License Requirements in Contracts: Legal Risks and Compliance

Author:
- Attorney Tugce Barishan

1. Introduction

Many activities or industries require certain specialties. With these requirements comes the necessity of extra contractual obligations, risk assessments and a strict legal compliance framework. In order to perform efficiently, the requirements should be checked on a personal, institutional or societal basis. If a contract requires a party to perform services that legally require a license, absence of such license bears the risks of the contract's voidability, unenforceability, nullification risks, not to mention loss of reputation, fines and criminal or administrative penalties. Courts generally will not enforce contracts that involve illegal conduct even if all parties were in good standing status because performing licensed work without proper credentials can make the work illegal as many jurisdictions mandate licenses to protect public health, public safety and welfare.

Aim:
This article aims to explain the legal implications, enforcement limitations, contractual safeguards and compliance risks arising where contracts require licensed services and regulatory authorisations.

2. Understanding When a Contract Requires a License

A license requirement is a legal or regulatory obligation when a person, company, or entity of a certain activity, professions, services, or business operations, that requires them to obtain official permission or authorization, namely a license, before engaging in the activity mentioned henceforth. It is mandated to perform specific tasks that requires the individual or the organization to hold a valid license issued by either a government agency or a regulatory body in order to legally perform in the regulated fields.

These are required to maintain and protect the community. Purpose of license requirements are usually about protecting public health, safety, and welfare or to ensure minimum qualification like education, exams, training while maintaining ethical or professional standards that have been built in ages. They also allow regulatory oversight through audits, renewals, penalties and they generate public trust.

Reflection of this into contracts is seen as license requirement clauses requiring one or all parties to prove they are licensed to perform their obligations and give other parties the right to terminate the contract if any or all parties fail to obtain or maintain required standards/licenses. This also protects parties against legal liability or indemnifies parties for possible losses due to unlicensed activity, thus the missing quality or regulated standards.

3. Sample Contractual Clauses on Licensing Requirements

Licensing and Regulatory Compliance

1. Representations and Warranties:
   Party A (hereby referred to as A) represents and warrants that it is duly licensed, authorized, and in good standing under all applicable federal, state, and local laws and regulations, and holds all necessary permits and authorizations (“Licensing Requirements”) to perform its obligations under this Agreement.

2. Ongoing Compliance:
   Party A (hereby referred to as A) shall maintain all such Licensing Requirements throughout the Term and annexes of this Agreement. Without limiting the foregoing, A shall notify Party B (hereby referred to as B) in writing of any suspension, revocation, non-renewal, or other event that might reasonably impair its ability to meet its obligations under this Agreement within (x) days of such event.

3. Termination Rights:
   If A fails to obtain or maintain any and/or all Licensing Requirements required to perform its obligations, B may terminate this Agreement on (x) days’ written notice and A shall indemnify B for all damages, losses or liabilities resulting from that failure.

4. Cooperation and Audit:
   A shall, upon reasonable request, provide to B necessary documentation of its Licensing Requirements (including evidence of renewal, compliance, notices from regulators) and shall cooperate with audits or regulatory inquiries related to the services provided under this Agreement and annexes.

4. Category Organized Main Types of Licenses

4.1 Professional Licenses

Professional Licenses are licenses that authorize individuals to practice in certain regulated professions typically requiring exams, degrees, and continuing education or updates in the required field. Please note these are examples to the mentioned field but they are not limited to:

4.2 Business Licenses and Permits

Business Licenses and Permits are different from professional licenses but the main idea is also to maintain public health and safety. They are required for companies to legally operate in a certain jurisdiction.

4.3 Trade or Occupational Licenses

Trade or Occupational Licenses are usually required for skilled trades and manual professions.

4.4 Intellectual Property Licenses

Intellectual Property Licenses, on the other hand, are licenses that allow someone to use protected content or inventions. Individuals or entities obtain intellectual property licenses to protect their rights and these licenses also gain value throughout these licenses.

4.5 Transportation & Vehicle Licenses

Transportation & Vehicle Licenses mainly regulate vehicle use and transport standards of goods and/or people.

4.6 Environmental and Regulatory Licenses

Environmental and Regulatory Licenses are required for businesses with environmental or safety impacts. These are required mainly for public safety regulations.

4.7 Government Contracting and Institutional Licenses

Government Contracting and Institutional Licenses act as a control mechanism to contracting with or being regulated by government entities.

5. Legal Consequences of Violating License Requirements

As mentioned above, the requirements in contracts are made to maintain or set standards. Violating those may cause the contracts to be unenforceable or cause loss of payment or right to sue or even fines, penalties, or criminal charges. In addition, suspension or revocation of existing licenses may also arise.

Statutory definition of “Licensing Requirements” varies from state to state and counties. While there is no single international or U.S. Uniform Code definition that universally covers “licensing requirements” in every contract context, there are some useful definitions that have been maintained over the years.

The most obvious solution to the interpretation and enforcement problems described in the previous sections is to simply review the contract-law/regulatory context of “licensing requirements” as means of the legal/regulatory permissions, licenses or authorizations, that must be met, maintained, or renewed for a party to lawfully carry out the activity under its contract, because compliance may seem as a cost but it is actually a safeguard.