Technology transfer is a mode of transfer of technological knowledge from one company to another or within the same company. Technology transfer can be in the form of tangible knowledge – knowledge embodied in physical goods, services and codified in blueprints, designs, technical documents, etc or intangible knowledge or know-how – like skills, tactics which the people have gathered or learned over a period of time in a particular sector or field for operating the technology. Technology transfer can happen in terms of horizontal transfer or in terms of vertical transfers. Vertical technology transfer happens when technology is developed in its natural lifecycle within the organisation from one unit to another, say from research and development unit to its implementation in production unit.  Horizontal transfer happens when technological knowledge flows from one organisation to another. In this document, we will be focusing on the aspect of horizontal transfers. For developing and under-developed countries, technology transfer is an important mean for gaining access to the latest technology from the developed countries. This chapter guides you through certain important provisions in a technology transfer agreement.


The scope of technology transfer can depend on the organisation who wants to source the technology, their strategies, objectives and their resources and capabilities. The parties in an agreement must decide on the mode of transfer of the knowledge and the extent of the transfer. While determining the extent of the transfer, the parties should explicitly identify what is being transferred, possibly in a separate schedule. The provision should also explicitly provide the things which are excluded from the purview of the license. This provision should be drafted with utmost precision, without any ambiguities or uncertainties.

Download Now

i) Technical knowledge

The scope can be in the form of technical knowledge, which can be supplied in such extent that the other party can reproduce the same without much hardship. In the case of transfer involving complex technology, the knowledge must be disseminated to the minute details, which can be embodied in the form of drawings, manuals, blue prints, etc.

ii) Hardware or goods

Another way of knowledge transfer can involve, transfer of knowledge embodied in the hardware, inform of machine, sub-components, software, or the whole production machinery.  Transferring through hardware is more advantageous as the working mechanism of the hardware won’t vary much even if they are shifted from one place to another. However, while transferring hardware, the receiving party should insist on transferring related operation manuals, process and guidelines. If the scope does not include a provision to transfer such manuals, the receiving party might not be able to run the machinery and the transfer will be futile.

iii) Knowhow

Another kind of transfer can be form of know-how or personal skills. Transfer of know-how or personal skills can considerably improve the whole manufacturing process. Such transfer can be form of training employees or workers or deputation of personnel of the company for few months or years to learn the tricks and traits and incorporate them in the quality management process of the receiving company to improve productivity. Face-to-face interactions with each other help in learning about a partner’s technology, its use in the context and possible modification that need to be made, to get it implemented at the home site.  For example, the workers in the X Company produce 40 % more than the Y Company having same or similar physical infrastructure. The Y Company may put some of their managers on deputation in X company so that they can learn the behaviour and other skill needed to improve the productivity in their own company.

iv) Field of use limitation

Field of use limitation clause can be incorporated in the agreement, wherein a patent licensor grants the license to use the patent only in a particular field or fields. Certain patents can be used in different fields; so having a “field of use limitation clause” will give greater control to the licensor over its patent. The clause should explicitly provide the fields for which the patent can be used by the licensee.

Territory and Exclusivity

Like other contracts, the contract must explicitly identify the territory of the license granted and also should mention whether the license is exclusive (sole licensee) or non-exclusive (license may be granted to other party). Generally, the licensee seeks for exclusive licence in a particular country and may also include neighbouring counties or regions. In case of exclusive license granted in a particular territory, demarcating a proper territory may prevent competition from similar entities that have similar license in other territories. For the licensor, if the fee is received in terms of per-piece or volume sales, the licensor may put a limitation clause on the exclusivity, making the exclusive period to be of say three to five years, and in case the licensee fails to meet the target, the license becomes non-exclusive.

Intellectual Property

Intellectual property (IP) involved in a technology transfer contract includes, patents, trademark, design, know-how. Developing and creating technologies or IPs involves huge investment, but imitation of those IPs can be done very easily. Research and studies show that there is increased amount investment and transfer of technology to the developing countries whose IP protection mechanism is stronger. Having a strong IP protection mechanism might reduce the chance of IP spillover or leaks to competing firms. The nature of IP protection in a particular country determines the terms and conditions and fees to be paid. In the case of weak regimes, the licensor might insist for strong confidentiality clauses and higher royalty to set off in case of IP spillover or leaks. However, impact of IP protection mechanism on technology transfer varies from products to products. While transfer involving complex technologies which requires huge machinery and expensive inputs might be unaffected by the IP regime of a country, but in case of products which can be easily imitated without much effort, the IP protection regime often dictates the nature of the terms and conditions.

