This article has been written by Aishwarya Parameshwaran pursuing the Diploma in Intellectual Property, Media and Entertainment Laws from LawSikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
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Intellectual property (IP) that deals with the protection of IP rights is an emerging branch of law. Rights related to original works in respect of music, art, cinematograph films, designs, inventions etc. which with the owner of the rights are covered under the ambit of IP rights. The intent of the legislature to legislate laws with respect to intellectual property is that, firstly people are encouraged to create works that will ultimately benefit society. Secondly, to ensure that the rights of such creator, inventor or owner of the rights is protected and thirdly to generate revenue.
In order to ensure protection of intellectual property rights, several contracts are executed by the owner of such rights. Some of the examples of IP agreements are Assignment Agreement, Licensing Agreement, Distribution of rights Agreement, Non-Disclosure Agreement, Franchise Agreement, Work for Hire Agreement, Publishing Agreement.
When parties enter into IP agreements, they are well aware of the fact that the stakes are high and they generally want the terms and conditions to benefit their individual interests. In such an arrangement, it is always safe to have an agreement which is precise and free from any kind of ambiguity. When parties enter into an agreement, they bind themselves into a legal obligation and they are free from such legal obligation only when they terminate the agreement or if the agreement expires. Such termination occurs as per the termination clause specified in the agreement. Now, let’s take a deep dive to understand what is a termination clause and what role does it play in an IP agreement.
What is a Termination Clause?
Generally, all agreements have a specified term until when it shall be enforceable. However, parties can also choose to make their association for perpetuity i.e., for a continued period of time.
Termination clause is nothing but predetermined terms and conditions upon which the parties can cancel i.e., terminate the agreement. This clause states the rules that shall apply whenever a party would want to terminate the agreement. It also lays down who may terminate the agreement and on what grounds.
It is advised to always negotiate the terms under the termination clause and carefully verify the same with an advocate in order to ensure that the terms are enforceable and fair. Additionally, one must always keep in mind that if the termination clause is used incorrectly, it may result in a legal conflict.
Purpose of Termination Clause
- Avoids future conflict:
The purpose of inclusion of a termination clause in the agreement is to rule out all the issues that surround breach of agreement. We must understand that not all breaches are equal, termination clauses act like a rule book stating rules on which a termination of agreement shall take effect.
- Determines when can an agreement be terminated:
Another purpose of this clause is, it specifies the date on which the agreement shall cease to exist and the grounds on which such termination can be effectuated .
- Determines who can terminate the agreement:
The third purpose is that, it lays down who can terminate the agreement when such circumstances arise.
Kinds of Termination Clause
A party’s right to terminate the agreement is dependent on the contract law or the terms of the agreement itself. The termination clause is also known as the Severance Clause. This clause allows the parties to terminate an agreement without causing any breach in the contract. It paves way for the parties to avoid a dispute and end the association by terminating the agreement under the predetermined termination clause. There are generally two kinds of termination, one being termination for convenience and other being termination for a cause. Now let’s understand the two in detail.
- Termination for Convenience:
As the name itself suggests, this type of termination happens when either party feels it is inconvenient for them to continue the association. When such an event arises, the party becomes eligible to terminate the agreement for convenience, provided, the Termination clause in the agreement expressly allows the parties to do so.
- Termination for a Cause:
Termination for a cause happens when there is a particular reason because of which either party intends to terminate the agreement. In an agreement, such a reason should generally fall under ‘material breach’. Now, what shall qualify as material breach of the agreement is generally determined by the terms and conditions specified in the agreement. Generally, when one party fails to perform the duties as specified in the agreement due to their own negligence and not due to unforeseen situations, it is termed as material breach. Before such termination occurs, a specified period of time is provided to cure such material breach. And after expiry of such specified time, the affected party can terminate the agreement for a cause.
How are IP agreements terminated?
- When will the term of the agreement expire?
When the agreement has an expressly specified date on which the agreement is going to end, such agreement is automatically terminated on such date. However, such termination doesn’t happen if the parties have another understanding. Let’s understand this with an example, if an agreement’s term is of 5 years, once this term of 5 years ends, it will automatically get terminated. However, if the parties mutually agree, they can extend the term of such agreement.
- Failure to perform their duty
When either party fails to perform the duty or task assigned to them under the agreement which ultimately results in material breach and fails to cure this material breach within the time stipulated in the agreement, the agreement can be terminated by the other party.
If a party has committed a breach of the terms and conditions agreed upon by the parties and doesn’t cure it within the time stipulated then the other party can terminate the agreement after sending a notice to the other party mentioning the reason for such termination.
- Force Majeure
This clause is generally a separate clause added in the agreement and does not form a part of the Termination clause. This clause comes into the picture when an unforeseen event happens, for example earthquake or floods and the parties are unable to perform the obligations under the agreement. In such an event, parties can choose to either wait till the stipulated time specified in the clause and continue with the agreement or terminate it depending upon the circumstances and understanding between the parties.
Why is termination clause important in an IP agreement?
- Prevents future confusion
One of the most important roles of a termination clause in IP agreements is that it avoids future confusion and ambiguity between the parties with respect to the terms and conditions of the agreement. Parties are well informed about the date on which the agreement shall cease to exist, the conditions which can trigger a party to terminate the agreement and who has the right to terminate the agreement if such circumstance arises. This in turn helps the parties to prevent litigation because the parties cannot later have contradictory interpretations of whether the agreement has been terminated or whether it still exists and is enforceable.
- Protects commercial interest of the parties
IP agreements often involve huge monetary stakes and since the stakes are high, it becomes essential to leave no room for confusion or ambiguities for the terms of such a crucial agreement. Once the parties agree to terminate the agreement, the parties can stop the further exploitation of the intellectual property and the parties get quantum meruit. This makes the question of consideration clear from both the ends.
- Protection of rights
Termination of an IP agreement means that the party exploiting the rights accruing from the intellectual property in lieu of consideration shall no longer be entitled to exploit it. He will have to return all the materials to the owner of the rights or to the authorized person. Additionally, the IP rights automatically reverts back to the owner of such rights. Once the agreement is terminated, such party becomes the unauthorized person. In case if this unauthorized party continues to exploit the IP rights after the termination of the contract, such exploitation of IP rights shall amount to infringement. Therefore, the termination clause ensures that the IP owners rights are protected even after the agreement ceases to exist. After the agreement gets terminated, the parties are free to enter into a contract with another party.
- Discharges parties from obligations
Once the IP agreement gets terminated, the parties are discharged from all the obligations unless otherwise agreed upon between the parties. For example, if there’s an agreement between a scriptwriter and a producer. If the agreement gets terminated before the script is complete, the script writer can immediately stop writing and start negotiating with a different producer. Similarly, such a termination may allow the producer to stop further development for the film. Hence, a well-drafted termination clause is an advantage for both the parties and it legitimately discharges their obligations under the agreement.
After thoroughly analysing the role of a termination clause in IP agreements, it is evident that the lack of a precise and well-drafted termination clause can result in irreversible legal and monetary repercussions. And since the stakes are extremely high, it is always advisable to have a tailor made, full proof agreement. Reason is, no party would want to fall prey to the risk of lengthy litigation or lose out on potential revenue-generating from intellectual property to ambiguities over terms of the agreement. While preparing an IP agreement, one must always keep the parties’ interests in mind and try to prevent their rights from being challenged in unforeseen disputes. Hence, it is in the interest of both the parties to negotiate the termination clause and expressly specify terms and conditions of the IP agreement.
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