Legal Precautions to be Undertaken before Executing a Transfer of Technology (ToT) Agreement: Lawyers Advice on IT Laws of India | IT Lawyer in Delhi NCR | Technology Lawyer in Delhi NCR | IT Attorney in Delhi NCR | Technology Attorney in India
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In modern times, technology has become a vital component of the business process of most companies worldwide. Technology can be leveraged in various ways by a company in order to gain a competitive advantage over its competitors and to maximise profits. The transfer of technology is an important way through which countries that are developing can access technology from developing countries.
There are numerous instances where a company cannot invest huge amounts of capital into research and development in order to create new technology. In such instances, the most feasible option for companies is to absorb/assimilate pre – existing technology from other entities.
The process of technology transfer can be carried out by entering into a contractual relationship with the company that owns the particular technology that the company wishes to acquire. Such contracts are generically referred to as Transfer of Technology (ToT) contracts.
The legal nature of ToT contracts
The terms of a transfer of technology contract essentially pertain to the mode in which the technology will be transferred from the entity that owns the technology (transferor) to the entity which wishes to acquire the said technology (transferee). Generally, there are two modes in which technology is transferred.
The first mode is a license agreement wherein the transferee is given the license to use the intellectual property rights that are associated with the technology like copyright, patents and trademarks. The second mode is by means of a know–how agreement wherein information and skills are transferred to the transferee. A ToT agreement also usually specifies the way in which the technology is to be used by the transferee once the technology is transferred.
The term ‘transfer’ does not entail that there is an actual movement of the technology. Transfer simple refers to the process by which the technology that is developed for a particular purpose by one user is put to a different use by another user. The majority of technology is present in the private sector and is owned and controlled by transnational companies.
The Indian financial regulatory environment for ToT Agreements
The payment for foreign technology transfer can take one of two routes in India. They are as follows –
1) The automatic approval route – Indian companies paying for foreign technology collaboration can take the automatic approval route in the following situations –
• When the cost of the transfer does not exceed 2 million US dollars.
• When the royalty payments are restricted to five percent of the domestic sales and eight percent of foreign exports.
2) Prior government approval by the Project approval Board (PAB) – the transferee will have to obtain the prior approval of the government in the following situations –
• When the sector to which the technology is to be acquired is not provided for in the automatic route for FDI.
• When the parameters for automatic approval are not met.
In cases where the approval of the government (Department of Industrial Policy and Promotion) is required, the transferee has to submit an application in From FC – IL.
Precautions/factors that ought to be taken into account while entering into a ToT Agreement (Transferee’s perspective)
• Engaging appropriate legal representatives – It is important for the transferee to engage a lawyer who has the requisite range of skills and experience. They should have commercial knowledge which they can rely on to lay down the terms of the agreement; Legal knowledge and an understanding of the relevant provisions of applicable law; Drafting and negotiating skills which will enable them to unambiguously negotiate on and draft a mutually acceptable agreement.
• Mutually beneficial relationship – It is crucial for the representatives of the transferee to create the impression, through their negotiations and terms offered that the ToT agreement will be beneficial for both the transferor as well as the transferee. Creating this impression is important as it will go a long way in making the parties feel like they are engaged in a collaborative process. This will open the door for future collaborative agreements and ensure that the transferee is not left in the dark, should there be new technology that is available.
• Guarantees from the transferor – It will be useful for the transferee to ensure that the transferor guarantees that the products that will eventually be manufactured using their technology will meet certain standards and pass performance tests.
• Technical assistance – The mere transfer of technology will seldom serve the purpose that the transferee wishes to fulfil. Therefore, it will be useful for the transferee to incorporate a clause into the ToT agreement which ensures that the transferor provides the transferee with technical assistance when required.
• Training of employees – If the technology in question requires special skills on the part of the employees of the transferee for its usage/operation, there has to be a provision included for the training of the employees by the transferor.
• Assistance in setting up facilities – The transferee should obtain an assurance from the transferor that if there is a requirement for assistance in the setting up or the usage of the technology, the same shall be provided for by the transferor.
• Buy – back options – It will be useful for the transferee to include a buy – back clause in the ToT agreement. This will give the assurance to the transferee that in the unfortunate situation where the technology does not perform to the satisfaction of the transferee, then it shall be returned to the transferor and the consideration for the same shall be reimbursed.
Obligations of the Transferee (Post conditions)
There are certain obligations that have to be performed by the transferee after the ToT agreement is executed. They are as follows –
• Timely payments – It will be in the interest of the transferee to make timely payments for the technology that is transferred. This will ensure that there are no unnecessary legal proceedings that are initiated by the transferor for default in payments.
• Keeping technology confidential – It is important that the transferee keeps the technology that it has received confidential. If this is not done, it may incur significant costs by means of fines or compensation.
• Production details – Most ToT Agreements stipulate that the transferred technology is only used for a specific purpose. In such a case, the production details and the ways in which the technology is being used should be divulged to the transferor.
If these above mentioned steps are taken, the transferee can be assured of compliance with the law as well as a mutually beneficial relationship with the transferor, which will serve the interests of the transferee in the long run.
Authored By: Adv. Anant Sharma & Vismay G.R.N.