Are You a Small Business Contract King or a Legal Liability? - dummies

Are You a Small Business Contract King or a Legal Liability?

By Clive Rich

Here’s your chance to see how good you are at spotting issues when contracting with trading partners. Test yourself with this quiz on licensing contracts. No cheating now.

The UK-based social-game production company Ever Hopeful Limited wants to license some software from a Ukrainian developer, Kiev Dynamo, to embed in Ever Hopeful’s computer games and to enhance its platform. Kiev Dynamo claims the software contains breakthrough technology that significantly enhances graphics and animation.

Ever Hopeful has limited resources in-house for technology development and limited cash. The directors, however, are keen to launch three new games within the next three months, and to re-develop the platform to leverage potential additional investment or even a quick sale. They also believe that the software is an important and potentially unique component, though it may need to be adapted for Ever Hopeful’s platform.

Given the innovative nature of the software, Kiev Dynamo has asked for a 20,000 euros upfront payment and a revenue share of 10 per cent in return for the licence. The directors of Ever Hopeful have agreed in principle to some initial payment and some ongoing payment in email correspondence, but the details aren’t too clear. They’ve now been sent a draft agreement.

What particular issues does this agreement need to address?

  1. Does the whole payment of 20,000 euros need to be paid? If so, does it all need to be paid upfront? How about holding some of it back against future performance by Kiev Dynamo?

  2. Are the rights Ever Hopeful is acquiring exclusive or non-exclusive?

    For the amount of money being demanded, Ever Hopeful doesn’t want the same technology being licensed to its competitors.

  3. What does 10 per cent of net revenue mean? Can any deductions be made before net revenue is calculated: for example, taxes, discounts, free goods, marketing costs? How often does Ever Hopeful have to account for royalties?

  4. What happens if the technology from Kiev Dynamo doesn’t work — despite its bold claims? Does Kiev Dynamo have to repair it or fix bugs at its cost? If so, what’s the process for this happening and what are the timeframes? Can Ever Hopeful get its money back or at least terminate the agreement?

  5. If Ever Hopeful needs to adapt the technology that it’s licensing, does it have this right in the licence agreement?

    If this agreement says that the technology can’t be adapted without Kiev Dynamo’s consent, that would be a problem — especially because Ever Hopeful is in a hurry to get the products containing the software out in order to raise investment.

  6. Does Kiev Dynamo wholly own all the software?

    The agreement should contain a promise that this is the case or else a promise that it has properly cleared all rights in relation to any third-party software included within its technology.

  7. Which law governs the contract if a dispute arises: UK or Ukrainian law? Where do disputes have to be resolved: in the Courts of the Ukraine or the UK? If no agreement is reached on disputes, can they instead be resolved using a mutually agreed international arbitrator?