Examples of covenants in ordinary course contracts

The covenants I discuss in this blog are for the smaller type of contracts. In subsequent blogs, I will address M&A-related and financial agreement related covenants.

This blog continues the preceding one and serves as an illustrative set-up to the check lists that will follow.

IP-related agreements. In a patent transfer agreement, the transferring party will transfer its invention. However, the transferee would like to maximise its use of the patented invention and also be made familiar with all know how connected to the patented invention. Also, a transferor may want to avoid any infringement claims for the use of any remote elements in the patent that do not relate to the transferee’s business but was covered by the patented invention (as the patent was applied for in view of the transferor’s business): the transferor may seek a non-assertion or licence-back in connection with the transferred patent. Similarly, a licensor of trademarks or other intellectual property rights often requires from its licensees that they notify the licensor promptly of any infringements identified in the market of such licensee. Such stipulations are covenants.

Lease or loan agreements. In a manufacturing equipment lease, the main objective of the lessor is to ensure that the lessee pays the rent timely and that it returns the equipment at the end of the lease. However, a lessor may want the lessee to operate and store the equipment in accordance with lessor’s instructions, to maintain the leased assets, to keep it insured and to allow periodical inspections by the lessor.
The lessor, in addition to its concern regarding the value of the equipment, will want to prevent that the lessee will be unable to pay the rent timely. Likewise, the lessor might require that the lessee provides an ongoing security for the lease instalments. If the lease has a potentially significant impact on the lessee’s business, the lessor may even require periodical information about the lessee’s financial capability to continue paying the rent.

Each of the above examples of deal-related or unrelated purposes is accomplished by covenants that prescribe what the transferor or lessee must do, and cannot do, in respect of the transferred patent or leased equipment, respectively.

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