Licensing emerging process technologies: modern approaches to risk allocation

By Jessica Mottau
Energy Environment, Social, Governance Renewable Energy Technology & Outsourcing Technology, Media & Telecommunications

Fit-for-purpose technology contracting 5 min read

Licensing emerging technology is a tempting prospect when navigating the ever-expanding world of decarbonisation and sustainability. However, getting the outcome you want requires a level of creativity and a contemporary approach to risk-allocation.

In this brief Insight, we:

  • outline the risks of applying standard liability positions when licensing nascent technology; and
  • provide some key risk mitigants for prospective licensees.


Emerging technology licences need customisation, rather than a one-size-fits-all approach.

With industries under pressure to prioritise decarbonisation and reduce their environmental impact, there has been a surge in novel process technologies. These include waste-to-energy and recycling processes (eg pyrolysis), innovative applications of 3D printing (eg in construction), development of plant-based plastics, and carbon capture and storage technologies.

Typically, in licences for well-established process technologies (eg petrochemical refining processes), licensors can limit their liability for a failure of the technology, due to their favourable bargaining position. However, emerging technologies present a different risk profile, and licences for them need to be tailored accordingly. That is, relying on 'standard' liability positions when licensing nascent technology may result in a contract that is not fit for purpose and could expose parties to increased risks such as:

  • technology failure
  • uncertain licensor support
  • reluctance or high costs from engineering, procurement and construction contractors to provide a technology wrap
  • potential bankability issues for the project.

Conventional technology and approaches to risk

In terms of the old approach, let's take what would happen with a conventional petrochemical plant (for example).

A prospective plant owner decides what technology to use, and licenses it from a third party. