Your industrialisation partners, which I will also call ‘licensee’ (refer to the article ‘Tips to exploit commercially your IP using a Licensing Strategy’ for more details on the Licensing business model) have reached the mass production phase of your technology/product. They are at risk of making errors when implementing the contractual provisions. Therefore, a close monitoring of licence agreements will spot two main categories of errors:
- The calculation errors
- The interpretation errors
My article is written for situations where errors are made in good faith.
What is a calculation error?
It is a self-explanatory term describing errors of calculation. 1 + 1 do not make 3!
What are the main causes of calculation errors?
They are mainly caused by a lack of internal controls within companies, illustrated by the following examples:
- Royalty calculation formula not updated in CRM systems or Excel spreadsheets
- Use of Excel spreadsheets, prone to human errors
- Relevant amendments to the contracts not communicated to the team responsible to prepare and submit the royalty reports to the licensors
- Royalty calculation process owned by one individual, without information cross-checking with a peer
An error calculation is an easy fix as it only requires a recalculation of the right amount. It also gives the opportunity for the licensee to acknowledge the situation and to make improvements to their internal controls processes. However, it can become more complex when interpretation errors are also at stake. Then, the error calculations can be used as a negotiation tool for both the licensee and the licensor.
What is an interpretation error?
It occurs when the two contractual partners have a different interpretation as to how to implement the licence agreements provisions in practice.
What are the main causes of interpretation errors?
The risk of choosing a different interpretation of contractual provisions is higher when the contract is not clearly drafted leading to misunderstandings between the contractual partners. I have listed some examples leading to this situation:
- Omission of key terms definitions in the licence agreement
- Superficial review of the different partners’ interests during the negotiation phase
- Lack of communication and of follow-up of the contract
- Provisions lacking clarity as to the methodology to apply during the implementation phase
- Lack of practical examples of royalty calculation
It is a much more complex issue especially when the amounts at stake are important. The poor drafting of an agreement leads to grey areas, where the licensee has no solid grounds to claim that their interpretation is the right one. Therefore, it is tricky to claim the full finding to the licensee without damaging the relationship. Those type of errors are usually settled with a win-win resolution between the parties.