This article looks at the licence agreement - structure and components. Subsequent articles in this series will look at the substance of particular clauses and competition law rules which have an impact on such substance.

Written or verbal licences

English law does not require that licence agreements be in writing. Conversely, where intellectual property rights such as patents are to be assigned the assignment must be in writing. "Writing" is not defined and may not include email communications though that is far from clear. The UK electronic commerce bill and EU electronic commerce draft directive, when both are agreed, are likely to provide that electronic contracts have the same legal effect as written agreements.

Assignment must be signed by the assignor or person assigning the rights. However most patent and knowhow agreements are mere licences or permissions to use, rather than outright transfers of the rights - assignments, so nothing is writing is required.

However, for practical reasons, committing the deal to writing is sensible. It means important legal areas are not left to chance and there is a written record of what was agreed to which reference can be made if disputes arise.

Structure of a licence agreement

Parties
A licence agreement should begin with the names and addresses of the parties to the agreement. Normally they are defined as licensee and licensor.

Use of Capital letters
Terms such as licensee and licensor are used with capital letters throughout. This use of capital letters means that a definition in the agreement is being used. Be careful only to use capital letters within a sentence for this reason. If a lawyer sees the word "Product" they will know to look to the definition section of the contract to find what that term means. If they see "product" they will know it is not defined.

Definitions
Ensure all the defined terms appear in one place, often clause 1 of the contract. These might include a definition of the Territory, Products, Net Sales Value (for royalty clause) and any other terms used. Sometimes there are also some general clauses stating that singular includes plural, masculine includes feminine etc.

Order of clauses
A licence agreement should set out in order what will occur. Thus traditionally after definitions it starts with the grant of the licence.

This is followed by the rights and obligations of both parties.

Then the payment or royalty provisions will appear.

There may be clauses about sale of products by one party to the other or servicing or sale of spare parts.

Confidentiality and intellectual property clauses will follow.

Towards the end of the agreement there will be a clause dealing with the term of the contract and how the agreement may be terminated. The consequences of termination follow.

A clause dealing with the respective limitations of liability of the parties should be included.

Finally more general clauses will appear, often called the "boilerplate", dealing with which country's laws apply, where disputes are handled, whether the agreement supersedes earlier agreements and how its provisions may be varied.

Numbering
The logical order above makes it easier for those familiar with licence agreements to follow the agreement. However there is no legal obligation to follow this form, nor even to reduce the licence to writing at all.

Other tips include:

• Have headings for each clause
• For longer contracts have a contents list
• Follow the customary numbering of 1. for clause 1 - not I or A. Have sub paragraphs of 1.1. Some contracts may go as far as 1.1.1. 1.1.1.1 would generally be too many to follow easily.
• Punctuate - though some older contracts did not traditionally have punctuation in case this was confusing.
• Have short sentences.
• Use plain English. Avoid "hereby", "said", "herewith" and other such older English.
• If a clause is not clear, do not leave it assuming lawyers know what it means. Simplify it. Do not leave anything to chance. If it is not clear if a particular point is covered say it again in clear English.
• If a foreign party is involved make it clear which language version of the contract prevails in the event of a clash.

Obtaining precedents
It is generally sensible to have reference to a similar licence agreement before drafting a new one. Even intellectual property lawyers would do this and indeed would have their own examples or precedents available. Examples of licence agreements are included in books such as:

• Intellectual Property Agreements - a looseleaf book by Trevor Cook & Audrey Horton of Bird & Bird, published by Sweet & Maxwell.
• Most solicitors use the 50+ volumes of precedents of Butterworths' Encyclopedia of Forms and Precedents, which is also available on CD-ROM, though this costs many hundreds of pounds.
• Longman's Practical Commercial Precedents is another work with some intellectual property contracts contained in it.

Some law firms sell their contracts in the intellectual property field over the Internet - see http://www.briffa.com. Under the technology section are a non disclosure agreement (£50) and a patent licence £150 amongst other agreements.

Other businesses simply take competitors' contracts and modify those.

Whatever means is used, make sure that all clauses are read and checked and modified. No one precedent is right for all deals and none should be used blindly without proper thought. Changing one clause can have implications for another clause.

Take legal advice in cases of doubt from intellectual property specialist firms, such as those recommended in the chambers directive http://www.chambersandpartners.com, or the writer's firm.

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The opinions expressed in the articles published in this section do not necessarily reflect those of Pharmalicensing or UTEK Corporation. No actions including proposals to or agreements with other companies should be taken by any reader without obtaining specific business or legal advice. Neither the publisher nor the authors accept any liability for any actions or activities undertaken by any reader or other third party as a consequence of these articles or for any errors or omissions therein.