Contracts such as research agreements, material transfer agreements and commercial licence agreements underpin the innovative, complex and dynamic collaborations between parties in the life sciences sector.
Even though contracts such as these do not always need to be in writing to be binding, there are a number of reasons why it is generally advisable for parties to enter into a written contract before embarking on a project – in particular to ensure certainty of terms and minimise the risk of disputes.
Certainty of terms
Agreements in writing provide a far greater degree of certainty over the terms of the contract than verbal discussions. At a practical level, the parties will want to be clear about what is being supplied, how much is due to be paid and when, the consequences of the parties not doing as they say and how the parties can exit the agreement.
There are many other provisions that parties usually look to agree, and certainty of terms applies just as much to what is included in a contract as what is excluded. Written contracts can include “entire agreement” clauses which make clear that the contract is limited to its written terms (and sometimes other agreed documents), usually with a view to excluding any other terms, whether written or oral, from the contract. This might then prevent a party to the contract from relying upon anything not written down, or indeed certain oral representations made between the parties.
Minimising the dispute risk
Ultimately, a written contract becomes a record of the agreed bargain between the parties. The clearer this record is, the less likely the parties will end up in dispute over the terms of their contract. For businesses in the life sciences sector, there are likely to be particular risk areas around the ownership of intellectual property rights between the parties and obligations relating to the protection of highly valuable confidential information.
Nevertheless, having a written contract does not guarantee that disputes between the parties will not arise. In some instances, the law also implies certain terms into contracts (some of which cannot be excluded), and the parties may not always be aware of these terms and their effect. This can be compounded in situations where the parties agree one thing in writing but act very differently in practice, or where an exchange of emails between the parties varies the contract terms or creates new ones.
Often therefore the intent behind the written contract is, where possible, to minimise scope for further debate on the contract terms, although there are a range of factors that influence how successful this might be, including the actual conduct of the parties.
Why might parties choose not to have a written contract?
Situations may arise in which a party considers it in its interests not to have a written contract in place. Lack of certainty of terms can work in a party’s favour in some situations, including those where the terms implied by law are preferable to those it may have attained in a written agreement.
An example of this is in relation to liability, where parties may have sought to limit their financial liability to each other in a written contract. Take away the written contract and the parties are left only with the limits and exclusions that the law provides – a position that may favour the buyer or customer. Parties may also dispense with a written contract because there are industry-standard terms that govern their relationship, more formal than a purchase order.
Avoiding using a written contract comes with a health warning as it is clearer to deal with the terms implied by law into the written contract itself. In any event, under English law some contracts must be in writing bind the parties, including certain types of corporate share transfers and guarantees.
The takeaway message therefore is a simple one: written contracts aim to provide greater certainty of contract terms, are likely to assist in the event that things do not progress smoothly and may also be mandatory in certain scenarios.