule in implementing the EU Directive. So far no draft regulations have been issued. The Directive will stimulate creativity and innovation by ensuring that all material protected by copyright including books, films and music are adequately protected by copyright. It provides a secure environment for cross-border trade in copyright protected goods and services, and will facilitate the development of electronic commerce in the field of new and multimedia products and services (both on-line and off-line via, for example, CDs). The Directive harmonises the rights of reproduction, distribution, communication to the public, the legal protection of anti-copying devices and rights management systems. Particular novel features of the Directive include a mandatory exception for technical copies on the net for network operators in certain circumstances, an exhaustive, optional list of exceptions to copyright which includes private copying, the introduction of the concept of fair compensation for rightholders and a mechanism to secure the benefit for users for certain exceptions where anti-copying devices are in place. Adoption and implementation of the Directive will enable the Community and its Member States to ratify the WIPO Copyright Treaty on the protection of authors, and the WIPO Phonograms and Performances Treaty on the protection of performers and phonogram producers.

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Technical copies on the Internet The Directive provides an obligatory exception for service providers, telecommunications operators and certain others in limited circumstances for particular acts of reproduction which are considered technical copies. This was a controversial issue. There are many conditions to be fulfilled before the exemption applies. In particular, those acts of reproduction must be an essential part of a technological process and take place in the context of a transmission in a network. The Directive ensures therefore that those who place copyrighted material on the net and those who transmit or carry such material are protected.

Exhaustive list of optional exceptions There is a detailed exhaustive list of exceptions to the reproduction right and right of communication to the public. All are optional and therefore Member States may choose to apply any or all of these exceptions.

Fair compensation Fair compensation applies to three of the exceptions, namely reprography (photocopying), private copying and broadcasts reproduced for viewing or listening in certain social institutions. However, Member States are given flexibility in how to interpret this. In particular, in certain minor cases, there may be no obligation for payment or further payment. The precise form of such compensation (which may, but does not have to, take the form of levies on copy shops, sales of blank tapes and equipment, as exists in most Member States) would be up to the Member States to decide in accordance with their own legal traditions and practices. Member States would also have a degree of flexibility in their treatment of fair compensation for time shifting i.e. private copies made off the air from radio or television for the purpose of viewing or listening to the broadcast at a later more convenient time.

Legal protection of anti-copying devices and exceptions A balance has been struck to ensure that an exception (e.g. an act of reproduction or copying for illustration for teaching) can be made use of where a copyright holder also has in place an anti-copying device, for example, a digital tracker designed to prevent privacy.


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Rightholders have complete control over the manufacture, distribution etc. of devices designed to circumvent anti-copying devices. Rightholders must either voluntarily or by way of agreements with other parties have to provide those who would benefit from a particular exception, for example, schools, libraries in the case of teaching, with the means to do so. It will be up to Member States to ensure that such means exist. However, as far as private copying is concerned, the quality and quantity of private copying and the growth of electronic commerce all mean that there should be greater protection for rightholders in digital recording media (whereby unlimited numbers of perfect copies may be made rapidly). In certain limited cases, where rightholders have made the means available, private copying may be carried out.

Community exhaustion The Directive applies Community exhaustion and not international exhaustion for the distribution right. This is in line with previous Directives in the field of copyright. Therefore, once a copyright protected product such as a CD or CDROM is marketed in the Community by or with, the consent of the rightholder, the distribution right is said to be ‘exhausted’, i.e. there is no right to restrict further distribution in the Community. Parallel imports throughout the Community will therefore be permitted but the rightholder will retain some protection against parallel imports from third countries.

Relationship with the E-Commerce Directive The E-Commerce Directive and this Directive complement each other, as the Copyright Directive deals with aspects of copyright law whilst the E-Commerce Directive harmonises various legal issues relating to the functioning of the Internal Market. This Directive supplements the liability provisions of the E-Commerce Directive by confirming that injunctive relief i.e. the ability to stop infringing activity by court or other action must also be available to rightholders against intermediaries when their services are used by third parties to infringe copyright or related rights.

