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Partially adapted from the "Training Manual on Technology
Transfer", by United Nations Industrial Development
Organization
(UNIDO)
Introduction
Warranties
in patent licence agreements
Warranties
in know-how licence agreements
Warranties
in trade mark licence agreements
Warranties
in other agreements
Annex
Introduction
Forms
of Technology Transfer
Difference
between warranties and guarantees
Meeting
of warranties and guarantees in this module
Warranties
in different licence agreements
Warranties
in different legal systems
The
risk element in technology transfer agreements
This
module is devoted to the topic of warranties connected with technology
transfer agreements. For the purpose of this module, the terms "Warranty"
and "Warranties" are used to encompass the meaning of warranties and
guarantees. In technology transfer the technology may encompass the
meanings of warranties and guarantees. In technology transfer the
technology may encompass different kinds of technical knowledge and/or
rights. And the transfer itself may take place in numerous ways and as
part of practically any kind of business or commercial
agreement.
Licensing is one form of technology transfer agreement.
The primary purpose of a licence is to permit an organization or
individual to use a protected secret or unaccessible industrial right or
knowledge. Typical licence agreements include patent licence agreements,
utility model licence agreements, trade mark licence agreements and
knowhow licence agreements. The rights granted through such agreement are
commonly referred to as industrial property rights. This module analyses
the various warranties and guarantees a licensor may undertake when
concluding this type of agreement. It does not deal with other licence
agreements, such as copyright licence agreements, franchise licence
agreements, such as copyright licence agreements, franchise licence
agreements, industrial design licence agreements or (copyright) software
licence agreements because they are not considered industrial property
rights.
Technology may also be transferred by numerous other
arrangements, for instance, by an agreement to supply a complete
industrial plant turnkey contract or by engineering contracts, management
agreements, technical assistance agreements and the like. Technology may
also be transferred by direct foreign investment, a wholly foreign owned
subsidiary or a joint venture.
This module concentrates on
warranties and guarantees in industrial property licence agreements
(patent, utility model, trade mark and knowhow) because these are the
licence agreements most frequently used in industry. However, for
comparison purposes, it also discusses warranties in the other types of
technology transfer agreements mentioned above because they offer
alternative sources of proprietary technology.
A licence is given
by an industrial property owner to third persons. The purpose of a licence
is to grant a right to use knowledge embodies in a specific unaccessible,
technological achievement. In the case of patents, utility models and
trade marks, the right to use them is protected by law and by registration
requirements. In the case of knowhow, the knowledge is not accessible
because it is a secret.
Forms of technology
transfer
Technology may be transferred by agreements other
than licences or technology transfer agreements. Thus, for example, a
simple sale-of-machinery agreement or a supply-of-equipment may be a
vehicle for technology transfer. However, unless technology transfer is
specified as a subject of an equipment supply agreement, the warranties
and guarantees connected with the agreement will be regulated by the rules
applicable to sales transactions, not by the rules applicable to
technology transfer transactions. A similar situation may exist in a
technical assistance agreement, where, for example, there may not be any
warranties for technology transfer at all. In such an arrangement, the
technology transfer may only be implied in the performance of some duties
connected with implementing such agreements.
The same is true of
agreements for constructing large industrial plants. In such agreements,
if technology transfer is a specific issue, i.e. if the new owner wished
to acquire the right to use a patent, a trade mark or some other knowhow,
a separate technology transfer agreement must be concluded. But if
technology transfer is not outlines as a specific obligation, the transfer
will be only implied as incidental to using the machinery.
Difference between
warranties and guarantees
"Warranty" is a term that
originated in the common law of Great Britain, and it is used today in
countries where the legal system is based on common law. A warranty is a
contractual promise. The individual making the promise is regarded as
undertaking contractual liability. This contrasts with mere statements or
representations, which are not the equivalent of a promise. Simple
statements were not considered warranties unless responsibility was
expressly undertaken. However, overtime it became common to consider an
affirmation at the time of sale a warranty, provided it appeared to have
been so intended. The present tendency is towards readier imposition of
liability and less stringent requirements for express statements by the
parties. If a warranty exists, the maker undertakes strict liability for
what he asserts.
Although warranties have a long history in British
common law, the modern concept of warranties is best expressed in the
British Sale of Goods Act of 1893. In that Act, "warranties" and
"conditions" are used differently. Warranties are less important promises
than conditions. As the Sale of Goods Act states, warranties give rise to
a claim for damages but not to a right to reject the goods and treat the
contract as repudiated or discharged. On the other hand, a condition is a
contractual term on which the very contract depends.
For example, a
contract may contain a specific condition stating that the property will
not be transferred until payment occurs. In this case, payment is a
condition of the contract. Similarly, if delivered goods do not correspond
to their description in the contract, the buyer may reject the goods. Some
of these terms have become implied conditions by law in contracts of sale.
If the condition is not fulfilled, the contract may be repudiated.
However, it should be pointed out that the parties are free to either
contract out a condition or to vary it.
Consequently, British law
does not use the term "guarantee" to describe the promises described
above, where in relation to warranties or to conditions. The terms
"guarantee" or "suretyship" in British law are used mostly in connection
with bank guarantees. In such a relationship, there are three parties: the
creditor, the debtor and the guarantor who undertakes to be liable to the
creditor if the principal debtor fails to discharge his obligation. The
arrangement between the creditor and the guarantor is called the "contract
of guarantee".
In international trade, the contract of guarantee
often has a different meaning, namely, that of an independent undertaking
by the guarantor to pay if the conditions of the guarantee are not
satisfied. The word guarantee is also sometimes used simply as an
undertaking. The term warranty/warranties is used in this module to
encompass both meanings.
