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License agreements and general principles of Finnish contract law

License agreements and general principles of Finnish contract law

Intellectual Property
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For drafting an IPR license agreement, the general principles of contract law applied potentially long time after the text has been finalized cause uncertainty as to the content of the contractual relationship. This uncertainty affects the content of the applicable law provision. If Finnish law is chosen as the applicable law, the parties generally have very broad contractual freedom to define the content of their contractual relationship. There is hardly any mandatory legislation applicable to commercial license agreements in Finland, and discretionary legislation exists only for very limited cases, such as the form requirements for the transfer of rights to modify the work in the context of a copyright license.

Although Finnish law does not contain explicit mandatory provisions for license agreements, general principles of contract law often significantly affect the parties' positions. The applicable principles include at least the principle of reasonableness and the subsequent potential of adjustment of contract terms, the principle of loyalty, and probably also the theory of expectations. Under Finnish contract law "adjustment" provides the courts with the competence to adjust or set aside a contract clause that is unfair or would lead to an unfair result. The conditions for application and legal effects of the adjustment and the principle of loyalty have been discussed quite extensively in case law and literature. Despite the amount of material available, the impact of the adjustment and the principle of loyalty on the rights and obligations of the parties to an individual license agreement is often difficult to define in detail at the negotiation phase. The assessment of the effects of the theory of expectations is further complicated by the fact that there is less case law and the comments in legal literature on the applicability of the theory are somewhat contradictory.

Principle of loyalty

It seems evident that adjustment and the principle of loyalty have an increasingly emphasized role in Finnish contract law. The basis of the principle of loyalty is taking the justified expectations of the other contracting party into account. The more dependent the parties are on each other, the greater their need for confidential cooperation. Thus, the degree of cooperation in the contract is also connected to the application of the principle of loyalty. Especially the risk-taking between the parties emphasizes the right to expect both to act with mutual respect and cooperation. The principle of loyalty can also serve as guidance in interpreting the terms and other obligations of the contract.

Theory of expectations

The theory of expectations can be seen as a specification of the principle of freedom of contract. According to the principle of freedom of contract, the starting point in contractual relationships is that each party is responsible for its own expressions of will and commitments. The theory of expectations complements this freedom with the idea that the parties have committed themselves to a contract assuming that the circumstances and other relevant elements of the contract are and develop as expected. The theory of expectations is applied especially to circumstances and factors not explicitly provided for in the contract. According to theory of expectations, a change or lapse of an expectation can result in the construction of the contract beyond or even in contradiction to the wording agreed between the parties.

The theory of expectations in the Supreme Court Decision KKO:2012:1

Differing views on the role of the theory of expectations in our legal system have been presented in Finnish legal literature. The argumentation of the Supreme Court in decision KKO 2012:1 strongly indicates the application of the theory of expectations. In its judgement the Supreme Court dealt with the effect of a change in circumstances and the lapse of expectations on the binding nature of a party's contractual obligation. According to the judgement’s reasoning, an incorrect or lapsed expectation may significantly impact the binding nature of the contract, if the condition was essential and decisive for the conclusion of the contract.

The Supreme Court further defined as criterion for applying the theory of expectations that the party invoking the condition must have acted diligently in drafting and negotiating the contract. Although the Supreme Court mentions as one of the requirements that "the condition and its significance for the conclusion of the contract must have been known to the other party", the wording of the following reasoning suggests that it is sufficient that the other party should have been aware of the condition.

The theory of expectations in other Nordic countries

The argumentation of the Supreme Court decision KKO:2012:1 is similar to the content defined for the theory of expectations in other Nordic countries and in Finnish legal literature. The theory of expectations has a more established position as an independent ground for judgement in Sweden and other Nordic countries. According to Swedish case law, for the application of the theory of expectations, it is required that:

  1. the condition must have been essential,
  2. the condition must have been known to the counterparty or the counterparty should have known about it,
  3. there are special circumstances due to which it is appropriate and reasonable to give relevance to the condition.

Many Finnish authors have been reserved about modification of contractual obligations based solely on the theory of expectations. However, the above-mentioned Supreme Court judgement suggests that the theory of expectations can be used as an argumentation under Finnish law. The significance of the judgement has been downplayed in legal literature due to the exceptional circumstances of the case.

In the above-mentioned judgement, lapsed conditions led to a condition in the contract being considered unenforceable. Based on case law and literature, it seems possible that depending on the case, the application of the theory of expectations can also lead to invalidity or cancellation of a contract. Even if the theory of expectations is not applied as an independent ground for a judgement, lapsed expectations can also lead to the adjustment of the contract or contractual damages.

Adjustment vs. theory of expectations

License agreements can be considered inherently sensitive to adjustment. Unlike the theory of expectations and the principle of loyalty, adjustment is based on an explicit legal provision, section 36 of the Contracts Act. The scope of application of this adjustment provision is broader compared to the possibility offered by the theory of expectations to intervene in contractual obligations. The increased possibilities for adjustment can be seen as having contributed to the fact that some authors see less need to rely on the theory of expectations.

Modern contract law

In applying Finnish law, views on so-called modern contract law presented in legal literature must also be considered. The basic idea of modern contract law is that increasingly, achieving the goals of contracts requires flexibility and cooperation from the parties. The solution for the need for flexibility and cooperation in modern contract law, as constructed in the literature, is in practice to give courts and arbitrators broader powers to interpret a contract and to deviate from literal interpretation on the basis of general contractual principles.

General contractual principles increase uncertainty

In negotiating license agreements, it is problematic that the conditions and legal effects of applying the principle of loyalty, the theory of expectations, and adjustment cannot be precisely defined in advance. The application of these principles and theories is based on an after the fact case-by-case assessment of the circumstances and the position of the parties. Such case-by-case assessment occurring retrospectively often is in contradiction with the needs for assessing risk and preparing for different eventualities expected from the parties during the negotiation phase of license agreements. The intervention of an external third party, whether a judge or an arbitrator, in the agreed validity, content and risk allocation of the contract in the event of a possible dispute causes a risk that is difficult to manage or mitigate during the negotiation phase. The uncertainty of the enforceable content of the contract may reduce the attractiveness of Finnish law as the applicable law in complex and long-term licensing arrangements.

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