The (costly!) risk of a poorly drawn contract

One of our clients has shared with us a story which you may like to read. While it may be something that most of you would know, it doesn’t hurt to be reminded of the serious (and costly) implications of using an inappropriate party in a contract.

A poorly constructed contract

To save money, the person in our story (let’s call him Frank) drew up a licence agreement between his entity (a trust, which held the IP) and his client (the user of the IP under the licence agreement). The annual licence fee is $300,000, adjusted for CPI each year.contract

Unfortunately, it has now come to light that the agreement was drawn up showing Frank’s trust as the contracting party. A trust is not a legal entity, and therefore has no power to enter into contracts. A trust can only contract through its trustee.

So what does this mean for Frank? He will not be able to enforce his rights under the licence agreement and the IP will be permanently usable by his client – without cost.

Ouch.

What could have been done differently?

Using a legal firm would have helped. If Frank knew what he was doing, the contract would have used the appropriate party – the trustee. If the contract had been framed by a lawyer as Frank had drafted it, Frank would have been able to make a claim on the lawyer’s professional indemnity insurance policy.

The cost of a licence agreement normally falls in a range of between $220 to $1,100. Small change for peace of mind and protection of rights.

Castle Legal can help you with a range of licence agreements. Please give us a call on 03 9899 9300 to discuss.