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License Agreement

A license agreement is beneficial in several ways and it can be of different types. Contact us, our legal experts will help you in drafting this agreement.

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Overview of License Agreement

The word “License” has been defined in the Indian Easement Act of 1882 under Section 52 of the Act. It is defined as when a person The term “License” is defined under Section 52 of the Indian Easement Act, 1882 as “Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such right does not amount to an easement or an interest in the property, the right is called a license.”

Thus, when a party provides license to use his/her intellectual property to other person under a defined set of terms and conditions for a defined time period in a written form, such a necessary paper is called a License Agreement.

Laws governing Licensing Agreements

There are several laws which define rights, liabilities and protection of intellectual property of a person and govern the license agreements in India. Such laws are as follows:

  • The Indian Contract Act of 1872
  • The Copyright Act of 1957
  • Trade Marks Act of 1999
  • Design Act of 2000
  • Patents Act of 1970
  • Competition Act of 2002
  • Stamp Duty Act (as charging of stamp duty is a state subject, the provisions are applied as per the respective state Act).
Elements of a basic licensing agreement

Following are the important elements of a basic licensing agreement:

Recitals

The recital part includes all clauses of the agreement that start with the word “whereas”. These are mentioned before the main body of the agreement. Such clauses are mentioned in the agreement to mention the details of parties to agreement and the main aim behind forming of such an agreement.

Name of Parties

This part includes personal details such as name and address of parties to the agreement. In case either party is a company, the draftsman needs to mention the name of the Act under which such company has been registered.

Tenure

This clause is inserted in the agreement so that both parties have a clear idea about the time period for which the license has been granted to the licensee for use. Such a clause might also include a statement relating to termination or extension of duration of the agreement.

Scope of Usage

Under this clause, the licensor needs to provide details with regard to the extent to which the licensee is allowed to use the licensed property. It also mentions the restrictions imposed on the licensee for use of the licensed property. Some of the restrictions include channel of trade, modifications made to the licensed property, geographical use, etc.

Licensed Fee

The consideration amount which is being paid to the licensor for using or exploiting the licensed property owned by licensor is called a license fee. The details should also include a payment chart if payment is made in installments and a defined mode of payment in which the fee is to be paid.

Force Majeure

There should be a clause related to force majeure (act of god). This clause exempts the liability of the licensee or licensor from any obligations in case any unforeseen event occurs. This clause should mention a broad definition of all events falling under the category of force majeure and effect of such acts on the rights and liabilities on parties to the agreement.

Indemnification

The term indemnification here means that it is the responsibility of the licensee to make good any losses incurred to the licensor by any act of licensee during the duration of the agreement.

Accounting, reports and audits

This clause is inserted in the agreement to specify the mutually agreed accounting and record keeping procedure which has to be followed by the licensee to ensure that proper accounting records are being maintained during the term of agreement with regard to payment of royalty to the licensor.

Governing laws and dispute resolution

There should be separate clause stating the law which will govern the agreement and a provision with regard to resolution of disputes between the parties with regard to the subject matter of the license which might occur during the time period of the agreement.

Checklist items for a licensing agreement

A basic and standard licensing agreement should contain certain information which is a must in the agreement. The checklist is as follows:

  • Personal details of parties such as name, residential or office address must be mentioned. The parties are required to mention the name of the Act in which they have been registered, in case the party is a company.
  • Duration of the license agreement must be clearly mentioned.
  • It is necessary to mention whether the licensor has the ownership of the licensed property or whether he is a holder of licensed property. It is also mandatory to check whether the licensor has the right to sub-license the property.
  • The property details and measurements must be described accurately and exhaustively.
  • All the words which have been specifically mentioned and used in the agreement frequently which have special meaning must be clearly defined in the agreement itself.
  • The mode in which the license fee will be paid must be clearly mentioned.
  • One must ensure that the formula which is being used to calculate the license fee is correct.
  • There should be an indemnification clause to make good any losses suffered by the licensor due to any acts of the licensee.
  • The definition of Force Majeure (Act of god) must be broad and exhaustive.
  • The language of the agreement must show the intention of the parties for which the agreement has been drafted.
  • The clauses stated in the license agreement must not violate the prevailing laws which govern the agreement.
  • The agreement must also contain a clause which can deal with the future change in the provisions of the Act in the agreement. 
Types of licensing agreement

If the property which is being licensed is a intellectual property, then the types of agreements are based on degree of exclusivity of the licensed property. These are as follows:

Exclusive Licensing Agreement

Under this type of agreement, a unique relationship is created between the licensor and the licensee. No party other than the licensee whose named has been mentioned in the agreement is allowed to use or exploit the property which is being licensed. A special feature of this agreement is that even the licensor is prohibited from using or exploiting the licensed property till the license agreement exists. Some examples of such an exclusive license agreement include trademark, copyright, trademark, etc.

