The draft arrives attached to a services agreement, a software subscription or a development proposal: an intellectual property (IP) licence, and you have been asked to check it before anyone signs. If your business creates or uses software, branding, content, product designs or inventions, this document decides who can use what, for how long and on what terms. Reading it properly takes more than a skim of the payment clause.
An IP licence is a contract in which the owner of intellectual property, the licensor, gives another party, the licensee, permission to use specific IP rights for specific purposes. Ownership stays with the licensor; only the right to use is passed on. The licence may be a standalone agreement or a clause tucked inside a larger contract such as a services agreement. It operates alongside that main agreement rather than replacing it, so its terms need to line up with what the deal actually requires.
The essential clauses of an IP licence
The clauses below are the ones worth reading closely. They appear in most licences in roughly this order, and each one carries a drafting choice that shapes how the arrangement works in practice.
What counts as the intellectual property
The definition clause sets the boundaries of the whole arrangement. If the licence defines "Intellectual Property" too broadly, you can end up granting rights you never intended to part with. If it is too narrow, the licensee may not be able to do what the deal requires. Most disputes about IP licences start here, so check that the definition covers the right material and excludes the rest:
- Pre-existing IP: IP owned by a party before the arrangement began should be identified, and licensed only for the purpose of the arrangement.
- New IP: IP created during the arrangement needs an express home, usually with the party that paid for it.
- Improvements: decide who owns improvements to the licensed IP and who may use them.
- Third-party IP: material licensed from someone else that is embedded in the licensed product needs its own clearance.
For copyright, the writing requirements bite here. Under s 10 of the Copyright Act 1968 (Cth), an exclusive licence only exists if it is in writing and signed by or on behalf of the owner, and under s 196(3) an assignment of copyright has no effect unless it is in writing and signed by or on behalf of the assignor. If your licence deals with copyright, and most do, an exchange of emails or a handshake will not be enough.
What the licence lets you do
The grant clause is the engine room of the licence. It describes the rights being handed over and the limits on them. Licences come in three basic flavours:
- Exclusive licence: only the licensee may use the IP, to the exclusion of everyone else including the owner.
- Non-exclusive licence: the owner may grant licences to others and may keep using the IP itself.
- Sole licence: one licensee only, but the owner keeps its own right to use.
For copyright, an exclusive licence carries a special benefit. Under s 119 of the Copyright Act 1968 (Cth), an exclusive licensee can sue third parties for infringement as if the licence were an assignment, with the same rights of action running alongside those of the owner. A non-exclusive licensee does not get that standing automatically and generally has to rely on the owner to enforce the rights. That is a strong reason to make sure any exclusive licence is properly documented in writing.
The grant should also set out the field of use (what the IP can be used for), the territory (where), the duration (how long) and whether the rights can be sublicensed. A licence that lets you use software only for internal operations, for example, will not cover you for selling that software to customers.
How long the licence runs
The term clause sets when the licence starts and ends, and what happens at the end. Three things are worth checking. First, whether the licence is revocable by the licensor during the term, and on what notice. Second, whether it renews automatically and on what terms. Third, and most commonly missed, whether the licence is tied to the life of a separate agreement.
If you are licensing in software while a services agreement is being performed, the licence usually runs for the term of that agreement. If the services agreement can be terminated on short notice, your right to use the software can vanish with it. For material you are paying to have built, that can be an expensive surprise. Consider asking for a licence that survives the termination of the main agreement, at least for material already delivered.
Who else can use the IP
The sublicensing and transfer clauses decide who the rights can spread to. A licensee that can sublicense can authorise its own customers, contractors or group companies to use the IP. A licensor will usually want that tightly controlled: sublicensing only with prior written consent, or not at all. The flip side matters too. If you are the licensee and your business model depends on passing rights down the chain, a flat ban on sublicensing can make the licence useless.
Transfers work differently. Under s 196(4) of the Copyright Act 1968 (Cth), a licence granted by the copyright owner binds every successor in title. In plain terms, if the licensor sells the copyright, your licence continues against the buyer unless the licence says otherwise. That is protective for you as licensee, but it is exactly why a licensor will push for the licence to be personal to you, non-transferable, and terminated on a change of control of your business. If your business might be acquired, the change-of-control clause deserves close attention.
What it costs
The payment clause sets the price: an upfront fee, ongoing royalties, or both. The detail that causes the most trouble is the base the royalties are calculated on. "Net sales" sounds straightforward, but the definition will list what can be deducted before the royalty is calculated. Check what is included, how often payment is due, whether amounts are in AUD and whether GST is on top. Three related clauses are worth checking:
- Reporting: how and when the licensee reports sales or usage; a licensor should ask for regular written reports.
- Audit: the right to inspect the licensee's records, and who pays if the audit finds underpayment.
- Minimums: a minimum annual royalty keeps a non-exclusive licence commercially honest.
What happens to new IP created along the way
If the arrangement involves creating anything, this is the clause that decides who owns it. Copyright in a work is owned initially by its creator, and in Australia copyright arises automatically without registration. If your business pays a developer to build software, you do not automatically own the copyright in it. You need a written assignment, and under s 196(3) of the Copyright Act 1968 (Cth) the assignment must be in writing and signed.