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Databases A database is a collection or compilation of independent works, data or other materials, that are arranged in a systematic or methodical way and individually accessible by electronic or other means. The database may comprise texts, sounds, images, numbers, facts and other data or materials. The European Parliament and Council recognised that making databases requires the investment of considerable human, technical and financial resources while such databases can be copied or accessed at a fraction of the cost needed to design them independently. In order to redress this imbalance, the Database Directive 44 was adopted, which is now law throughout most of the E.U. This law provided greatly enhanced protection to information, such as market research data, which is held in databases. It also ensures that the maker of a database is properly paid if it is used by someone else.

General rights in market research data Before the Directive was issued, data may have been protected by copyright, and the law of confidentiality. The computer programs used in the making or operation of a database are protected by an entirely separate directive 45. There is also a directive dealing with renting and lending databases 46.

Sui generis right for databases The Database Directive created a ‘sui generis’ right, which allows the maker of a database who can show that there has been qualitatively and/or quantitively a substantial investment in producing the contents (substantial investment) to prevent others from transferring the contents elsewhere or making them available to the public. This right applies irrespective of whether the database would otherwise be protected by copyright or any other legal principle, and it is obtained automatically, without the need for any further steps, such as registration, to be taken. Further, the right can be transferred by way of a licence. The sui generis right begins to run when the database is completed, and expires 15 years from the 1st January of the year following completion. If the database is made available to the public during this time, the period of protection is extended to 15 years from the 1st January when the database is made available to the public.

44 Directive 96/9/EC of the European Parliament and of the Council 45 Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs 46 Council Directive 92/100/EEC of 19 November 1992 on rental and lending right


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The law also recognises that databases are frequently updated and amended and provides that if the alterations result in the database being considered to be a substantial new investment, a new period of protection shall start to run. It follows that data which continues to be substantially updated will probably enjoy protection of the most recent version for approximately 15 years.

Copyright in databases The Directive also harmonised national EU copyright laws in so far as they relate to the selection and arrangement of databases. It provides that if an author makes an ‘intellectual creation’ by selecting or arranging the contents of a database (the ‘expression’ of a database), it will be protected by copyright. This copyright will attach solely to the selection or arrangement of the research data (i.e. the methodology) and not attach to the contents themselves. This part of the law has no effect on the existing national and Community laws relating to copyright in the contents of databases. The owner of the copyright in the ‘expression’ of the database has the exclusive right to reproduce, translate, adapt, and distribute it, among other acts. They are also the only person able to authorise others to do so. The copyright in the ‘expression’ of the database lasts for the usual period of copyright, namely for 70 years from the date of death of the author of the work.

International exhaustion An interesting point raised by the drafting of the Directive is whether the owner of sui generis rights or copyright in a database will lose those rights by selling the database, or permitting it to be sold, outside the Community (the so-called ‘international exhaustion of rights’ principle). In a landmark case, the European Court has held that in the field of trademarks, a similarly worded law does not create international exhaustion, thereby allowing, for example, manufacturers of branded clothes to sell their goods to distributors in the USA and then prevent these goods from re-entering the Community for sale on the ‘grey market’ at greatly reduced prices. By analogy, it would seem likely that the same interpretation would apply to the Directive. The effect of this is that if you are the owner of sui generis rights or copyright in a database, and you sell or allow another to sell your database in the Community, you will lose the right to control any resales of your database. If you sell or permit a sale outside the Community, you can probably legitimately restrict your purchaser from reselling your database in the Community.

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PRACTICAL STEPS

The effect of the Directive is that unregistrable rights are accorded to creators of databases. The most important steps to be taken to ensure that the rights are preserved, and can be used effectively against others, are to: •

keep records of when, how, and by whom databases are created and amended;

•

agree with the individual creating or amending the database in whom the rights will vest (if an employee, they will be deemed to vest in the employer);

•

contractually bind employees (and, where appropriate any third parties) to keep databases and their contents confidential;

•

protect computer software by passwords, encryption of material or other means;

•

enter into carefully drafted licence agreements if others are to see, use or alter databases or any part of them.