In German legal practice, as sometimes is
the case in modern British and American legal practice, the term guarantee
is used to describe what French would mean by the term la garantie or what
German law would understand by Gewahrleistung. The fact is that the French
term garantie, like force majeure, has found wide application in
international trade. From international trade, these terms are spreading
into everyday usage in different languages.
Meeting of
warranties and guarantees in this module
For the reasons
outlined above, when the term warranty is used in this module, the
difference that still exists in English law between warranties and
conditions is not implied. When the term guarantee is used, it is not used
in the meaning of suretyship or bank guarantee. Unless otherwise
indicated, the two terms are here interchangeable and have the meaning
that they would have in the French and German legal systems. However,
because the module deals not with contracts of sale but with contracts of
licence, it does not talk about sellers and buyers but about licensors and
licensees. Similarly, in licence agreements it does not talk abut
warranties or guarantees concerning the legal or physical properties of
goods sold but about the legal or other (factual) properties of the
licensed rights or of the technology to be transferred.
Warranties in different
licence agreements
Not all licence agreements have
identical warranty provisions. Although there are similarities between
agreements, there are also important differences among them. The
differences stem from the different characters of the subject matter
regulated by each agreement. A patent owner, for example, is not giving
identical warranties to licensees, as is a knowhow or a trade mark owner.
For this reason, the warranty provisions of patent, trade mark, and
knowhow agreements have to be analysed separately. An attempt will be made
to point out these differences and similarities.
Furthermore, the
parties to licence agreements are free to structure the warranty
provisions in their agreements as they wish. This freedom may be curtailed
only if there are mandatory applicable legal provisions. However, in many
legal systems there are only a very few mandatory provisions applicable to
the warranty provisions in technology transfer arrangements, so in
principle it is most often up to the parties to set standards of
expectations and risks in their agreements.
It is not implied here
that the parties to an agreement should agree in any specific form to
warranties. However, it is assumed that the parties in technology transfer
agreements wish to reach a reasonable balance of rights and obligations.
Such reasonable expectations undoubtedly imply a fair and equitable
structure of warranty provisions. The definition of equitable structure
varies from one case to another and depends on different variables, such
as payment provisions, territorial application and technical
preparedness.
If the parties omit to mention warranties in an
agreement, it is probable that a court or an arbitration tribunal with
jurisdiction over the dispute will accept their free decision not to
provide for warranties. However, in such a case, if there are no
warranties, the courts or arbitrators will apply the proper rules of the
applicable law to address any omissions.
Warranties in different legal
systems
Many countries have laws and regulations, including
court decisions and precedents, which together create the national legal
framework for intellectual property rights. Depending on the national
legal systems, the answers and solutions to certain questions may differ
from one jurisdiction to another. In principle, the practice of licence
agreements within a national legal system allows the parties freedom to
agree on the scope of warranties for transferred technology. Nevertheless,
caution may be warranted, because encroachment by legislators in this area
may not be entirely excluded. In other words, in some legal systems there
may be no mandatory legal rules applicable to licence agreements. In such
a system, the parties wishes, as spelled out in the licence agreements,
will be accepted by the courts. When the parties do not raise a specific
matter in their agreement, or if their intention cannot be derived form
the wording of the agreement, the courts will substitute the will of the
parties by applying non-mandatory legal provisions. In other legal
systems, mandatory rules may apply to the contents of licence agreements
and specifically to the warranty and guarantee provisions of such
agreements. In such cases, if the matter were to come before a court, the
courts would overrule the agreement and apply the mandatory rules. For
these reasons, parties to an agreement should consult the applicable legal
system before concluding an agreement.
The risk element
in technology transfer agreements
Technology transfer
agreements (patent, trade mark and know how agreements) are considered
"risk" contracts, because there is relatively little mandatory legislation
regulating these transactions' because the parties are free to shape the
contracts as they wish; and because there are no inherent warranties that
the undertaking will succeed. For all these reasons, the parties are left
to structure their relationship, including warranties, according to their
own wishes and needs. In this framework, it is not surprising that the
negotiating skill of the parties, as well as the strength of their market
position, often plays a decisive role in balancing the parties' rights and
obligations.
In the area of warranties and guarantees, the risk
elements is especially accentuated, because it is largely up to the
parties to set the scope and the limits of their rights and obligations.
Many legal systems are silent on the warranties a licensor should extend
to his licensee.
Normally a licensor attempts to limit his
warranties. In order to do so, a licensor may use all available
preferences. For example, a licensee may fail to conclude a technology
transfer agreement if the requested warranties exceed those acceptable to
a licensor. Therefore, licensees structuring licence agreements,
especially the warranty sections thereof, must be alert to protect their
interests.
Warranties in patent
licence agreements
Legal
status of patents
Technical
applicability and usefulness of patents
Commercial
exploitability of the patent
Third
party infringements
Warranty
closes in utility models
The
common warranties in an exclusive patent licence agreement refer to the
following matters :
- Legal status of the
patent
- Technical applicability or usefulness of the
patent
- Commercial exploitability of the
patent
- Third-party infringements
In the
legal literature, the phrase "deficiency in the thing itself" is used when
a patent cannot be used as foreseen in the agreement between because of
its technical shortcomings. When it cannot be used due to some third-party
infringement of rights, the phrase "legal deficiency" is
used.
Legal status of
patents
Licensees should clearly understand the legal
position of a patent. They must know if a patent has been granted or if it
is only under examination and/or if an application is filed. Because the
future use of a patent depends to a great extent on its legal status,
licensees are entitled to full and detailed information about patent
status.
Consequently, the first reasonable warranty expected from
a licensor is that a patent exists and is legally valid. Of course, a
patent may not yet be granted, but only applied for or requested. In such
a case, the licensor should warrant he exact and described legal status of
his patent application or "lay it open for public inspection".