Future copyright can also be dealt with in advance. Under s 197 of the Act, an agreement signed by the prospective owner can assign copyright in works that do not exist yet. That is how a development agreement can validly transfer ownership of software that has not been written. If the parties only licence the new material instead of assigning it, ownership stays with the developer and your right to use it can end when the licence ends.
Moral rights are a separate layer. In Australia, authors of works have rights to be attributed, not to have their work falsely attributed, and not to have it treated in a derogatory way. These rights attach to the individual author and do not automatically pass when copyright is assigned. Under s 195AWA of the Copyright Act 1968 (Cth), an act within the scope of a written consent genuinely given by the author does not infringe their moral rights. A licence involving commissioned material should therefore include written moral rights consents from the actual authors, not just from the company that employs them.
What each side promises
The warranties and indemnities are where the risk sits. A licensor should be asked to warrant that it owns the IP or has the right to grant a licence over it, and that the licensed material does not infringe anyone else's rights. If a third party claims infringement, an indemnity from the licensor should cover the cost of defending the claim and any damages you have to pay.
A licensee should expect to warrant that it will only use the IP within the scope of the licence, and to indemnify the licensor for losses caused by misuse. Watch for one-sided drafting here. An indemnity without a cap, or a warranty that runs forever, can put unlimited liability on your business. Caps on liability, the exclusion of consequential loss, and carve-outs for the indemnities are all normal points of negotiation.
What happens if things go wrong
The termination clause sets out the events that bring the licence to an end: breach that is not remedied, insolvency, or termination for convenience on notice. The consequences matter as much as the trigger. Most licences require the licensee to stop using the IP and to return or destroy all copies of licensed material on termination. If that material is embedded in your products, check what you are being asked to destroy and whether you have a grace period to wind down.
Insolvency events deserve care. A clause that terminates the licence automatically if a party enters administration can be commercially harsh, and it may not be enforceable against a company in administration under Australian insolvency law. If the licence is important to your operations, this is a clause to have reviewed rather than accepted as boilerplate.
Optional clauses worth asking for
Some clauses are situational, but they matter when the trigger arises:
- Audit rights: worth including whenever royalties are calculated from the licensee's reported sales or usage figures.
- Right of first refusal: gives the licensee first chance to buy the IP if the licensor decides to sell it, which is valuable when your business depends on the licensed material.
- Most-favoured-nation: if the licensor grants other licences of the same IP on better terms, your royalty drops to match. Useful when several other businesses hold a licence to the same IP.
- Change-of-control protections: if the other party may be acquired, agree in advance whether the licence survives and on what terms.
- Liability caps and carve-outs: caps on the total liability of each party, with carve-outs so the indemnities and confidentiality obligations still bite.
How an Artificer Legal lawyer can help you review an IP licence
A lawyer experienced in IP licensing will read the licence from both sides of the table. When we review a draft, we start with the definition of IP and the grant, because everything else hangs off those two clauses. We check that the licence matches the commercial deal: that the licensee can actually do what the deal requires, and that the licensor is not giving away more than it means to.
We push back on the usual pressure points: definitions of IP that sweep in material you did not intend to hand over, one-sided termination rights, unlimited indemnities, and licences that die with a main agreement. We insist on the statutory formalities, such as an exclusive licence of copyright being in writing and signed, a written assignment where ownership is meant to pass, and written moral rights consents from the authors of commissioned work. Where the licence is between companies in the same group, we also check that the arrangement is documented properly, so that the IP protection the structure was set up to achieve is not undermined.
We negotiate in a practical order: the definition and the grant first, then term and termination, then the commercial terms such as royalties and indemnities. If you would like an independent review of a draft licence before you sign, an Artificer Legal lawyer can go through it clause by clause and tell you where the risk sits.
Start with the definition of Intellectual Property
Across the licences we see, the definition of Intellectual Property is the drafting choice that most often decides who wins when things go wrong. A definition that sweeps in everything the business has ever created, or one that leaves out the material the deal actually depends on, turns an ordinary dispute into an expensive one. Read it first, know what is inside it, and make sure the grant, the term and the termination clauses all point back to it consistently.
An IP licence is a permission to use, not a transfer of ownership, and the difference matters. An exclusive licence of copyright must be in writing and signed, an assignment must be in writing, future copyright can be assigned in advance, and written moral rights consents protect the authors of commissioned work. Registered rights have their own rules: the owner of a registered trade mark has the exclusive right to authorise others to use it under s 20 of the Trade Marks Act 1995 (Cth), and use by an authorised user under the owner's control counts toward keeping the mark live against non-use removal under s 8 of that Act. A patentee has the exclusive right to exploit the invention and to authorise others to do the same under s 13 of the Patents Act 1990 (Cth). Check the definition, the scope of the grant, the term, who else can use the IP, what it costs, who owns new IP and what each side promises, and the licence is much more likely to do what your business needs. If any of those clauses is unclear, that is the point at which a lawyer's review pays for itself.