A quick guide on how to read a contract

An IP contract, whether a licence or an assignment agreement, is an important and legally enforceable document. You should always read the terms of an agreement carefully and understand their consequences.

Key Terms

The following is a quick guide to familiarise you with some of the key terms and clauses that frequently appear in IP contracts. However, please note this is not an exhaustive list and you may want to consult a professional before signing an agreement.

1. Parties to the contract - An IP agreement usually starts with specifying the details (i.e. name and address) of each contracting party and the capacity in which they are entering into a contract (i.e. who is the licensor/assignor and who is the licensee/assignee). Remember:
   1. Assignor - is the person transferring IP rights;
   2. Assignee - is the person receiving the IP rights;
   3. Licensor - is the person granting the licence;
   4. Licensee - is the person receiving the licence;
   5. Discloser - is the person sharing the confidential information;
   6. Disclosee - is the person receiving the confidential information.
2. Grant of Rights/Rights granted/Scope of Agreement - This is the most important clause in an IP agreement as it defines what rights are being licensed or assigned; whether a licence is exclusive or non-exclusive; and what restrictions apply to the licence or assignment. (Please note that there is no set format for drafting an agreement, therefore, each of these components may either appear together under one clause or separately under different heads). Since this clause defines the scope of rights of the receiving party, any use beyond the rights granted under this clause may result in infringement.
3. Term of contract - This clause defines the time period for which a licence or assignment is valid. It is important to make a note of the term of your agreement because any use after the contract term expires can result in infringement.
4. Territory - This clause defines the geographical territory in which a licence or assignment is valid. If a contract is limited to a territory, any use beyond the territory may result in infringement.
5. Consideration - Some contracts may use the term ‘consideration’, which is a legal term to signify what is given in exchange for the grant of IP rights. Usually the consideration will be an amount of money. For example, the price paid for an assignment of IP rights might be $10,000. This payment is the ‘consideration’ under the contract.
6. Warranty - IP contracts will often contain a warranty clause. This clause provides a written guarantee to the licensee/assignee that the person granting the licence or assignment has the necessary rights and authorisation to do so. In other words, the assignor or licensor will often be asked to warrant that they are indeed the IP owner and have the power to grant the necessary legal rights. They may also be asked to warrant that the licensee or assignee’s use of the IP in question will not breach any third party rights. A warranty clause protects the assignee/licensee, by providing that they have obtained the IP rights in good faith and have acted upon representations provided by the assignor/licensor.
7. Termination - Always read the termination clause carefully. The termination clause defines the acts and circumstances under which a contract can be ended by either party. Some of the common acts resulting in termination of an agreement are a failure to pay the consideration amount or a failure to comply with the terms of agreement.
8. Revocation - A licence agreement may state whether or not the licence is revocable. This means whether or not the licensor can retract or ‘take back’ the permission granted to the licensee, even before the licence term has expired, if they decide that they are unhappy with the licensee for some reason.
9. Governing law - The governing law clause often appears at the end of a contract and is easy to miss. However, it is an important clause that defines under which country’s law and/or state jurisdiction the contract shall be governed and interpreted in case of any dispute or disagreement. This clause is especially important for those parties that contract internationally. For example, where an Australian licensor grants a licence to a business located in Vietnam. In this case, the parties have the option to either choose Australian or Vietnamese law as the governing law in the case of a dispute. Many contracts with US parties will specify that the law of California or another US state applies to the contract.
10. Remedies - The contract may provide for certain remedies for the parties in the event that one party breaches the contract. The remedies may include that the contract is terminated, or that one party has to pay financial compensation to the other party. Some contracts will require the parties to go through a process of dispute resolution (often called ‘mediation’ or ‘arbitration’) before they take the dispute to court.    

Other terms to note:

• An agreement may refer to specific IP rights, such as the right of communication in copyright. The module on Intellectual Property Principles explains these rights in copyright and patent law.
• A contract may also include industry-specific terms. For example, book publishing contracts will often include terms about ‘royalties’, which are the ongoing payments that authors receive as a percentage of the purchase price of books sold. Different industries may use similar terms in different ways. You should check online for the relevant industry body to contact for assistance if you are unsure about these terms.