If a
patent has been granted, the licensor should also warrant that he has
unhindered right to grant the patent licence, that there are no mortgages
or pledges of third parties on the patent right, or that the patent is not
dependent on some prior patent or on a utility model. If there is a prior
right to use the patent", the licensor is expected to inform the licensee
about it.
An essential feature of patents is that they are valid
only in countries where they have been properly registered. Warranties
concerning the legal status of a patent should include the obligation of a
patent holder to register the patent in the territory where a licence is
granted and to maintain its registration.
A patent may become void
and be revoked if it is discovered the technology is not novel and patent
protection should not be awarded. In such a case, the licensee may
terminate the contract; there would be no justification to continue paying
a fee for an invention without patent protection. However, the question of
whether a licensor should warrant the novelty of his invention remains.
Furthermore, the question of who should bear the risk of expenses incurred
by the licensee during the period until the withdrawal of the patent must
be answered.
The annex contains 24 sample clauses often found in
technology transfer agreements. They are not intended to serve as "good"
or "bad" examples. Of course, clauses that tend to decrease or entirely
eliminate any warranty by the licensor should be looked upon with caution
by licensees. Four such clauses are presented in order to make them easily
recognizable when they are made a part of contractual
proposals.
Generally speaking, a licensor is not responsible for
the future validity of a patent, but the parties may consider the
consequences of a subsequent invalidation of a patent. The usual remedy in
such cases is contract termination, most licensors would not assume
liability for damages. The licence contract remains operable until the
patent is finally revoked; a mere danger that a patent will be declared
invalid does not necessarily entitle the licensee to terminate the
agreement (annex, example 5).
The costs of maintaining a patent
normally falls, on the licensor. However, if there is an exclusive patent,
the licensor may request the licensee to bear the cost of patent
maintenance. Some developing countries have developed sample licence
agreements in which they attempt to protect the licensees in cases of
infringement (annex, example 6).
When a patent is sold and there is
no agreement, a licensor generally does not warrant its validity. A
argument often heard in favour of this approach is that because patent
sale agreements are typically risky contracts licensees should bear the
risk of unpleasant surprises. This explanation is given in spite of the
fact that a patent sale contract is a "contract of sale" in which the
sellers' liability for the quality of goods sold is well established and
where it is clear sellers are liable for defects in goods
sold.
Consequently, the invalidity of a sold patent does not
necessarily create a basis for rescission or modification of an agreement.
In cases of payment by installments, payments must be continued. For these
reasons, it is very important for the licensee to provide for an adequate
warranty provision in the agreement.
Technical
applicability and usefulness of patents
Generally speaking,
the modern tendency is to hold a licensor responsible for the technical
applicability and usefulness of an invention but not for the commercial
profitability of products based on it. However, because licence agreements
often are not subject to mandatory legal rules, the actual scope of
licensor warranties depends on the agreement's wording.
In many
cases, licensees are not acquainted with the technical usefulness of the
patent and rely on the licensors' representations. Licensors should know
the field of application and the usefulness of their patented technology.
Licensees are not expected to validate technology applications before
concluding a contract. Consequently, the licensor is expected to warrant
the applicability and technical usefulness of the patent.
If the
parties do not mention a technical usefulness warranty in their contract,
a question may arise concerning the implied warranty of the licensor.
Various laws and authors respond differently to this issue. Sometimes the
courts rule that the warranty is implied and sometimes that it is
not.
Licensors often tend to disclaim any responsibility for the
legal and technical deficiencies of their patents (annex, example 7). If
the parties wish to specify the licensor's warranties for technical
usefulness, these should be written precisely and specifically. The
parties should precisely describe the technical function for which the
patented technology will be used and describe any testing that
demonstrates the patent's usefulness. If a licensor warrants the technical
usefulness of a patent, a licensee is entitled to terminate the agreement
if such usefulness cannot be demonstrated. Similarly, if the patented
technology is inoperable, the licensee may terminate the
agreement.
Commercial exploitability
of the patent
In principle, the risk of commercial
exploitation and profit making should be borne by the licensee. There is
nothing to prevent a licensor from providing a warranty that the protected
product or process can be commercially produced and that it can be sold
and distributed. However, these warranties are not standard or usual and
for them to exist, they must be expressly negotiated. In the absence of
such agreements, the normal balance of contractual risks will favour the
licensor.
Licensees may also negotiate for the right to terminate
an agreement when continued working of the patent represents an undue
burden. Such situations may arise when continued production would mean
excessive costs, or when production become unprofitable, economically
unreasonable or impossible. The test of economic viability may be
structured in relation to the royalties to be paid. For example, if a
minimum royalty is specified and the commercial results show that even
that minimum royalty has not been reached, the licensee may wish to
exercise his right to terminate the agreement (annex, examples 8, 8, 10
and 11).
It could be argued that a licensee, if commercial
potential does not exist, should have the right to terminate the licence,
even if he does not have a right to be indemnified by the licensor.
Likewise, if a licensed technology is apparently outdated, a licence
agreement should not be considered as a "life rent" for a licensor and
should not be allowed to drive the licensee into bankruptcy.
Third party
infringements
In any patent licence the possibility exists
that the activities conducted under the licence could infringe patent or
other rights of third parties. However, seldom will a licensor agree to
indemnify the licensee against such infringement possibility. Licensors
are reluctant to undertake this kind of warranty because they rarely are
in a position to know or foresee the nature of a licensee's future
activities nor do they have control over such future activities. For this
reason, in principle, they are unable to evaluate the magnitude of risk in
extending an indemnity obligation.
