You have just handed a finished IP licence agreement to your solicitor for a final review, and they circle a clause near the back: the sub-licensing provision. It is short — often a single sentence — but it will determine whether your licensee can bring in third parties to use your intellectual property without your direct involvement. Get it right and you preserve control; get it wrong and you may discover a stranger is commercialising your brand, software, or invention with no obligation to you whatsoever.
The sub-licence clause sits inside the broader IP licence agreement, which is the document that governs the relationship between you (the licensor) and the party you permit to use your IP (the licensee). The overall agreement defines scope, territory, royalties, and duration. The sub-licence clause specifically addresses one question: can the licensee pass any of those rights down to someone else? It does not stand alone — it draws its meaning from the rest of the agreement — but it often decides who controls the downstream commercialisation of your IP.
The essential clauses in a sub-licensing arrangement
Whether sub-licensing is permitted at all
The starting point is binary: does the clause allow sub-licensing or prohibit it? Many licences are silent on the point, which creates uncertainty. In Australian contract law, silence does not automatically mean prohibition, so if you want a clean answer — in either direction — the clause must say so expressly.
The three drafting positions are:
- Prohibited entirely: the licensee cannot bring in sub-licensees under any circumstances. This suits high-value or sensitive IP where you want direct relationships with every user.
- Permitted with prior written consent: the licensee may sub-license, but only after seeking and receiving your approval for each proposed sub-licensee. This is the most common position and balances flexibility with oversight.
- Permitted within defined conditions: sub-licensing is allowed without case-by-case approval, provided the sub-licensee meets pre-agreed criteria (territory, industry sector, minimum financial thresholds). This suits franchise-style arrangements and international expansion.
If you choose the consent model, specify the mechanism — how the licensee requests consent, what information they must provide, and the timeframe within which you must respond. An open-ended consent clause with no response deadline leaves your licensee in limbo.
The "not unreasonably withheld" standard
If your agreement includes a consent requirement, it should also address whether that consent can be withheld freely or only on reasonable grounds. The IP Australia model contracts — which represent standard Australian practice — include language providing that consent must not be unreasonably withheld. This is prudent drafting for both sides.
For licensors, this standard does not mean you must approve every sub-licensee proposed to you. It means your refusal needs a defensible reason: the proposed sub-licensee is a direct competitor, lacks the financial resources to meet the licence conditions, or operates in a territory outside the agreed scope. What you cannot do is refuse arbitrarily or for reasons unconnected to the legitimate protection of your IP interests.
Key drafting points for this clause:
- State that consent must not be unreasonably withheld or delayed — delay can be just as damaging as refusal.
- Specify that the licensee must provide written notice of the proposed sub-licensee's identity, territory, and intended use before consent is sought.
- Include a deemed-consent mechanism: if you do not respond within a defined period (commonly 20 business days), consent is treated as given or refused, depending on your risk appetite.
The sub-licensee's obligations
One of the most commercially significant issues in any sub-licence arrangement is who remains accountable when the sub-licensee causes a problem. The sub-licence clause should make clear that:
- The licensee remains primarily liable to you for any breach of the head licence, regardless of whether the breach was caused by the sub-licensee.
- The sub-licensee is bound by at least the same substantive obligations as the licensee — particularly confidentiality, quality standards, and permitted use restrictions.
- You have the right to step in and enforce the head licence conditions directly against the sub-licensee if the licensee fails to do so.
The practical mechanism for achieving this is a "back-to-back" requirement: the licensee must ensure every sub-licence agreement it enters mirrors the key obligations in your head licence. Specify that the sub-licence agreement must be in writing, that the licensee must provide you with a copy on request, and that any amendment to a sub-licence requires your prior written approval if it would affect rights you have reserved.
Scope alignment — territory, term, and use restrictions
A sub-licence cannot grant rights the licensee does not itself hold. That principle matters, but the clause should state it explicitly rather than rely on it being implied.
Scope alignment means:
- Territory: the sub-licensee can only operate in the territory the licensee is licensed to cover. If your head licence covers Australia only, the sub-licence clause should confirm that sub-licensees are restricted to the same territory.
- Term: the sub-licence must expire no later than the head licence. If your head licence runs to 30 June 2030, the sub-licence clause should prohibit your licensee from granting a sub-licence that purports to run beyond that date.
- Permitted use: the sub-licensee's permitted use should be defined with equal precision to the head licence. If the head licence permits use of your software only for internal business operations, the sub-licence must not allow the sub-licensee to on-sell access to end users.
Scope creep — where each layer of sublicensing quietly expands the rights being exercised — is one of the most common sources of IP disputes. An explicit alignment clause prevents ambiguity about what any party in the chain is actually permitted to do.
IP ownership and registered rights
The sub-licence clause should confirm that nothing in any sub-licensing arrangement transfers ownership of the underlying IP. Licensing is a permission to use; it is not an assignment. This is particularly important for registered IP — trade marks, patents, and registered designs — because the register maintained by IP Australia records the owner, not the licensee.
