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COVID-19: impact on contracts with an IP element

05 May 2020

With an increasingly pronounced impact of COVID-19, businesses are having to look at what this means for rights and obligations under their contracts, as well as the more practical implications.

Businesses trying to manage their cash flow may look for ways to suspend their contractual obligations, or try to get out of them entirely. One way of doing that, which has understandably received a lot of public attention, may be to invoke a force majeure clause. Most English law contracts contain a force majeure clause, which spells out what happens if a party cannot perform their contractual obligations because of events outside their control. The clause may set out the types of triggering event, whether the parties are allowed more time to perform their obligations, who pays any increased costs, and whether there is a right to terminate the contract. For more information on force majeure clauses and the doctrine of frustration in the context of contracts generally, you can read our earlier article here.

There are some particular implications in the context of agreements which involve a grant of intellectual property (IP) rights. IP pervades many sectors and the agreements in question can include film/television or online content production; merchandising; and distribution.

Commercial arrangements can be impacted in different ways, for example:

  • Agreements between creators and publishers or production companies may be impacted if they contain specific delivery milestones which can no longer be met, because of government restrictions or the inability to carry out the work.
  • Licensors may be unable to approve licensed product samples at the same speed, or at all. This could in turn impact on the licensee’s manufacturing process. Some agreements provide that, if the licensor’s approval is not given within a certain period, the sample product is deemed approved, but that is not always the case.
  • Minimum sale or manufacturing obligations in distribution agreements may no longer be achievable as a result of economic downturn, or if lockdown has forced production to be halted.
  • Licensees coming to the end of their licence term, or whose licence has been terminated, may find that they are unable to benefit from a contractual sell-off period. Demand for products may have temporarily plummeted, or the supply chain disrupted, and they may therefore seek an extension of the sell-off period. The same can apply to parties who have reached a settlement agreement following a dispute, which sometimes specifies a sell-off period.
  • It may temporarily be impossible to comply with a delivery up obligation in a settlement agreement or Court Order, following an IP dispute, necessitating a workaround.

Where a contract has a force majeure clause, it will typically provide that, if the period of delay or non-performance lasts for longer than a certain number of days, the affected party may terminate the agreement by giving a certain period of notice.

Licensees may wish to review their agreements to establish when this right of termination will arise. Conversely, licensors should be aware that some of their licensees may look for a way out of their agreements, and should take note of when a right of termination due to a force majeure event will arise, and be prepared to line up alternative arrangements.

In the majority of cases, the first step will be a commercial discussion to see how both parties’ needs can be accommodated. For example, by adapting processes so they can be done remotely, postponing payments, or agreeing a delay to performance. If an agreement is reached, the parties can agree to vary the contract by consent. Any such variation should be recorded in writing and signed on behalf of the parties to the original contract, and most contracts will have a ‘variation’ clause to that effect.

For more information and advice on existing contracts, how to cater for the impact of COVID-19 in new contracts, or how to deal with the exercise of a force majeure clause, you can contact our specialist contractual disputes team here.

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