Non-exclusive Licensing Agreement

It is the opposite of an exclusive licensing agreement. Under this type of agreement, the licensor has the authority to grant the license a number of licensees. The licensor is also authorized to use the licensed property during the time of the agreement.

Co-exclusive Licensing Agreement

Under this agreement, the licensor is allowed to grant license to more than one licensee to use or exploit the license. The number of licensees is limited the number of licensees is fixed when the parties enter into the license agreement.

Sole Licensing Agreement

The agreement is similar to the exclusive licensing agreement. This agreement is different from the exclusive agreement that under this agreement, the licensor is also allowed to use or exploit the license even during the tenure of the license agreement.

Issues covered by the licensing agreement

There are several matters which are covered by parties under a license agreement. These are as follows:

Copyright

It is a legal right provided to an author or a creator of an original work granted under a statute. The licensor the right to reproduce the existing copyrighted work, to perform or publically display the copyrighted work by means of digital and audio transmission and to prepare a derivative based on the copyrighted work. Thus, the parties enter into such agreements for granting the rights of copyright on the copyrighted work to the licensee which he/she is authorized to use the decided time period in exchange of consideration as royalty.

Patent

A party enters into an agreement for patent for allowing the licensee to use, sell or make the patent invention of the licensor for consideration of a fee for license. This agreement is a supplement agreement to a patent license agreement. The agreement lays procedure to transfer the knowledge and skills which are required for effective and proper use of the patent technology. 

Trademark and Service mark

Under this type of agreement, a licensee is permitted to use a trademark or service mark which is owned by the license by following the agreed terms and conditions mentioned in the agreement.

Trade secret

There is no specific law under which trade secrets are registered in India. The prevailing Acts provide security and protection to the secret and confidential information which is related to a business organization and cause great financial loss to the business entities if such information is leaked to the general public. Such a license agreement is entered by the parties to legally protect the confidential information which has been shared with the parties to the license agreement. The agreement clearly defines the information which should be kept as confidential and how such information should be used by parties to the agreement.

Largest areas of concern of licensing agreement
  • Calculation of licensed fee – A licensor enters into a licensing agreement with a motive to earn money by providing his/her property for use to the licensee for the specified time period and for consideration. Thus, deciding a profitable and balanced license fee is very crucial.
  • Quality Control – Under a licensing agreement, it is very important to keep a quality control on the products or services made by the licensee. The quality must fulfill the expectations of the licensor as if the quality is being sacrificed by the licensee to save money it will create a huge negative impact on the brand image.

Scope of usage – The parties should mutually agree on deciding the scope of usage of licensed property before entering into a license contract. It should be decided keeping in mind the worth and demand of a product in near future. If such decision is not taken at the desired time, it will affect the agreement in negative manner and the parties will not be able to achieve their purpose behind entering into the contract.

Consequences of not making a licensing agreement

Entering into a licensing agreement helps the licensee to know the proper use of the licensed property. Without a license agreement in written, it can be difficult for parties to execute the same. It can lead to wastage of money, time and a lot of energy to the licensee until he/she finds a perfect way of using the licensed property he/she received from the licensor. It is a directionless approach. Thus, it can lead to failure of parties in achieving the set business goals and frustration of the same.

End User Licensing Agreement

A contract entered between a software developer and end user of the same developed software is called an End-User Licensing Agreement (EULA). As it is termed as a contract, the provisions of Indian Contract Act of 1872 are applicable. As the word “end user” suggests that software is provided to the consumer of such software, the other party is not allowed to transfer such agreement to any third party. Such an agreement is made to fulfill the below-mentioned purposes:

  • Such an agreement is made to safeguard the rights of the licensor on the property which he/she has licensed. No licensee is allowed to copy the source code of the software against the decided terms and conditions of the agreement.
  • To remove any possibility of licensee using the licensed property without payment of proper consideration to the licensor.
How can a person create a license agreement?

A party who is interested to form a license agreement must contact a legal professional for drafting a well-structured license agreement. No Act mandates that such an agreement must be drafted by an advocate only. If a party wants to draft the agreement by himself/herself, he/she can do so. But there might a chance that a person who is not an expert of law might miss out mentioning certain important aspects of the agreement. Whenever such an agreement is being drafted, the draftsman needs to keep certain things in mind. These are:

  • The language of the agreement must be clear, simple and easy to understand.
  • One should avoid any use of short forms in the agreement as it can cause confusion.
  • The agreement should mention all possible and important clauses to cover all possible situations that might arise in future with regard to the licensed property.
  • The words that are being used in the agreement must convey one meaning to readers to avoid any possible confusion.
  • The details of party, date of execution and termination of agreement, the amount of licensed fee and other compulsory charges must be clearly and accurately mentioned.

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