Nevertheless, licensors
sometimes agree to assume the defence of any suit brought against the
licensee for infringing the rights of third parties. Most often the
licensor agrees only if the technology and/or technical information is
applied by the licensee without any substantial modification. If such a
warranty is assumed by the licensor, usually the licensee is required to
promptly inform the licensor of any claim made against him, to give
exclusive control of the defence to the licensor, to limit the overall
liability to a certain amount (usually in relationship to fees paid) and
other similar conditions.
Similarly, licensees or third parties
(for example), customers of licensees) may seek remedy against the
licensor. Such claims may occur in cases when the products produced under
the licence are defective. Licensors may wish to exclude liability for
such contingencies, and provide contractual provisions to that effect. If
there is a possibility of use in jurisdictions where 'strict liability"
principles would make the licensor liable to third parties, a licensor may
wish to be indemnified by the licensee for costs, damages, expenses and
similar claims enforced against him.
Warranty clauses in utility
models
Utility models can be protected through registration
in the form of a description, a drawing or other picture, or a model.
Protection is accorded using somewhat less strict requirements than for a
patentable invention. Therefore, utility patents offer less protection
(for example, shorter duration) than patents. Otherwise, the rights
granted under a utility model are similar to those granted under a
patent.
Licensors usually warranty the existence of the utility
model on the date of a contract. They also guarantee that they own the
utility model and that there are no rights of third parties to the utility
model. Licensors also warrant that they will not abandon the utility model
during the contract period.
In cases of infringement, licensors try
to transfer the burden of defense to the licensees (annex example 12). The
reason given for obligating the licensee instead of the licensor to defend
the utility model is that he will learn about infringements in his
territory before the licensor. Similarly, licensees have a paramount
interest to use the utility model without any disturbance from third
parties.
Licensors often attempt not to undertake any additional
warranties of the legal kind. However, they are often ready to warrant
that the invention, as embodied and in accordance with the utility model,
can be factory-produced and economically marketed. A warranty of this kind
does not necessarily mean that a licensor is liable if a licensee cannot
produce the product due to his own inexperience or shortcomings. Under
such a clause, a licensor will still not be liable for the profitability
or for the economic results of production based on the utility model
(annex, example 13).
Warranties in know-how
licence agreements
Warranties
of accuracy and completeness
Warranties
for the stage of technological development
Adequacy
and suitability for specific production
Third
party infringements
Warranty
of results
Warranty
against infringement
Secrecy
arrangements
Know-how may be secret or non-secret. If the know-how is secret,
licensors want to be sure it is not revealed to third parties, because it
would lose its value. The fact that know-how is not legally protected
implies that licensors are not supposed to warrant its legal protection,
although they are expected to keep it secret or confidential. Licensors
are not expected to reveal the knowhow to the public, because once it
becomes public knowledge, it becomes accessible to everybody, which may
destroy the justification for continuous payment of royalties.
Nevertheless, it seems that secrecy of knowhow is not necessarily one of
its essential elements. In other words, it is possible to consider as
knowhow a body of knowledge that, although not secret, is simply not
easily accessible.
It might be expected that a licensor would
warrant that using the knowhow will not infringe third parties rights or
that its use will not cause damages to third parties. However, many
knowhow licensors decline to undertake liability of this or any other
kind. Therefore, licensors often decline all warranties for the
transferred knowhow (annex, example 14). In spite of a licensor's tendency
to exclude any specific warranty for knowhow, there still are areas where
such warranties typically are expected and required. In broad terms a
knowhow licensor may extend warranties in two specific areas: (a) a
warranty that the knowhow has certain technical properties and (b) a
warranty that using the knowhow will not infringe the industrial property
rights of third parties.
Generally speaking, in knowhow licence
agreements, the following areas may contain explicit warranties from the
licensor :
- Accuracy and completeness of
technical information
- State of the development of
technical information
- Adequacy and suitability for
specific production
- Third-party
infringements
- Warranty of
results
- Warranty against
infringement
- Secrecy arrangements
This is by
no means an exhaustive list of warranties which a licensee may request
from the licensor of a knowhow: rather, it is a sample. Furthermore, these
warranties may not be sharply differentiated from one another. In such
cases the exact scope of a warranty may be judged only by its description
and definition. In formulating specific warranties, it may easily happen
that some of the extended warranties spill over into a wider scope than
originally intended.
Warranties of accuracy and
completeness
It is usual to demand from the licensor a
warranty that the technical information supplied under the knowhow licence
agreement is complete in terms of what has been described and promised,
and that it is complete in the sense that it contains all the information
necessary to achieve the anticipated results. This is not a warranty of
results but a guarantee for accuracy and completeness of the delivered
material. Such a warranty is usual when the knowhow has to be handed over
in tangible form. In these cases, a list of the material's headings and
description of content may be provided in the agreement. Using this
technique, there is no danger of revealing, the content of secret knowhow
which it is possible to specifically identify the items to be delivered
and describe the substance of materials to be delivered.
Due to the
intangible character of some technology, there may be a problem in
defining completeness, particularly when the technology is not documented.
In such cases, additional measures may be needed to assure completeness,
such as visiting the plant or receiving training.
In the same
manner, a warranty of accuracy of the supplied information may also be
requested. This means the licensor must ensure that the technical
information supplied under the agreement does not contain errors,
mistakes, omissions and similar shortcomings. The warranty of completeness
and accuracy, because its wording is sensitive, may sometimes be a
warranty of the results (annex, example 15).
Warranties
for the stage of technological development
The know how
licensor may be supplying his latest technology or an older technology. It
could be very useful to clarify, in the agreement, the stage of
technological development. If a disclosure of this kind is not made in the
contract, licensees may not know exactly what they will be receiving. They
may believe they will receive the latest technology, while this may not be
the case.
If the licensor gives a warranty that the knowhow is its
latest technological development, it will be responsible for damages if it
supplies an older technology (annex, example 16).
