Drafting Of Royalty Clauses: 30 Ways To Head For Windfall Or Pitfall

Erik Verbraeken
IFP Energies, Nouvelles, Associate Director, Contracts Division, Rueil-Malmaison, France

After a lengthy and difficult commercial negotiation, licensor and licensee have finally succeeded in finding an agreement. They have agreed on the business principles that are to govern the exclusive license that the licensor will grant to the licensee with respect to a very promising “green drilling” technology with burgeoning market perspectives. Under the agreement the licensee accepts to pay the licensor a percentage royalty on net sales of the licensed product. The next step will be for the Legal Division of licensor to draft a contractual document under which this gentleman’s agreement is to be translated and converted into a legally enforceable commitment. A one out of a dozen exercise, isn’t it? However, the proof of every pudding is in the eating, and your royalty clause may leave you with either a sweet or bitter aftertaste when the latter has to be reduced to practice on the operational battleground: oh so sweet when you have adopted a meticulous drafting approach that has taken heed to the particulars of the business deal and that is tailor-made to face the various accounting and legal implications of the royalty structure that has been agreed upon; oh so bitter when you have resorted to the dreadful drafting approach where the royalty clause is copied from the first source available on the Internet without caring to adapt and relocate the latter in its proper context, and for which John Ramsay has already provided multiple examples in this journal. Depending on your pudding recipe, and taking the liberty of a little exaggeration, you may find out that your royalty clause has either become the source of a business windfall, or has laid the pillars for a business pitfall. The present article provides an illustration of 30 business items that, when inappropriately converted into contractual language, may give rise to the creation of a fundamental gap between business expectations and business realities.


Search LESI

Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors