Key considerations for constructing good commercial contracts

The ever growing demand for efficient, sustainable, affordable homes has resulted in the public and third sectors seeking entrepreneurial ways to create innovative ideas to meet it. This can be through research or development of technology in the utilities, construction, renewable energies, telecommunications and information communication technology sectors.

Commercial Contract Intellectual Property Lawyer Scotland Housing Rights

Often, these innovations require collaboration with third parties (whether they be customers, suppliers, licencees or collaborators), to initiate, develop, deliver, manage, or supply content. They involve the use of parties existing Intellectual Property Rights (IPR) or the creation of new IPR in the content produced or delivered.

Intellectual property is a valuable commercial asset which may be used and exploited in various ways. Protecting your existing IPR and any right arising in created works appropriately all too often depends on careful project management and robust commercial contracts.

Contractual agreements of this nature will involve complexity, risk and the need to manage different interests. Their importance should not be underestimated – a solid commercial contract ensures you get what you need out of the project, know how it is to be delivered, and can respond to changing requirements and disputes effectually.

Building on solid foundations – the basics of commercial contracts

Here we look at the key issues to consider when entering into and negotiating commercial contracts with robust IPR provisions.

Structure

While it may be tempting to use another contract as a template or cobble together a contract from previous agreements (avoiding a lawyer at all costs), there are serious risks in doing so. Key provisions may be missed or inadequate - or worse unenforceable - particularly if you are unsure who actually created the template and whether it is up to date with current laws or applicable to your purposes and the risks of the proposed arrangement.

Understanding the 'value' from the outset

Setting aside adequate time at the start to consider the purpose of any project, and the following issues, will provide a robust foundation for negotiation of the contract terms:

  • what you are bringing to the table (personnel, know-how, IPR, assets and funding)
  • what the other parties are contributing
  • what you want to achieve
  • how the outputs will be used
  • timescales for delivery
  • the budget and value to your organisation

With regards to IPR, consider what intellectual property rights there are. What is the subject matter of the agreement and what does it consist of?

The project may include a variety of IPR, for example:

  • Know-how and trade secrets (for those personnel developing technology);
  • Patents for novel technology
  • Trademarks (for a name of the product which integrates that technology) or services developed;
  • Copyright (for software developed integrating the technology), or
  • Design-related IPR in the design drawings and copyright in the architectural drawings

All too often parties are reluctant to dedicate time at the initial stages, whether it is because they are unaware of the potential issues, are under tight timescales to deliver the project, or underestimate the strength of their own position and end up negotiating out of key points, just to get the deal done.

Due diligence can be beneficial to better understand the other party's motivations and needs in the negotiation process.

IPR ownership

The majority of commercial contracts will involve the use or development of new IPR of the parties. The position in respect of the ownership and exploitation of IPR arising as a result of the contract is sometimes overlooked and may restrict what you can do with the delivered or created content arising from the project.

You need to be clear about what is included and what is not. Key considerations include:

  • who actually owns the IPR? Is it owned outright or jointly with another party?
  • is the IPR used under a licence granted by a third party and if so what is the scope of the licence?
  • has any of the IPR been infringed by a third party?
  • do you want to own it outright, jointly or will a licence to use the IPR be sufficient?
  • in licence arrangements, you should also be clear regarding what rights you intend to grant or be granted with respect to that IPR, including: territorial range, type of use, duration of the licence and rights to sub-licence.

Whether it be the development or provision of software, websites, hardware or other IT services, parties to the contract should ensure the parameters of what is expected of each other should be clear and unambiguous. Additionally, there should be a clear understanding of:

  • what is provided, by whom
  • when this needs to be performed
  • what the outcome to be achieved is
  • how the outcome or deliverables are to be assessed or measured
  • the remedies available in the event of failures and breach
  • and what parties can do after the contract ends.

Without clear scope of work the chances of costly litigation and disputes will be much higher.

Changing goalposts

In the current climate, careful consideration of how changes to the technological, political or economic landscape will impact on your business requirements is necessary. Managing changes and risks that may emerge during the course of the project will be more cost-effective and conducive to achieving the desired outcome.

In the absence of regular review, break clauses, or continuous improvement obligations, there is a risk that the terms of the contract stop meeting the needs of the project over time which can impact on the desired outcomes being achieved and a breakdown of the relationship between parties.

It is therefore recommended to include:

  • Obligations to keep up to date with industry best practice or to adopt industry standards, and an obligation to regularly propose ways in which the services can be improved or delivered at better value; and
  • Robust governance and change of control mechanisms, to ensure issues are managed in response to changing business requirements, how those changes are introduced effectively and how any additional charges are calculated.

Too little, too late?

In practice, the push to sign a contract by a certain date without consideration of key terms regarding scope of work, key commercial issues and conditions means terms of key importance are left to be agreed after the deal has been signed. Adopting this approach carries a degree of risk, as the balance of power between parties can shift post-signature, resulting in the negotiation of less favourable terms, lack of clarity as regards service level requirements or milestones, pricing structure, and in some cases those key terms never being agreed or implemented.

From a legal and from a practical point of view, there should be clear process set out in the contract to agree the outstanding points with appropriate remedies if agreement can't be reached and what you need to do to ensure those changes are included within the contract terms.

Conclusion

The devil is in the detail, or lack thereof. If these issues are properly addressed in the contract then the contract is likely to be more productive and rewarding for all parties.

Whilst there is always a pressure to sign deals as soon as possible (particularly against artificial deadlines), investing some time before the contract to understand your needs and the contract terms - and involving legal input at an early stage in the process - can lead to a more cost-effective, satisfactory outcomes and maintain good relationships in the long term.

How can we help?

If you would like to discuss this, or any other related matter, please get in touch with a member of our team.