Adequacy and
suitability for specific production
There is nothing to
prevent a licensor from warranting the suitability of its know how for
certain technological requirements of the licensee. In cases of such
warranty, the licensor will attempt to acquaint itself with the
circumstances and other relevant technical and environmental conditions
under which the know how will be applied by the licensee. The warranty of
suitability implies not only that the technology is applicable but also
that it is technically suitable. However, such a warranty would not
necessarily imply that the licensor has undertake to warrant the results
of applying its technology. It may be saying only that if specific
conditions in the licensee's production process are met and complied with,
then the technology will be suitable for achieving certain goals. Such a
sensitive warranty, often tied to multiple conditions, requires very exact
and precise language to define its precise scope. Here, licensors are
often reluctant to use broad language and very often the warranties end up
being very narrow. Sometimes licensors are ready to warrant the
suitability of technology for specific production but intend to tie in
such clauses to the further provision of technical assistance, the supply
of specific raw materials or similar additional undertakings. Samples of
such warranties show the difficulties connected with them (annex, examples
17 and 18).
Third party
infringements
If a knowhow agreement is explicitly based on
secret knowledge, the licensor warrants, even without any specific
provisions in this respect, that the knowledge is secret and is not known
to third parties. Because knowhow is not legally protected, licensors
cannot move against third parties for infringing knowhow secrets. If
secret knowledge covered by the knowhow agreement becomes public
knowledge, the duties of the licensees, and particularly the duty to pay
fees, becomes void.
To protect the secret or privileged information
contained in the knowhow, licensors may bind their own employees not to
reveal the secrets to any third party. Likewise, they can contractually
oblige licensees not to reveal to any third party know how secrets,
including all technical drawings, plans, maps, etc.
Warranty of results
Warranty of
results is not necessarily implied in a knowhow agreement. In order to
exist, this warranty must be specifically mentioned in the knowhow licence
agreement, or at least, implied through relevant provisions of the
agreement or other connected circumstances. Nevertheless, there is nothing
to prevent a knowhow licensor, like a patent licensor, from giving a
warranty of results.
In a warranty of results, a licensor warrants
the licensee to achieve specific results by applying the delivered know
how. This warranty has to be proven by obtaining the results produced when
using the technology. While earlier mentioned warranties do not imply any
warranty for the economic results of the technology, a warranty of results
may imply, or even explicitly undertake, a warranty for economic results.
This guarantee may also contain warranties concerning the consumption of
raw materials, energy or lubricants and similar economic parameters. A
reasonable licensor will agree to this type of warranty only if issues
like training and raw materials are specified in the
contract.
Sometimes warranties are formulated in a positive manner,
affirming liability for certain results, but more often one encounters a
refusal to warranty any results (annex, examples 19 and 20). Even when the
licensor does warranty the technical possibility of achieving specific
results, this does not automatically mean the licensor has undertaken a
warranty for profitable use of the licence. Such an obligation could be
assumed only if specified in the agreement.
Warranty against
infringement
Although knowhow, unlike parents and trade
marks, is not protected, its use may infringe the industrial property
rights of third parties. Often a licensor will warranty that using
specific knowhow will not infringe third party rights.
If the
licensor is not sure whether his know how is infringing some industrial
right of others, it may at least warrant that it has no knowledge that
third parties' industrial property rights could be infringed by the use of
the knowhow. Regardless of its knowledge, the licensor may warrant that
the licensee will be able to use the knowhow without legal interference by
third parties and that no infringement suits will be filed against him or
they are filled, that it, the licensor, will defend and bear the cost of
such defence (annex, examples 21 and 22).
Laws in some countries
provide that an agreement between parties may not exempt the technology
supplier from liability in the case of actions by third parties for
infringement of industrial property rights.
Secrecy arrangements
In a
knowhow arrangement, a licensee typically agrees to keep received knowhow
secret, because any disclosure could destroy the value of the knowhow,
thereby harming the licensor.
An essential feature of know how is
that it can legally be protected only within a contractual framework.
There is a danger of revealing knowhow during negotiation, when the
licensor explains the basic characteristics, traits and experiences of the
knowhow. At this stage, there is no other way to protect knowhow than to
obtain a pledge of confidentiality. For this purpose, a licensor usually
proposes signing a secrecy pledge. This pledge may obligate the licensor
not to use acquired information for his own purposes and not to reveal the
information to third party. Such a pledge may be mutual, if licensees as
well as licensors are likely to reveal privileged information or secrets
to each other. Any pledge may be strengthened by including a penalty or
damage liability clause. Such a pledge would not apply to information
publicly known or already known to the other party (annex, examples 23 and
24).
Warranties in trade
mark licence agreements
Legal
status of trade marks
No
warranty of results
Trade
mark licensing contains considerably fewer warranties and guarantees of
the foreign licensor than patent and knowhow licensing. Trade marks
generally denote the product's origin and do not have such a finite
character as the technical information contained in patents. In many cases
trade marks are tied to patent and knowhow licences, or they may
constitute one element of another kind of technology transfer
agreement.
Nevertheless, trade marks are often the primary and the
only subject of a licence agreement. Moreover, they have become
increasingly important in modern global competition where a distant, but
known, name or mark can increase sales beyond all expectations. Warranties
in trade mark agreements could cover the legal status of the trade mark,
with no special warranty of results.
Legal status of trade
marks
In a trade mark licensing agreement the licensor may
warranty the legal status of a trade mark. It usually warrants that the
trade mark hs been properly registered and that the trade mark has been
properly registered and that its registration will be maintained in force
throughout the duration of the agreement. At the same time, the trade mark
ownership should be duly recognized and not be subject to any sort of
qualifications.
In some countries the condition for continued
validity of a trade mark is continuous use by the owner. "Use" may
sometimes mean manufacturing and selling a product bearing the trade mark.
