by Stuart Burns, Head of Fisher Forensic

It is sometimes said that every case is different and there is a good deal of truth in the claim. Nevertheless, certain issues occur repeatedly. Based upon our experience, here are six clauses which are often overlooked, but which, we are convinced, every contract should contain.

1. A ROBUST AUDIT ENTITLEMENT

It may sound self evident that a licensor’s right to conduct audits should be spelled out. But by ‘robust’ we do not merely mean access to books and records, important though that is. The contract should stipulate that auditors are entitled to carry out the audit within two weeks of announcing their intention. Without this, endless excuses can be used to delay the audit for months or even years, by which time the trail may have gone cold.

Remarkably, some agreements say nothing about interest payments on under reported sums. Yet if the audit discloses a pattern of under reporting going back several years, the interest could be substantial. Interest compensates the licensor for the very real costs of borrowing that would be mitigated if the licencee had paid accurately.

Many contracts simply provide for royalties to be calculated on the basis of invoiced prices. Instead, agreements should stipulate that royalties should be based upon carefully and clearly defined gross/net selling prices. If the licensee decides to give buyers an additional discount for prompt payment, that is a matter for them to decide. The licensor should not suffer, by receiving a reduced royalty as a result.

There could be a number of reasons why a licensee might decide to sell off products at a vastly reduced price – perhaps to clear old stock or to offload goods when the contract is drawing to an end. Yet products sold this way can have a damaging effect on the integrity of the brand, particularly if goods end up at low end discount retailers. The contract should declare a minimum selling price solely for royalty calculations purposes (expressed as a percentage of the normal price) and declare that any sales at a lower rate will be treated as minimum selling price transactions.

It is not enough to include measures that forbid certain actions. The contract should also set out compensation remedies if these measures are ignored.

Almost every contract will give a licensee rights to a certain geographic area, yet few set out the consequences of trading outside this region. The agreement should state that ex-territory sales will be regarded as counterfeit, meaning the licensor is entitled not merely to royalties, but to the net selling price. The same should be true of any sales made after the contract has expired. It has to be admitted that EU competition rules can make this difficult to enforce within the EEA, but such clauses should always form part of agreements for other territories. It cannot be said too often that any weakness or ambiguity in a contract will almost certainly be exploited by a licensee, or will at the very least give rise to unnecessary and potentially harmful disagreements. In licensing, clarity is not only desirable, it is essential.

Stuart Burns is the head of Fisher Forensic. He can be reached on +44 (0)20 7388 7000 or sburns@hwfisher.co.uk