Intellectual Property

This article was written for Generics Web, for which I write a monthly column

Contracts : avoiding the pain

This month I've decided to write a different kind of article. I am hardly going to mention pharmaceuticals. There will be nothing at all that specifically relates to generic medicines, yet I hope you will find it interesting and useful. I would like you to tell me!

This article is for those of you who are involved with the business relations of your companies, and because of its nature and length, much is left out. Please do not take it as comprehensive legal advice.

I want to write about contracts, and how to agree and record them. You may think that contracts are for lawyers, but actually, all of us deal with them - in employment, in buying and selling, agreeing practices with other companies, conducting our business. All of that involves contracts.

Some companies have a policy that all contracts should involve lawyers - and I don't think any succeed. Almost inevitably, even if initially arrangements are formally recorded, variations occur, are welcomed or condoned, often without formal amendment to the document. In other companies executives have a policy of doing their damndest to avoid lawyers and formal documentation whenever they can, perhaps relying on relationships to make things work. Legal documents and good relationships should not be a contradiction, and I would like to offer some suggestions as to how to narrow the gap.

I am prompted to write this article because I have just been, dealing with YET ANOTHER badly drafted contract. In this case, it was a distributorship agreement which looked, on its face, quite well written. It was a perfectly valid contract, however, it failed to cover certain matters which were absolutely essential to the distributor. The manufacturer wasn't happy with it either - it was saddled with a deal which locked it into a price and duration which did not enable it to recover tooling costs. By the time I got involved the executives concerned were spitting at each other. The distributor had to re-negotiate, and achieve more flexibility, at costs which were 25% higher than those originally agreed, and for a duration which was several times longer. This provided it with a viable product, from which both parties could make money and avoided a situation which seemed likely to result in the receivership of one party, and substantial irrecoverable costs on the part of the other. Much of the pain, stress and lost sales could have been saved if the parties had done a good job of agreeing the contract in the first place.

With pharmaceuticals, the available market is usually big enough to make both parties happy. There is no point in entering into a contract unless the product or service which you are buying or selling is going to achieve a benefit for both parties.

Formation of Contracts

A contract is created when there is an agreement between two parties. Under English law, there has to be an offer and acceptance. All major terms have to be agreed. Minor terms may be implied by a course of conduct, what is normal in the business and others (e.g. that products are of merchantable quality, fit for the purpose for which they are sold) may be implied by law. If fundamental terms are not agreed (price, identity of goods, that kind of thing) then there will be no contract.

Binding contracts can be oral. Under English law, only contracts relating to land must be in writing. It is a common misconception that contracts have to be written in order to be binding. This is not so, but of course it is much easier to clearly identify the terms of a contract which has been recorded in writing. E-mails and other informal messages can be useful evidence as to the terms of a contract which has not been formally recorded.

In common law countries (England, USA), there is a great deal of importance on the literal wording of the contract. Civil law, which applies throughout Europe, and in many other countries, considers matters from a more philosophical viewpoint. Civil lawyers look at what was intended, rather than being limited by what was said. There are many advantages in this approach, and it can be less predictable - give less commercial certainty. Contracts made under civil law can be much shorter than those which are governed by common law.

What should you do in order to create a good contract?

Decide what do you want

Work out what you want, and ask for it. You may get it much more often than you expect. (A philosophy for life, as well a piece of legal advice!) Often, this is where contracts fall down. The matter may not be thought through properly, or one party may not ask for everything he wants, perhaps because he thinks he is more likely to get it if he asks later, or that it will be easier to agree a particular aspect of the transaction without lawyers. Possibly, but if you adopt this course of action, do it with your eyes open, knowing that you may not be able to agree what you want later on. Make sure that what you have agreed is comprehensive in its own right so that, as it stands, you have a contract that can be performed.

Simplicity and Clarity

When you have agreed a position with the other party, express it simply and clearly. You do not have to use legal language. Indeed, in my opinion, it's better if you don't. No Latin! What is needed is a clear document which those who are involved with the matter day to day can understand and use. A document which has to be taken to lawyers for a translation will be a source of expense and stress. The shorter the better, in my view. If you know that something is implied by the law which is to govern the contract, then you don't need to put it down in writing. If you are not sure, include it.

Governing Law, Disputes, and Choice of Forum

In contracts made between parties from different countries, it is very important to include a "governing law" clause specifying the law which applies to the contract. You may choose a legal system in the jurisdiction of one of the parties, or pick an unrelated jurisdiction. To the extent that you can, work out how you will solve problems at the time you write the contract. That will make any dispute far quicker and easier to resolve, and much less expensive. Different kinds of problems may arise within a contractual relationship, and if you can provide a mechanism for sorting these out without litigating, you may save much pain and expense. So for example, you can provide that disputes as to quality are referred, in the first instance, to a third party who you both trust, that financial queries are settled by an agreed accountant, and so on.

What courts, if any, will you use in case of dispute? Do you want courts that are quick, is it important that the courts have a knowledge of pharmaceuticals? Pick appropriately. Different legal systems have different strengths. English courts, for example, tend to be quick, skilled and reliable. They are highly regarded and may be persuasive in other jurisdictions. However, determining disputes before English courts is an expensive matter. Civil courts tend to be less predictable (because of the different manner of interpretation) may be slower, and in some cases, are less inclined to grant injunctions. However, there are many variations.

You may want your matter determined by arbitration, particularly if you want to keep facts confidential. Some forms of arbitration, for example ICC application, can be slow and expensive.

There are many different fora. Here in London we have a specialised arbitration court. Provided you are specific enough, and have arbitrators who consent, you can be very flexible as to how you run an arbitration.

You may decide that you want to mediate disputes. This can have many advantages and costs are certainly one of them. If parties need to think out of the box, look at flexible options. mediation can be a very good solution. The amount of preparation, and hence cost, which is necessary for mediation is likely to be far less than that required for court proceedings or arbitration - parties may be willing to agree matters which a court would require to be proved.

Mediation is particularly useful where a dispute involves a breakdown in communication, or emotional issues. Don't think that commercial disputes do not involve emotions! They do, and generally, there is no room for this aspect of the parties' conflict in court. Furthermore, dealing with emotional issues in court is a very expensive business. The kind of emotional issues which you may meet in a dispute involving pharmaceutical products may include, for example, the pride/arrogance of an inventor or proprietor of a patent, the refusal of a management team to admit its mistakes, an entrenched culture of "positive thinking" which is so strong that it flies in the face of logic, the need of one management team to assert its difference from previous management, the need of a party to show that it is meaner and more aggressive than the other. I have met all of these in the course of litigation for generic companies against innovators. I have seen disputes which have been fought at vast cost, and never should have been, and disputes which have been settled at the court door when settlement should have occurred months earlier. There are circumstances where acknowledging emotional issues can lead to a much faster resolution.

Often, originators do not settle with generic pharmaceutical companies, even when their legal case is poor, for one very good reason : profit. Stopping a generic product from coming onto to the market, even by a few weeks, may mean a great deal of money, and be commercially sensible even when a patent is untenable. In discussing contracts, I have picked a few issues, understanding of which I think would lead to less expensive, easier, commercial relationships. Complex pharmaceutical contracts are likely to involve both commercial personnel and lawyers and simple contracts may be agreed without lawyers - in both cases I believe that a greater understanding of the risks and benefits by all concerned would be useful. Let me know what you think, and do contact me if you want advice on your contracts!

Anna McKay, August 2005

Anna is an independent adviser on Intellectual Property matters to the pharmaceutical industry. She has studied in England and France and has conducted many cases for generic companies. She is a qualified mediator.

For more information on any of the above, contact me at:

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