Use by a licensee is considered the same as use by the trade mark owner.
In such cases licensor seek a reverse warranty from the licensees stating
the trade mark will be "used", within the meaning required by local
regulations, in order to maintain the registration. Licensors may require
bona fide intention to use the mark for goods nd services as a legislative
shield against stockpiling trade marks by people who have no intention of
ever using them. Such requirements may be reflected in trade mark licence
agreements.
No warranty of
results
A trade mark licensor will almost never warrant the
quality of any product produced by a licensee. In most cases the licensor
retains the right to control products manufactured under the licensed
mark. In a way, this is a logical distribution of risks. On one hand, a
licensor has no control of the production process. This is true even when
the trade mark licensor provides instructions for manufacturing the
product. It is the licensee's obligation to abide by the production
instructions. However, the trade mark owner has a bested interest in
ensuring that the products manufactured under his trade mark are the same
quality the public is used to receiving. Therefore, trade mark owners
seldom extend any warranties concerning the goods produced with the trade
mark but retain a right to inspect goods before they are put on the
market.
Warranties in
other agreements
Warranties
in sale transactions
Warranties
in turnkey arrangements
Warranties
in engineering contracts
Warranties
in technical assistance agreements
Warranties
in management contracts
Warranties
in joint-venture agreements
As
already mentioned, there are alternative means for transferring
proprietary technology including, but not limited to a simple sale of
machinery and equipment, turnkey arrangements, foreign investments and
management agreements. This section examines the use of warranties in
these technology transfer agreements.
Warranties in sale
transactions
Warranties in a sale transaction tend to be
limited to the quality and quantity of goods comprising the transaction.
If machinery and equipment are being sold, the warranties focus on the
quality of goods and the ability of the equipment to perform the functions
and operations for which it has been manufactured. For example, if a pump
is sold the seller may warrant it will operate as specified for a certain
period of time (usually 12 months). The period through which the warranty
remains in force is called the guarantee or warranty period. Once this
period expires, the seller, in principle, will not have any further
warranties. An implied warranty is that the seller has title to the goods
sold and that he may transfer that title by delivering the
goods.
In an outright sale, there are no warranties for the
transferred technology. The technology embodied in the pump is not the
subject of the transaction. The transaction deals with the pump itself;
therefore the warranty is on the pump's quality and operation for a
specific period.
Warranties in turnkey
arrangements
The subject of a turnkey contract is usually a
whole plant, including the individual pieces of delivered equipment and
machinery. These contracts warrant that the plant will function and
perform according to the warranted parameters.
If some machinery
and equipment does not function as contracted, the contractor has to
remedy the defects. A contractor also is obligated to provide a plant that
produces the contracted output. The output is usually measured for a
limited period of time (testing period). Once tests show the plant
produces the agreed quantity at a certain quality, the warranty period
begins. Because the contractor is no longer in charge of the plant after
the tests are complete, it no longer warrants the plant will actually
produce a certain quantity or quality. Nevertheless, the contractor
remains obligated to connect all machinery and equipment defaults through
the warranty period. This period is often called a maintenance
period.
The difference between a guarantee or warranty period and a
maintenance period often lies in the slightly different contractor
obligations. Under a warranty obligation, the contractor is obliged to
replace at his own cost the machinery and equipment that defaults in
performance. In a maintenance obligation, the contractor is only expected
to do whatever is necessary to rectify defaults, at the expense of the
facility owner.
Again, in some turnkey agreements there is no
special warranty for the transferred technology. If, for example, the
turnkey arrangement involves supplying and erecting a hydropower station,
the owner will receive all the technology needed to run the station. The
combined working and operating machinery delivered implies that specific
results can be achieved. The machinery warranty implies a warranty of
technology. However, as in sales arrangements the technology is not the
subject of the contract.
However, if the owner believes the
machinery and equipment will not enable him to manufacture the intended
goods without additional insight into using the technology, he may request
a special technology transfer agreement. Such an agreement may be either a
direct licence agreement or an indirect technology transfer agreement such
as a technical assistance agreement or a management agreement. In such
cases, there may be special process performance guarantees based on
separate technology transfer agreements. A detailed discussion of process
performance guarantees that become particularly relevant in case of
complex industrial projects is given in module 18, on contracting complex
industrial projects.
Warranties in engineering
contracts
For the purpose of this review, engineering
contracts are considered to be contracts concluded by engineering firms.
These firms provide the wide range of services required to conceive,
design and begin operating complex, capital-intensive industrial and
metallurgical projects, including licences and technology, with
management, recruitment and training.
The warranties engineering
firms undertake vary depending on the type of obligations they agree to
assume. If the subject of the contract is to provide technology through
licensing or to provide management or training services, the scope of
warranties must be agreed by the parties. If the agreement is a turnkey
one, the warranties shall be as described above. In combined
turnkey/technology transfer/technical services agreements, the warranties
reflect the warranties typical of such contracts.
Warranties in
technical assistance agreements
A technical assistance
agreement provides for one party to render technical assistance to another
party. The party rendering the assistance may agree to send technical
experts to the other party or to train the technical experts of the other
party or to maintain certain equipment or to perform some similar
function.
There is no doubt that technology transfer is taking
place in a technical assistance agreement. However, the main subject of
such agreements is not technology transfer, but technical services.
Therefore, any warranty is directed toward properly fulfilling obligations
connected with rendering the service, not with transferring the
technology.
Warranties in management
contracts
The purpose of management contracts is to assume
certain management functions for one party. Such contracts are usual, for
example, in the hotel industry, but they are also feasible in other
industrial sectors. In this arrangement, a management contractor warrants
the performance of his management functions. Within these functions, he
may be obliged to transfer knowhow and technology to the
recipient.