The first priority would be to identify the existing IP to be used, and what type of IP might be produced during the existence of the contract by the vendor. In such cases, it is essential that the ownership or the terms of use of that IP is specifically mentioned in the contract itself. In the case of a pre-existing IP, generally the IP lies with the party who created it, and a license to use pre-existing IP should contain appropriate field of use limitations and may be exclusive or non-exclusive, etc.

i) Improvements & jointly developed IP

In a technology transfer agreement, there is a possibility that a new IP is created, or it is improved or the existing IP is used by the parties. In the case of a newly created IP, it is essential to identify who will have ownership of the IP, and whether the licensee will have certain rights regarding its usage or will it be joint-ownership. In the case of joint-ownership one should review the applicable laws of the country and its possible consequences.

However, the most complex of the IP rights which might be created are the “Improvements”, on the existing IPs. Though it is hard to identify or define what can qualify as an improvement, improvement generally means Changes, modifications, enhancements, developments, revisions, additions, updates, adaptations, variations, amendments to existing IP. First and foremost, the parties must explicitly mention what constitutes improvements. One should focus on the areas, which might make the IP valuable, like functionality, reduction of cost, improvement of performance, added features making the product more useful.

While negotiating on improvement clause, it is possible that the parties agree to make the improvement rights reciprocal – granting each other licenses for the improvements, rights can include only the patented improvements (but that would limit the scope by not including know-how). The improvement license for the inventing party can be made exclusive for a limited period; this can be important where the market favours the early adopter of the improved technology in a significant manner. The clause should also mention is the improvement can be sublicensed. Making the improvements non-sublicense able will reduce the threat from the competitive companies. In case, the parties agree to make the improvements sub-licensable, the provision might allow the inventing party a share in consideration received from the sub-licensing.

ii)  “Grant back clause” Under a grant-back clause, the licensee gives the licensor the rights to the improvement made by the licensee on the licensor’s technology. It is essential that the agreement must provide that the scope of such improvement is defined in clear words


A technology transfer agreement often involves in transfer of know how or sensitive business information and trade secrets. In the case of a breach, the licensee might face financial harm as well might result in harm to the goodwill of the company. It is essential that the agreement contain certain strong confidentiality protection clauses.

The crucial thing that need to be kept in mind is identification of the confidential information, certain information like information already in public domain or knowledge of the licensee should be kept out of the purview of the clause. It is essential that the contract should specify the standard of care to be taken by the licensee in handling of the data, which might include provisions for physical security, signing of non-disclosure agreements with the employees of the vendor, internal security protocols and procedures and compliance of other standard security protocols set by the industry to minimise the risk of information breach. The contract should mention the person to whom reasonable disclosures that can be made, for example, employees and sub-contractors.

The contract should also specify the obligations and remedies of both the parties in case such a breach happens. The contract should also specifically have provisions, to notify the customer in case of a breach and lay down procedures to mitigate the effects. Provisions related to indemnity in case of a breach can be incorporated in the case clause or in a separate indemnity clause. The licensee should look for clauses which limit such claims in the form of caps or consequential damages, or not covering third party liabilities. The licensor may ask the licensee to take compulsory insurance to cover such risks.  There should be a provision, which allows the licensor to periodically audit the security protocols of the vendor. Breach of confidential information may happen even after the expiry of the agreement. So the provision should be drafted in such a manner that the clause survives even after the expiry of the agreement.

i) Black-boxing and watermarking

Black-box is a method of protection of IP which lies in the form of idea, product, process or design, and is crucial to the underlying technology. Under this mechanism, the licensor licenses  the end product without giving out the details required to process or manufacture the same. Black boxing can only be successful, if the key technology which is important for the process is identified and a mechanism to protect the same within the licensor’s organisation is developed.

Though watermarking might not be an effective method to prevent disclosure of trade-secrets. But, the watermarking on documents containing trade-secrets might help in proving ownership in case a breach is detected.

Fees and Payment

In a technology transfer agreement, fees can be determined on the basis of lump-sum payment or royalty based or a combination of both. While laying down the terms, it is possible to have separate modes of calculation for different type of intellectual properties (IP) and even different pricing mechanisms. Say for example, the pricing of standard essential patent (SEP) (patent which constitute technology which are a set standard in the industry) may be priced in a totally different manner from the other patents involved in the transaction. The pricing of SEPs are generally made on fair, reasonable, and non-discriminatory terms (FRAND terms), different from the general patent licensing terms. Benefits of having different pricing mechanism reduce risks like, in case one of the patents is declared of invalid, it does not affect the calculation of royalty for the other licensed patents.

