Key terms in IP contracts: consequences of termination

Termination Kit

It may seem strange to argue that consequences of termination is one of the key terms in an IP contract.  This subject rarely features in term sheets, or in early-stage commercial negotiations.

When the parties’ commercial representatives negotiate the main terms of their IP transaction, they often seem reluctant to discuss what will happen when their relationship comes to an end.  It is like asking courting couples to discuss the terms of their divorce.  Oh wait, that’s called a pre-nup…

IP agreements often involve long-term relationships.  Licences and R&D collaborations, to take two examples, may last for many years.  The licence agreement or collaboration agreement may require the parties to work together in various ways.  For example they may have meetings to discuss IP protection strategy or how development work will be undertaken.  They may be required to share information, eg in relation to dealings with regulatory authorities.  One party may have agreed to indemnify the other against third party claims, and the process for dealing with claims is likely to require interaction between the parties.  If royalties are paid, there will typically be obligations to provide statements and make records available for audit.

Thus, parties to long-term agreements tend to have numerous, ongoing obligations to one another.  Some of these obligations (eg obligations to work together on R&D) will cease when the agreement comes to an end.  Other obligations may survive for a limited period (eg confidentiality obligations).  Yet other obligations may survive indefinitely (eg indemnification obligations).  In addition, there may be new obligations that only come into effect on termination, eg an obligation to cancel registration of licences at national Patent Offices or Trade Mark Registries.

The consequences of termination should be spelt out in detail in the agreement, so that everyone knows where they stand.  One of the issues that needs to be addressed is identifying which clauses of the agreement survive termination.  Some agreements that IP Draughts has seen use a formula such as “those clauses which are meant to survive termination will survive termination”.  In IP Draughts’ view, this is not an adequate way of dealing with the issue.  There is no substitute for going through the agreement, clause by clause, and identifying which clauses and sub-clauses should survive, and whether this survival should or should not be limited in time or circumstance.  For example, obligations to pay royalties and allow auditing of sales records should usually survive termination, but only in respect of sales made prior to termination.

The end result should be a clause that lists which clauses survive termination and in what circumstances.  The list of clauses needs to be checked again before a final version of the agreement is prepared, as sometimes clause numbers change or clause content changes after the first version of the list was prepared.

This is all part of the detailed, painstaking work of a contract drafter.  If a lawyer is responsible for preparing all the drafts and the final version of the agreement, the commercial parties can leave this work to him or her.  If the commercial parties elect to prepare drafts without using a lawyer, they need to make sure that they take the same, painstaking approach as their lawyer would.