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Samuel Goldwyn famously said, “A verbal contract is not worth the paper it's written on.” The self-contradictory irony in the remark is humorous, but the remark itself is not entirely true.

 

A PhD student participated in a research program with her supervisor and two postdocs.

 

The research was funded under a Collaboration Agreement with a company. The Agreement granted the company an option to negotiate a license, exercisable within 30 days of the Final Report being provided.

 

No student assignment of IP was obtained at the start of the research.

 

The Research Office reminded the student’s PhD supervisor to provide the student with a Deed of Assignment to sign.

 

The student had made significant contributions to the research, conceptually and inventively. She felt attached to the research and the IP she had created, some of which she invented alone and some jointly with her colleagues.

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She was hesitant about signing the Deed of Assignment.

 

The company’s option to negotiate a license was explained to her, as well as the university’s need to secure ownership of the IP to meet its obligations under the option to negotiate a license, should it be exercised.

 

She asked:

 

“if no license to the company eventuates, will the university license my IP into a startup company I set up to further research and commercialise the IP?”

 

Her PhD supervisor telephoned the Research Office for advice and was advised to give the student an assurance that that would occur.

 

The PhD supervisor put the phone down and replied,

 

“Yes, I can assure you of that.”

 

That statement was an oral side promise.

 

The student replied that she wanted to speak to her parents. After doing so, she emailed her PhD supervisor:

 

“I have discussed the situation with my parents. As we discussed, on the basis that the university will license my IP to my startup company if no license to [name of company] eventuates, I agree to sign the Deed of Assignment.”

 

She signed the Deed of Assignment and handed it to her supervisor.

 

The research was completed, and the Final Report was provided. The company exercised the option. License negotiations commenced but did not progress, the company’s appetite for the technology diminishing.

 

Anticipating that the company’s diminishing interest would not result in a license, the university commenced discussing a license with another company.

 

Negotiations with the second company progressed.

 

The student learned of the negotiations with the second company. She said to her supervisor:

 

“You promised that if the license to [the first company] did not eventuate, the university would license my IP to my startup company.”

 

The supervisor referred the conversation to the university, which replied:

 

“There was nothing in writing about that, so even if that conversation took place, it was not binding.”

 

The university wanted to keep the IP the student had created with the package of IP developed by the whole research team, as the remaining IP, without the student’s IP, was unlikely to be commercialisable on its own.

 

Who is right?

 

Will the law entitle the student to have the university’s promise to license the IP to the student’s startup carried out?

 

Or will the law fall back on the absence of a written contract to deny the student what was promised?

 

What is the law on this?

 

A collateral contract is one that exists independently of, but alongside, a main contract.

 

The main contract here was the Deed of Assignment, which not only assigned IP but, as is usual, also contained contractual obligations.

 

The collateral contract was the agreement between the student and the university (acting through its staff member, the PhD supervisor) that, if no license to the first company was granted, the university would license the student’s startup company.

 

All the elements of a contract were present for the collateral contract to be formed: offer, acceptance, consideration, and intention to create legal relations.

 

The legal consideration from the student in the collateral contract was the student entering into the main contract – the Deed of Assignment.

 

Proving the terms of the oral collateral contract was straightforward. The terms were confirmed in the student’s email.

 

Was the promise too vague to be enforceable, given that the terms of the license to the student’s startup were not addressed?

 

Not at all. The university had an established policy on licensing startups, including a largely non-negotiable template license that covered all terms, including financial and equity terms.

 

Was the fact that the startup company did not exist at the time of the collateral contract an impediment?

 

Not at all. The collateral contract fell into a well-recognized class of pre-incorporation contracts, which are legally enforceable.

 

The student’s family engaged its solicitor and demanded that the university fulfill its promise by granting a license of the student’s IP to the student’s startup. Discussions ensured. Significant costs were incurred. Litigation was threatened.

 

The law was clear.

 

Where there is a collateral contract, often created by oral side promises, the collateral oral contract is legally enforceable.

 

The evidence of the terms of the side promise, that is, the terms of the collateral contract, was clear as well – they were in the email. 

 

There was no point in continuing a dispute, let alone litigating, when the outcome was so predictable.

 

The university agreed to license the student's IP to the student’s startup.

 

Lesson: Beware of oral promises, made to anyone – not just students. They can be legally binding. Do not make them lightly, and do so only after careful consideration.

 

Postscript: Afterward, the student’s startup company licensed in the remaining IP created by the research team, and the company attracted significant venture capital investment.

 

You may be interested in other IP Bits issues concerning contract law for IP professionals:

 

• "Let's Agree on that Later" - Implications for Research Agreements and License Agreements

• Governing Law Need Not Be Contentious

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