As most of the technology transfer agreement involves transfer of know-how, payment of a lump-sum amount might be beneficial for the licensor, who might transfer a significant amount of proprietary information. In the case of non-continuation of the agreement, the interest of the licensor is protected. Fees can also be based on royalties, which can be based on a percentage of net sales of the licensed product, fixed royalty on per product sale.   Sometimes the provision may include provision for advance payment to be made for an initial period or a minimum royalty to be paid irrespective of the volume of sales. For the licensor, having a minimum royalty clause will incentivise the licensee to commercialise the technology. The licensees must be careful regarding the provision related to minimum payment, as in case the production gets delayed it might face financial obligations. The licensee may dilute the provision by inserting a provision that the minimum royalty period to start after commercialisation starts.

The clause should also mention the schedule for such payment, late payments, currency to be used, and responsibility of payment of taxes. Under the Indian Income Tax Act, the royalty or fees received for providing technical services are taxable in the hands of the licensee. While negotiating the contract, the parties should explicitly provide who is responsible for paying the tax. The provision can have an audit clause, wherein the customer can audit the bills and invoices on a periodical basis for effective transparency.


An agreement always has a chance of facing some risks associated with transactions. No contract can be free of risks; however it is essential that risk is either shared, limited or pre-emptive steps taken. A technology transfer agreement should contain provision related to warranties made, which includes that the licensor has absolute ownership over the transferred IP, the IP will produce a quality, the IP does not violate any third party rights to best of knowledge of the licensor.

An expressed condition can be incorporated making it mandatory for the parties to the other party in case of breach, for which the other party has suffered some loss. However, there can be provisions related to limitation of liabilities in form of a cap, or non-covering of consequential damages (like loss of profits), personal injury, property damage, third party contracts, acts & omissions by employees and by subcontractors, negligence, misconduct, acts of nature, non-functioning, etc.


The term of Technology transfer can be decided mutually by the parties. But certain rights like patent and know-how are subjected to statutory limitations. Generally, the patent rights are granted from the date of grant of the license till the expiration of the statutory period (for India 20 years). Similarly, the limitation on getting royalty from know-how is limited by the Reserve Bank of India (RBI). Royalty from licensing know-how can only be obtained for 7 years from the date of commercial production or 10 years from date of agreement, whichever is earlier.

Termination and consequence

The term clause should specifically mention the term of the contract, conditions for extension of the contract and might provide for provision for mutual termination of the contract.

The termination clause should expressly laydown the events which might lead to termination of the service, by either party or one of the parties. The termination for cause provision should expressly lay down the events which might lead to termination of the service, by either party or one of the parties. Termination rights of the contractor may include – Non-payment of contract price, material breach by the owner, request for suspension of the work by the owner for a time exceeding a predetermined time. Termination rights of the owner may include – unreasonable delay in execution of the project, underperformance in terms of quality or quantity of work. Other general termination grounds can be insolvency and force majeure.

i) Termination upon challenge clause – This clause gives the licensor right to terminate the agreement if the licensee challenges the legal validity of the licensed technology. Having this clause will incentivise the licensee to make proper assessment of the technology before they enter into the agreement and prevent disruption during the term of the agreement. The clause also protects the interest of the licensor, dis-incentivising the licensee from raising false challenges to the validity of IP in order to negotiate a better deal from the licensor.

 ii) Termination due to change of control – An important licensed technology can land in the hands of a competitor through acquisition of the company which the licensor has granted right of the technology. To avoid such situation, a technology transfer agreement should contain a termination due to change of control clause. This clause needs skilful negotiation by the licensee, to limit the extent of application of the provision to such cases where the licensee was taken over by a competitor of the licensor. Also, who or what constitutes competitor also needs to be defined in the clause itself.

iii) Exit management or remedies clauses

Generally a technology agreement is a long-term contract, so is not uncommon that the parties find themselves in disputes with each other. In case the parties fail to resolve the dispute mutually, the contract may need to be terminated or even in case of completion of term of the contract, it is essential that the contract should have properly drafted clauses to handle the exit in an efficient manner without much disruption. In the case of termination of the contract, the agreement can explicitly provide for the return of technical manuals, machinery which embodies the technology, etc. Another concern that can be taken care through proper drafting, where the vendor has terminated the contract in case of a dispute related to payment, the clause may provide that the disputed amount be credited to a trust account for continuation of the services. A survival clause should be incorporated in the agreement which will allow survival of certain provisions post-termination like, effect of termination, confidentiality, non-use of the technical information and non-use of the patent.



Please enter your comment!
Please enter your name here