Licensing Agreements - the clauses that are essential

Who drafts your licensee agreement? Whether you have an in-house legal team, use the company solicitor or you cut and paste someone else’s, all agreements should contain:


It is essential to define how royalties are to be calculated, that royalties are due on all sales, and any discounts and deductions which are permitted.The relevant clause should detail the royalty rate to be applied to sales outside the territory and sales if made FOB. A percentage of returns permissible should be set and agreed.

Submissions & Payments

Submission of declarations should be specified and be in a format that contains the essential information (see Declarations). The Agreement should clearly state when monies owed should be paid and all invoices raised should contain the same payment terms. Any penalties for late payment and non declaration should also be detailed.

Audit & Records

This clause should set out the right of audit and the length of time documentation should be kept. It should detail which documents can be reviewed and copied and this should include affiliated companies. Reimbursement of audit costs should be available if excessive discrepancies are identified.


Royalties should be paid on all third party sales. The license agreement must clarify this by stipulating that inter-company sales are subject to the same royalty conditions as those to outside clients, or calculated on the normal selling price.


As an essential part of the selling process, it is imperative to control the quantity of licensed product given away free of charge, and to ensure that if licensed articles are used in promotions or as premiums/prizes, permission is obtained first.

Sell Off

Again, clarity is essential from the outset: sell off applies only to stock in hand; stock must not be ‘dumped’ into the market; and whether royalties declared will be applied to any remaining advance balance

Ownership of the Property

The license only permits certain uses for the property. All products need to be approved, and failure to obtain approval, or the use of licensed material in an unlicensed manner, will lead to damages being claimed by the licensor.