For trade marks, there is an additional consideration. Under the Trade Marks Act 1995 (Cth), a licensee who uses a registered trade mark with the owner's permission is an "authorised user". The owner is required to exercise control over the authorised user's conduct — including quality of goods or services. If a sub-licensee is introduced into the chain, the licensor must still be able to demonstrate that level of quality control, either directly or through contractual requirements passed down to the sub-licensee. A licensor who loses the ability to exercise that control risks the trade mark becoming vulnerable to cancellation for non-use.
Royalties and financial flows
If you are receiving royalties based on the licensee's revenue, a sub-licence that creates a new revenue stream — but does not flow royalties through to you — represents a direct financial loss. The clause needs to address:
- Whether sub-licence fees or royalties generated by sub-licensees are caught by your royalty calculation.
- Whether the licensee must report sub-licensee revenue separately in any royalty statements.
- Who is responsible for collecting royalties from the sub-licensee and remitting your share to you.
A common structure is for all sub-licence fees to pass through the licensee, with your royalty calculated on the gross amount the licensee receives from the sub-licensee. This keeps the financial relationship bilateral — between you and your licensee — rather than creating a direct payment obligation from the sub-licensee to you.
Termination and what happens to the sub-licence
If the head licence terminates — whether because the licensee breaches it, or because the agreed term expires, or because you exercise a termination right — what happens to any sub-licence that was properly granted during the term? Without a clause addressing this, you may have sub-licensees who argue they have an ongoing right to use your IP even after the head licence has ended.
The clause should specify:
- Termination of the head licence automatically terminates any sub-licence granted under it, subject to any survival provisions you have agreed to.
- If you elect to step in and assume the sub-licensee's obligations directly (to preserve a commercially valuable relationship), the mechanism for doing so must be set out.
- The licensee is obliged to notify all sub-licensees of termination promptly and to enforce cessation of use.
Optional and situational clauses worth considering
The following provisions do not belong in every agreement but are worth including where the circumstances warrant:
- Step-in rights: gives you the option to assume the licensee's obligations under a sub-licence if the licensee becomes insolvent or ceases to enforce sub-licensee obligations — particularly useful where the sub-licensee relationship has standalone commercial value.
- Audit rights: entitles you to audit the licensee's sub-licensing records and the sub-licensee's compliance with the head licence terms — appropriate where royalties are tied to sub-licence revenue.
- Pre-approved sub-licensee list: names specific entities or classes of entity that the licensee may sub-license to without seeking fresh consent — common in franchise structures where the franchisor has already assessed the sub-franchisees.
- Change of control trigger: requires the licensee to notify you and seek fresh consent if a proposed sub-licensee undergoes a change of control — relevant where you have approved a sub-licensee on the basis of who owns it.
- Overseas sub-licensing restriction: requires separate consent for any sub-licence that takes effect outside Australia — advisable where your IP has different protection status or commercial sensitivities in other jurisdictions.
How Artificer Legal approaches sub-licence drafting
The sub-licence clause is one of the provisions we review carefully when a client brings us an IP licence agreement — whether they are the licensor, the licensee, or a prospective sub-licensee.
For licensors, we focus on three areas: first, ensuring the consent mechanism is enforceable and not so onerous that it exposes you to a claim that you are unreasonably withholding consent; second, confirming the back-to-back obligation is drafted tightly enough that you can actually enforce your head licence conditions against a sub-licensee; and third, checking that your registered IP rights — particularly any trade marks — are protected by adequate quality control provisions that extend through the sub-licensing chain.
For licensees, we look at whether the sub-licensing rights you have been granted are adequate for your commercial model. If your business depends on being able to bring in sub-licensees — for example, to cover territories you cannot service directly — a broadly drafted restriction can undermine the entire deal. We will negotiate the scope of "reasonable grounds" for refusal, push for a response timeline on consent requests, and ensure you are not carrying unlimited liability for a sub-licensee's conduct.
If you are dealing with registered IP — trade marks registered with IP Australia, granted patents, or registered designs — we also check the ownership entity. IP held personally by a founder, rather than by the operating company, should be assigned to the company before any licence or sub-licence is granted. Doing so reduces personal liability exposure and ensures the correct entity appears as licensor on any registered rights.
The clause that decides who really controls your IP
The sub-licence clause is not simply a procedural formality tucked away in the definitions and boilerplate. It is the clause that determines whether you remain the effective controller of your IP once it enters the hands of a licensee. A licensor who fails to include a clear consent mechanism, a back-to-back obligation, and a termination waterfall may find their IP being used by parties they have never met, in ways they never agreed to, generating revenue they will never see.
The drafting choices covered in this article — whether to permit sub-licensing, on what terms consent may be withheld, how obligations flow to sub-licensees, how scope is aligned, how royalties are calculated, and what happens on termination — work together to create a coherent framework. No single clause operates independently. A well-drafted sub-licence provision, reviewed against the rest of your IP licence agreement by an experienced practitioner, is the most reliable way to ensure your IP remains commercially yours.