KEY ISSUES TO CONSIDER WHEN DRAFTING LICENCE AGREEMENTS

Pekka Takki47 identified the following short list of points not covered by the Software Directive or the Database Directive that need to be considered when drafting licence agreements: •

Defining the extent of the use. The licence may limit the use, for example, to designated equipment, designated users, named users, or to the amount of users (total amount of users or concurrent/simultaneous users).

•

The use may be limited with respect to the technical environment, such as to a specific operating system, database program, or to a specific type of hardware.

•

Perhaps the most important restriction concerns the limits of use with respect to the user organisation: if not otherwise agreed, only the original licensee may use the rights defined in the contract. The affiliated companies of the licensee, for example, do not automatically have a right to use the software or the database. Problems may arise if the original corporation is restructured or if some of the functions of the company are outsourced.

•

Related to the above, the transferability of the licence.

47 Notes to accompany a presentation on Software Licensing Agreements at the Hawksmere ‘Drafting Agreements to comply with EU Law’ November 2001, London


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•

Usually the licence agreement comprises only the right to use – not the possible services related to the software (such as installing and training). In many cases it would be in the licensee’s interest to pursue bundling of the related services into the same agreement, at least with respect to delivery and acceptance (and in the same overall price). On the other hand, the licensor may want to bundle the license with, for example, maintenance services. In this case the licensee may be tied to the licensor even if the license would be perpetual and fully paid.

•

Licensor’s liability for the programme, and in particular, for its fitness to the intended use of the customer.

•

Warranty, which more often than not, is in fact a form of limitation of liability.

•

Term of the contract, i.e. whether the licence is perpetual, or whether it requires recurring payments.

•

Termination of the licence.

Competition law Introduction Intellectual Property Rights confer upon their owners an exclusive right to behave in a particular way. It follows that there will always be a tension between Intellectual Property Rights on the one hand and Competition Law rules on the other that seek to restrict the operation of exclusive rights and open up markets in general. There is a further tension between Intellectual Property Rights and the rules relating to the Free Movement of Goods contained in Articles 28-30 of the EC Treaty. Licences of technology may fall foul of either Article 81 or Article 82 of the EC Treaty. If they may fall foul of Article 81, the following Block Exemptions or Regulations may be of assistance:

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•

The Technology Transfer Block Exemption 240/96.

•

Vertical Agreements Regulation No. 2790/1999.



THE TECHNOLOGY TRANSFER BLOCK EXEMPTION

The Technology Transfer Block Exemption exempts from Article 81 (1) certain bilateral licences of patents and know-how, including mixed licences. It lists certain ‘white clauses’ which normally do not infringe Article 81(1), but which are granted Block Exemptions if they do. There is also a list of ‘black clauses’ the inclusion of which will prevent the Block Exemption from applying to the licence. In the case of software licensing, this will only be covered by the Technology Transfer Block Exemption if the software licensing is ancillary to a licence of patent rights and/or know-how and contributes to the purpose of the patent/know-how licence.

Licensing agreements The European Commission has adopted a report to evaluate the Technology Block Exemption. The report is an analysis of the present application of the Block Exemption in relation to licences and intellectual property rights and contains a comparison of the US and Community approaches. It raises issues such as the treatment of software licensing agreements and licensing pools, which have increasingly become important for the promotion of new technologies. The report suggests that the Block Exemption should be extended to cover copyright, design rights and trademarks. It also advocates a more lenient approach towards agreements between non-competitors, where the parties are in a vertical relationship. The market power of the parties and the structure or the markets is also considered to be highly relevant to the analysis, following the trend set by the Vertical Agreements Regulation. Following further consultation with industry, consumer associations and interested parties, the Commission may propose new competition rules for technology transfer agreements in the second half of 2002.

