Business contracts may be used to improve on the general law and the rights of the parties to the contract. In this feature, we discuss management of intellectual property rights and how better rights may be obtained in business contracts.
All businesses face a series of risks in the course of participating in a competitive market such as that in the United Kingdom. Every year market specialisation increases with companies filling market niches created by innovative products and services releases to the market the year before. The cycles continues endlessly.
Advisors of different sorts frequently look to pigeon hole the different types of risks into categories such as (1) strategic, (2) regulatory compliance, (3) financial or (4) operational. Risks may also be categorised as commercial or legal risks. Even the best legal advice cannot protect businesses from commercial risk; it is after all one of the incidents of doing business and competing in the marketplace. Just as competing in sporting events give rise to a risk of injury, so does competing in a commercial environment; in both cases not all losses arising from injury are recoverable.
One of the principal methods of managing legal risk and minimising commercial risk is by taking advantage of contracts, to (1) manage property rights and (2) reduce or exclude legal liability and in the case of businesses engaged in buying or selling products or services.
Contracts are legally binding agreements between the parties to the contract. Once the contract has been formed, the terms of the contract cannot be changed without the agreement of all the parties to the agreement. Many businesses use standard terms of business and insist that the business be conducted on the basis of the legal relationship setup by those terms. The practice of doing so introduces a greater degree of certainty, predictability and certainly standardisation into business relationships. Ideally the terms of business will adequately allocate both commercial and legal risk to the most appropriate party.
There are a variety of matters which are usually addressed in properly drafted contracts for supply of goods and services; other matters are suited only to contracts for supply of products are not relevant to contracts for the supply of services, and so tailoring of terms of business for the idiosyncrasies of the business is important. A business may have a relatively long customer lifetime, and look to enter into framework agreements to set up the overarching relationship, and thereafter reduce administrative overhead in the placement of orders by customers over the life the relationship; the orders would be governed by the terms of the framework agreement, thus removing the need to enter into formal contracts on each occasion. Other businesses may specialise in supplying goods or services on an ad-hoc basis. In long term contracts, there may be good reason to build flexibility into the agreement, to take account of changes in prices of materials, currency fluctuations that affect the prices of the goods or services supplied.
Properly drafted terms of business should specifically deal a number of matters to minimise ambiguity, including:
The stock in trade of many businesses is primarily protected by intellectual property rights. Intellectual property rights are by their nature restrictive rights. Rights owners are granted the power to prevent third parties using their intellectual property without their consent. When it comes time for materials in which IP rights subsist to be exploited, it is the law of contract that is called upon to permit use of materials, subject to the conditions of contract. Contract law plays a central and integral part of the managed exploitation of intellectual property rights, in distribution and agency arrangements. It is the property rights granted in those legally binding contracts that give value to the transaction; contract law is the device used to properly manage those rights.
Many businesses overlook the importance of registered trade marks to protect brands which uniquely identify the business and the products or services. Registered trade marks are a persuasive and powerful tool in a commercial context to warn another business off a deceptively similar trading name. In the absence of a registered trade mark, businesses are left to the law of unregistered trade marks. Although the law of unregistered trade marks is an incredibly flexible and adaptive means to protect brand names, an application of passing off is almost invariably more expensive to enforce against delinquent third parties due to the evidential burdens involved.
A common type business contract is non-disclosure agreements. Non-disclosure agreements are usually drafted to be legally binding and designed to impose restrictions upon information released to another person, pursuant to the terms recorded by the agreement. In the absence of a non-disclosure agreement, the discloser of information would be left with their rights under the general law to protect the information released from unauthorised disclosure or use. The general law requires a claimant must show that the circumstances of the case justify the court finding that the information (1) retained the requisite quality of confidence, (2) was imparted in circumstances importing an obligation of confidence, and (3) that the information has been misused. Establishing such circumstances requires meticulous preparation of evidence proving these elements. Thus in the vast majority of cases proving to the satisfaction of a court that confidential information has been misused is an onerous exercise.
Contract law simplifies this. If it were the case that a contract has imposed obligations of confidence between the parties, the discloser is not simply left with its rights at general law. The non-disclosure agreement imposes separate and independent rights to the general law, and indeed when properly drafted, may far exceed the rights that a claimant would otherwise be left with under the general law. As with other types of contracts, non-disclosure agreements may be framed to allow different types of uses of the information released – what those terms are rely upon what the parties intend to achieve.
When it comes time to make commercial decisions in respect to the risks are to be protected by contract, companies would be well advised to ensure that the contract accurately reflects the commercial intentions of the business. Failures to do so may have dire commercial and unforeseen legal consequences, and render the business injury commercially and legally difficult to recover from.
For business legal advice and more information on managing commercial risk and business contracts, contact us online or call us on +44 20 7353 1770.