In principle, this transfer is not the main object of
the contract but incidental to the management function. Such contracts
usually provide for training the recipients personnel in such a manner
that they acquire the knowledge necessary to run the business by
themselves. However, the knowledge and skills transferred during
management operations are not the subject of these contracts. The subject
is the management function itself. Therefore, the warranty in such
contracts is directed towards performance of the management functions
rather than towards the technology transfer- and skills.
If the
parties to a management agreement wish to achieve the transfer of specific
knowhow, they may prefer to conclude a separate transfer of knowhow
agreement.
Warranties in joint-venture
agreements
Joint venture agreements represent a form of
foreign direct investment. In such arrangements, foreign investors combine
their investments with the participation of local partners. Foreign
investments may be in a tangible or intangible form. Intangibles are
usually rights owned by foreign invetors. Most often such rights are
industrial property rights such as patents, trade marks or
knowhow.
If the investment is not comprises of industrial property
rights, it is likely that a foreign investor will invest tangible assets,
such as money or machinery and equipment. In such cases, it is also very
likely the foreign investor will conclude a separate contract for
technology transfer with its local partner or with the newly established
joint venture company.
In the first case, i.e. when industrial
property rights are invested as capital, foreign investors are expected to
warranty certain properties of the transferred technology just as if the
technology was being transferred under a separate contract. Local
recipients of foreign technology are entitled to expect the same quality
and protection regardless of whether a technology is invested as capital
or is licensed under separate contract.
Annex
WARRANTY CLAUSE OFTEN FOUND IN
TECHNOLOGY TRANSFER AGREEMENTS
Example 1
If the
use of the patent forming basis of this agreement results in a claim for
infringement against the licensee, the cots and any damages awarded
against him shall be borne by -------------(either licensee or
licensor).
The costs and expenses of any country-claim or of
settling a claim shall be borne by ----------(either licensee or
licensor).
The licensee shall inform the licensor of any claim made
against the licensee for infringement and shall enable the licensor to
join in any legal proceedings.
Example 2
The licensor
also warrants that one the date of signing of this agreement, to the best
of his knowledge, it is not aware of third parties valid patent rights or
similar protection for inventions which would be infringed upon by
licensee's use of the technology subject to this
agreement.
Example 3
Licensor guarantees that it is
not aware of any legal deficiencies of the patent licenses hereunder. It
particularly guarantees that it is aware of neither any third party's
prior rights to use, nor of a dependency of the licensed patent on third
party's patents, nor of technical deficiencies of the invention on which
this patent is based. Licensor assumes no liability for lack of
deficiencies mentioned.
Example 4
The licensor does
not warrant the novelty of its invention, but should it transpire that the
patent is void by reasons of its publication, whether wittingly or
unwittingly, the licensee shall be entitled to determine the agreement
wholly or in part by notice in writing.
Example
5
Partial or complete invalidation of the licensed
patent
This agreement and its validity shall not be influenced
by the fact that the licensed patent should finally be declared invalid.
Licensee shall, however, have the right to terminate this agreement within
three months from such a final declaration of invalidity of the licensed
patent or to request from the licensor an adjustment of royalties with
respect to the licensed knowhow.
Previously paid royalties shall
not be refundable. Royalties which were due prior to the final declaration
of invalidity, but have not yet been paid, have to be paid by the
licensee. The latter does not apply if the licensee has informed the
licensor by registered mail of the fact that competitors infringe the
licensed patent and have refused to sign a cease and desist declaration
submitted to them with a warning letter. If licensee does not file a
patent infringement complaint within a reasonable period, it shall remain
obligated to make royalty payments hereunder.
If the licensed
patent is partially invalidated or the licensed patent is determined to be
dependent upon an earlier patent, licensee has the right o request an
adaptation of this contract to changed circumstances. This does not apply
to a case of dependency of an earlier patent, if licensor holds licensee
harmless, e.g. by royalty payments to the owner of the earlier
patent.
Example 6
Infringement
1. The
licensee shall promptly advise the licensor in writing of any notice or
claim of infringement and of the commencement of any suit or action for
infringement of any patent against the licensee which is based upon the
use of any invention that is the subject of the patent(s) or of any patent
of an improvement granted to the licensee and which is used by the
licensee under the authority and in accordance with the terms of this
agreement.
2. The licensor shall upon receipt of such notice and if
promptly requested in writing to do so, undertake at its own expense the
defence of any such suit or action and the licensee shall have the right
to be represented therein by advisory counsel of its own selection at its
own expenses. The licensee agrees to cooperate fully in the defence of any
such suit or action and to furnish all evidence in control.
3. In
the event the licensee undertakes the defence of any such suit or action
against it, the licensor shall nevertheless bear the expenses of, and
fully cooperate in, such defence and shall have the right to be
represented therein by advisory counsel of its selection.
4.
Neither the licensor nor the licensee shall settle or compromise any such
suit or action without the consent of the other if the settlement or
compromise obliges the other to make any payment or part with any property
or assume any obligation or grant any licence or other rights or be
subject to any injunction by reason of such settlement or
compromise.
5. The licensor will release, acquit and discharge the
licensee from any and all claims or liabilities for infringement or
alleged infringement of the patents prior to the date of validation by the
-------------- Government authorities of this agreement.
Example
7
Licensor undertakes no liability whatsoever for legal
deficiencies of the patent and is not aware of any rights of third persons
on the patent. Licensor is likewise not aware of any deficiency or defects
of the invention. Licensor is not assuming any guarantee or warranty or
other liability for legal or other defects of any kind.