Vertical Agreements Regulation As stated in chapter 5, this Regulation strictly allows exemption from Article 81 (1) to certain vertical agreements. The exemption also extends to ancillary provisions relating to the assignment or use of intellectual property rights by the buyer if they are directly related to the use, sale or resale of goods or services. The Regulation does not however, cover agreements which have as their main object the use or transfer of intellectual property rights.


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The European Commission has issued guidelines to assist in the interpretation of the Vertical Agreements Regulation. Although the guidelines are not binding, they are of considerable force. In particular, they state in relation to copyright 48: •

Obligations imposed by resellers of copyright goods on subsequent buyers not to infringe the copyright fall within the Regulation and are exempt

•

The sale of hard copies of software together with a ‘shrink-wrap’ licence (i.e. a set of conditions included in the package of the hard copy which the end-user is deemed to accept by opening the package) may be covered by the Regulation

•

Restrictions on copying, resale or the use of software installed on hardware on third party systems are generally within the Regulation

ARTICLE 82

Article 82 essentially prohibits the abuse of a dominant position by one party. In the context of licensing, the European Court of Justice has found there to be breaches of Article 82 where there has been a: •

Refusal by a dominant licensor to license any third party under certain conditions; or

•

Granting or refusal of licences under discriminatory or other abusive terms.

The remedies granted have been compulsory licensing and/or damages.

Conclusion Licences of technology need to be drafted in the light of the laws of Contract, Intellectual Property, E-Commerce and Competition. Within the EU, several significant steps have been made during the last decade to bring greater harmony to the domestic laws of Member States in these fields. Further, certain new laws that are specific to, for example, software licensing have been promulgated and are in the course of implementation by Member States. This is an important development due to the exponential growth in the granting of software licences over the past few years. The anticipated new Competition Rules for the application of Article 81 to licensing agreements expected shortly, are likely to mark another important development in the law in this area. 48 Guidelines paragraphs 39-41

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Chapter 10 Conclusion

Chapter 10 Conclusion Entering into international commercial agreements requires a broad range of skills. Negotiation skills, honed for the international arena, will be put to test at the outset. Questions of pre-contractual liability need to be borne in mind at every stage of the negotiation process. The most important aspect to be determined in any commercial agreement is the applicable law or laws. Certain other regulatory laws, such as competition law, may also apply if the transaction is to take place within a relevant trading block. The agreement may be regulated by certain specific laws, such as agency law. The other fundamental question to be resolved when entering into an international commercial agreement is where any dispute that may arise will be determined. Such a discussion needs to be raised sensitively when the parties are at the beginning of a commercial relationship and everyone hopes that the deal will be a success rather than result in a dispute. Currently, there is no global harmonisation of the rules relating to where a party may sue or be sued (i.e. jurisdiction). However, the proposed Hague Convention on International Jurisdiction and Judgments in Civil and Commercial matters heralds the prospect of a new era when a global set of rules relating to questions of jurisdiction will be available. This will be an exciting development for international business people and lawyers. The Hague Convention, in addition to determining jurisdiction, will allow for a global system of recognition and enforcement of judgments given in one jurisdiction in another jurisdiction. The procedure will involve the enforcement of a judgment by a second court without usually the need for the content of the judgment of the first court to be reviewed. If this proposal is adopted, as it is looking likely to be, it will result indirectly in a degree of harmonisation of the laws across the world. This is because, for example, an English court may, pursuant to the Convention, recognise and enforce a judgment given by an American jury in a product liability case awarding punitive damages against a producer of a defective product. The effect of the Federal Law of the United States will therefore be introduced ‘by the back door’ into England. The practical result of such universal recognition and enforcement must be that the diverging national laws relating to international trade will approximate with one another. A more harmonious body of international trade law can be only good news for international traders and is to be eagerly awaited.

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