Understanding License Requirements in Commercial Contracts

Author:
- Attorney Tugce Barishan

What “License Requirements” in a Contract Generally Mean

A “license requirement” clause (or licensing obligation) in a contract refers to provisions by which one or more parties commit to obtaining, maintaining or verifying certain governmental or regulatory licenses, permits, approvals, registrations or authorizations in order to perform their contractual duties or for the contract itself to be valid.

Key components include:

• Definition of which licenses/permits/approvals are required (e.g., professional license, business license, regulatory permit).
• The timing (e.g., prior to performance, upon execution, renewal obligations).
• The party responsible for securing/holding them.
• Consequences if the license is not obtained or maintained (e.g., contract termination, indemnity, inability to enforce).
• Ongoing compliance/regulatory burdens often embedded (e.g., renewals, reporting, adherence to rules).

For example, a clause might read:
“Party A shall obtain and maintain in full force and effect all licenses, registrations, permits or other approvals necessary for the performance of its obligations under this Agreement.” — which is a typical licensing requirement clause.

Why Licensing Requirements Matter in Contracts

From your interest in contract law (and especially given your focus on AI/technology and international commercial law), these are the main reasons licensing provisions are important:

1. Legality of Performance

If a party lacks required licenses, it may be unable to legally perform. The contract might become unenforceable or voidable as a result. For instance, in one commentary on New York (NY) business contracts:

“Depending on the industry … specific licenses or permits may be required. Failure to comply with these licensing requirements can render a contract invalid…”

This is a major risk from a contract-law perspective.

2. Risk Allocation and Responsibility

Licensing clauses shift risk: Who bears the burden of obtaining/maintaining the license? If the contract is silent, disputes often arise. Clear drafting helps allocate that risk.

3. Regulatory Compliance and Continuing Obligations

Many industries (construction, healthcare, gaming, etc.) require licenses. Contracts must reflect that compliance. For example, in one context:

“Employee acknowledges that Employer … is subject to licenses issued by governmental authorities … Employee shall apply for and obtain any license … which Employer or any regulatory authority … requests or requires”

That indicates continuing obligations beyond mere signature.

4. Enforceability and Downstream Effects

If a required license is not obtained (or revoked), performance may be hindered, liabilities may increase, or the contract may be terminated. From your AI/tech lens: if a party licenses intellectual property but lacks regulatory approval (say for data processing), that poses a serious risk.

5. Cross-Border / International Dimension

Given your international commercial law expertise: licensing requirements differ by jurisdiction. A contract may require licenses in multiple countries/jurisdictions. You must check local law, regulatory frameworks, and enforceability in different jurisdictions.

Key Drafting and Review Issues to Watch

When you’re preparing or reviewing contracts (for your legal practice or in scholarly articles), consider including or scrutinising the following items:

• Precise definitions. What counts as a “License”? Is it a license, permit, registration, regulatory approval, or all of them?
  E.g., “Licensing Requirements means the legal conditions a party must satisfy to obtain, change, or maintain approval for conducting a particular activity.”
• Scope / territoriality. Does the license obligation cover only the jurisdiction of the contract, or worldwide? Especially in tech/AI licensing, you may need global/regional compliance.
• Timing. When must the license be obtained? Before execution? Before performance? Requirement for renewal or maintenance during term?
• Assigned responsibility. Which party is responsible for procuring or maintaining the license? What happens if they fail?
• Verification / evidence. Should the party provide evidence (certificates, regulatory letters) to the other side?
• Failure / revocation consequences. If the license is not obtained, or is revoked, what happens? Examples: termination rights, indemnity, suspension of obligations.
• Cost and burden. Who bears the cost of obtaining/maintaining the license? Are there reimbursements?
• Ongoing compliance. Licenses often require continuing regulatory compliance (e.g., professional conduct, data laws, renewals). Is that captured?
• Interplay with other provisions. E.g., warranties (“Party represents it holds all licenses”), conditions precedent, covenants, termination clauses.
• Regulatory change / material change. What if the regulatory regime changes and new license obligations arise during the term?
• Enforceability / regulatory-driven termination. Particularly if the license is a prerequisite for the contract’s subject matter (e.g., gaming license, healthcare provider license). For example:
  “If required … Employee fails to … secure Employee’s License … then … the Agreement shall immediately terminate and shall be null and void.”

Practical Considerations for Your Focus Areas

Given your interests — contracts + AI/technology + international context — here are tailored considerations:

• Tech/AI contracts. If one party is developing an AI system, licensing may involve data-processing licenses, privacy/consumer protection authorizations, export licenses (for certain tech), or professional-service licenses (if acting as a consultant). You might craft a clause: “Party A shall obtain all regulatory approvals and licenses required for the export, deployment or use of the AI system in the applicable jurisdiction.”
• Cross-border licensing. If you have parties in Turkey, the U.S., E.U., etc. — each jurisdiction may impose different license/permit requirements (e.g., data transfer licenses, professional practice licenses). A contract should specify jurisdictional compliance: “Each party shall comply with its local licensing requirements and will provide evidence thereof to the other party upon request.”
• Academic/research/contract law article angle. In your article theme (“Mutual Assent in the Age of Algorithms”), you might explore how licensing requirements serve as an additional layer of regulation in algorithm-licensing (e.g., when algorithms are licensed, or AI modules are licensed) and how failure to comply with regulatory licenses may affect mutual assent (validity of contract), enforceability, and risk allocation.

Summary

In short: licensing requirements in contracts are critical provisions that ensure parties are legally authorized to perform their obligations. They protect against regulatory risk, allocate responsibility, and increase enforceability. When drafting or reviewing contracts, clear definitions, responsibilities, consequences for non-compliance, and jurisdictional/regulatory awareness are key.