Example
8
The licensor undertakes no responsibility for the risks of
industrial realization, which are assumed solely by the licensee. The
licensee shall be deemed to understand the subject matter of the licence
and shall undertake its industrial realization. If it fails to do so
within a period of -----------------(it is advisable to specify a date
before which determination may not take place) the licensor shall be
entitled to determine the contract. It shall also be entitled to recover
damages. (This variant may be used when the subject matter has bee
manufactured before the contract is made.)
Example
9
The licensor does not warrant that the invention is capable
of industrial realization nor shall it be responsible for the consequences
of any failure to realize it. If industrial realization proves impossible
or too difficult for the licensee, either party may determine the
contract. In such a case neither party shall be liable in damages to the
other.
Example 10
The licensor does not warrant that
the invention is capable of commercial exploitation. The risks of such
exploitation shall be assumed solely by the licensee.
Example
11
Licensor guarantees neither the patentability and validity
of the licensed patent nor the commercial exploitability and/or readiness
for plant use of the invention, and shall not be liable
accordingly.
Example 12
Obligation to
defend
1. Licensee promises to defend the utility model
against challenges by third parties at licensee's costs. In the case of an
infringement of the utility model it is incumbent upon the licensee to
pursue, at its costs, infringements within the licensed territory. This is
inapplicable if the infringing activities are insignificant and the
litigation costs will be disproportionate to possible losses of
sales.
2. If the licensee fails to pursue infringers, then licensee
shall not have the right to back payments or reduction of royalties. In
the case of a successful prosecution of an infringer, the possible damage
awards shall belong to the licensee.
3. If third parties bring an
invalidity suit against the utility model, the royalty payments are
reduced to one half, regardless of whether the third parties abide by the
utility model or not. The other half of the royalties is to be paid into
escrow account until the final decision in the invalidity suit. If the
utility model is cancelled the amount in the account is paid to the
licensee; if it is upheld, the payment goes to the
licensor.
Example 13
Liability for
defects
1. Licensor assures that it is not aware of legal
defects with respect to the utility model, and that it is not aware of any
technical defects of the invention underlying the utility model. Licensor
shall not be liable for any unknown defects, particularly resulting from
patents or utility models of third parties.
2. Licensor guarantees
that the invention in accordance with the utility model can be factory
produced and economically marketed en gros.
Example
14
Warranties
1. The knowhow and technical
data which are provided under this contract are those which the licensor
itself uses in the production of the licensed article. Nevertheless, the
licensor does not make any guaranteed promises that the know how and
technical information is correct and without defects, that the use of the
information makes possible the adequate production of the licensed article
or that the technical information is complete.
2. There is no
warranty that the use of the licence does not infringe third parties
rights or does not cause damages for third parties.
3. All warranty
claims are excluded as far as these are based on the technical data or the
knowhow transferred. No warranty is made for the reliability, the quality,
the economic utilization, the usefulness of the licensed article for the
intended purpose or for any other purpose.
Example
15
Guarantee by transferor
Subject to the
terms and conditions hereinafter set forth, the transferor makes to the
transferee the following guarantees; al the written knowhow and the
technical information handed over or disclosed to the transferee pursuant
to the provisions of this agreement will be correct, complete, up-to-date
and adequate to (manufacture the product) (apply the
process).
Example 16
Licensor guarantees that the
technical documentation supplied by licensor to licensee with the contract
shall be the latest technical documentation which is actually used by
licensor and the improved and developed technical documentation shall be
supplied in time by licensor to licensee in the course of the
contract.
Example 17
The licensor hereby warrants
that the technical information supplied as knowhow as described in this
agreement is suitable for manufacturing the product as stipulated herein,
but provided that the technology is used under the same conditions, and
with same intermediaries and other materials, as used by the licensor as
its plant at the time of the signing of the contract.
Example
18
The transferor guarantees that the process has been
technically tested in its works and that the process has resulted in the
production of the product. However, transferor will take no part in the
use made by the transferee of the knowhow supplied under this agreement
and accordingly gives no guarantee that the transferee will obtain the
same or similar results in the use thereof.
Example
19
The licensor guarantees that the knowhow delivered under
this agreement and transferred to the licensee will enable the recipient,
through its acquisition and application to achieve the proposed technical
aims …
Example 20
Licensor does not warrant that the
invention and knowhow are capable of industrial realization nor shall it
be responsible for the consequences of any failure ---------------- to
achieve this. If industrial realization proves impossible or too difficult
for the licensee, either party may determine the contract. In such a case
neither party shall be liable in damages to the other ----------------
Similarly, licensor does not warrant that the invention and the delivered
knowhow are capable of commercial exploitation. The risks of such
exploitation shall be assumed solely by the licensee.
Example
21
Licensor guarantees that it has lawful ownership of all the
know how and technical documentation supplied by licensor to licensee in
accordance with the contract, and that licensor has the right to transfer
them to the licensee. In case a third party brings a charge of
infringement, licensor shall take up the matter responsibilities which may
arise.
Example 22
Warranty by the
transferor
The transferor hereby warrants that as of the date
of the signing of this agreement, it has no knowledge of any patents
granted or rights insuring to third persons that would prevent the full
enjoyment of the technical information furnished under this
agreement.
Example
23
Confidentiality
The licensee undertakes to
preserve the confidentiality of all designs, drawings, technical
information and knowhow furnished by the licensor and shall not divulge
any part thereof, except what is normally required for the sale and use of
the products covered by the licence, and for manufactures of parts and/or
components or raw materials in (the country name). The licensee shall
place his staff under strict obligation not to divulge the knowhow, in any
circumstances, during the period of validity of the
contract.
Example 24
Licensee agrees to keep the
knowhow and technical documentation supplied by licensor under secret
conditions within the validity period of the contract. If a part or the
whole of the above mentioned know how or technical documentation will be
opened to the public by licensor or any third party, licensee is no longer
to have the secret obligations to the opened parts. |
