Contract – Illegitimate Code

IP Contract

I had reason to enter into an Intellectual Property (IP) contract recently between my company and another entity. After reviewing the standard form and making the necessary changes, both parties proceeded to sign the agreement in the presence of witnesses.

After that, I went to the tax office to get the contract stamped because that’s the normal thing to do with contracts. However, while I was there, I learned something new, which might interest other local start-ups especially with respect to IP issues.

It turns out that there is no need to stamp an IP deed of assignment.

According to Schedule 1, Item 32, Exemption (d) of the Stamp Act 1949, IP assignments are exempted from stamp duty. It’s the very last in a list of exemptions and is worded as:

Exemptions
(d) Transfer or assignment on sale of any copyright, trade mark, patent or any similar right.

So, the tax office was unwilling to stamp the agreement for me as it is exempted under the law.

What this means to most start-up companies is that you can easily and rather quickly execute IP assignment contracts, between the employees with the company, and between companies as part of normal commercial IP transactions.

I learn something new everyday.

Exemptions

In contracts, we will often find all sorts of exemption and exclusion clauses particularly for standard form contracts. However, the courts tend to frown on such instruments as they fundamentally remove certain legal rights that people enjoy. Therefore, there are a few important things that we need to remember about exemption clauses.

Again, I shall look at this through the lens of a start-up since I use similar language in many of my works.

Firstly, exemption clauses have to be notified to the person accepting it. This notification has to be sufficient. How this notification is done depends on several factors of course.

Brought to Attention
It was held in Sanggaralingam v Wong Kook Wah that it was not sufficient to merely display a notice to the customer up-front about the exemptions, but it was necessary to bring the attention of the customer to it. This can be done by using large bold blinking letters or simply mentioning it to the customer before they signed. The key point is that any exemption clause must be brought to the attention of the customer.

In terms of a web start-up, this means sticking the exemption clause clearly in a place where the customer can get to it. They must know that it exists and must be able to easily find it if they want to. So, sticking a big disclaimer page might be a useful first step of doing it.

Presumption of Knowledge
It was held in Parker v South Easter Railway that presuming that someone else has knowledge of the exemption is not right. Therefore, merely sticking up a large bold blinking sign board is not necessarily sufficient. It is also important to ensure that the customer knows of it.

In terms of a web start-up, this means that we cannot assume that the customer has access to the terms and conditions that we have stuck onto our website. We don’t need to care if they have actually read it, but we must ensure that they know of it’s existence, which leads us to our next point.

Not Read
It was established in L’Estrange v F Graucob Ltd that having signed a document, the excuse of not reading it cannot be heard, as long as there was no fraud or misrepresentation during the process. This is typically used by websites where a user cannot possibly proceed until they click on the “I Accept” and the “Next” buttons.

So, for all start-ups providing any sort of service that needs to be exempted from liability, it is essential that they get their users to sign through terms and conditions. Whether the user actually read it or otherwise is not essential in the law as long as the actual terms were provided up-front.

Other Issues
It was established in multiple cases including Thornton v Shoe Lane Parking that providing the actual exemptions after the contract was already formed, is pointless. This means that any exemption clauses must be brought to the attention of the customer before they become our customer.

It was also held in Curtis v Chemical Dyeing Co that misrepresentation can nullify the exemption clause. Therefore, it is crucial that all copies of the terms and conditions say the same thing. If there is any confusion with multiple versions of the clauses, there will be a case of misrepresentation.

Next, is a question of construction – whether the exemption clause having already been incorporated into the contract, is valid. There are four general rules for this.

Contra Preferentum
The first rule that will be applied to interpreting exemption clauses is the contra preferentum rule, which basically means against the preferred party. This means that any ambiguities in the exemption clause will be interpreted to be against the party making the exemption claim.

Negligence
Now for the ringer – negligence. It was held in Canada Steamship Lins v The King that if negligence is to be exempted, the clause must contain express language to that effect. This means that in order to exempt liability from negligence, it was necessary to include words such as “exempted from damages and losses including those caused by negligence” or similar.

However, the law in Malaysia has changed recently. An amendment to S.24(a)-(d) of our Consumer Protection Act now includes wording that classifies a term as unfair if it includes words that exempt negligence.

However, the new law goes into much more detail on examples of various forms of unfair contract. Reading the illustrations are really enlightening. It’s not just negligence that is considered an unfair term now, even unilateral alterations to terms without prior notice, is unfair!

Collateral Contract

My attempt at question 3 on terms and representations. This is a tough nut to crack. According to the question, S and T were in negotiations but certain terms were not included by T in the written contract. T claims that the Evidence Act would not allow oral terms to be included if a written contract is in place. The question is whether these statements are still legally binding nonetheless.

My gut instinct tells me that they have to be, but let’s look at the Law.

Oral Terms
Establish the 4-tests.

Parol’s Rule
The parol evidence rule prohibits a person from adducing oral evidence where the terms of the contract have been put into writing. This means that where a written document exists to record the agreement, the court will not allow the introduction of oral evidence to contradict the terms of the agreement.

The reason for this is established in Tindok Besar Estate S/B v Tinjar Co where it was decided that introduction of extra evidence that modify the terms of the agreement would open the floodgates to all manners of dispute and no agreement would be safe from being re-written in court.

Therefore, T is preliminarily right in telling S that those negotiated terms that are not included in the written contract cannot be introduced in court, if S were to bring the case to court – except that there are exceptions to the parol evidence rule that have reduced the effectiveness of S.92 of the Evidence Act.

However, in Tan Chong and Sons Motor Co v Alan McKnight it was decided that the rule only applied when all the terms negotiated had been reduced to writing. If some terms agreed to orally were left out, those terms could still be introduced as evidence.

Collateral Contracts
In addition, S.92(b) of the Act allows the admission of parol evidence on the existence of any separate oral agreement on matters where the document is silent and that are not inconsistent to it. This device is a collateral contract and is particularly useful where an oral statement is made which induced the party to enter into contract.

The oral contract is considered a separate contract but exists side-by-side with the main contract. Therefore, it does not violate the parol rule but is a work-around for the limited situation where the oral terms induced the party to enter into contract.

It was held in Kluang Wood Products S/B v Hong Leong Finance Bhd that the requirements for this are that there exists a representation that was intended to be relied upon and used to induce the party into signing the contract. Therefore, the representation itself must amount to a warranty, collateral to the main contract.

Therefore, the issue now is whether the representations made during the negotiations between S and T were relied upon and induced the other party into signing the contract and therefore exists as a collateral contract, side-stepping the parol evidence rule.

Summary
From this, it is quite possible that the representations made by T during the course of negotiations form a collateral contract and are legally binding. The rule to determine this depends on whether they were intended to be relied upon and used to induce S into signing the contract.

The question itself is not clear on this but this can be inferred from the insistence by S that T include those representations in the written contract. Those terms must have been important to S. Therefore, I would argue that the representations are legally binding in the sense that they exist as a collateral contract.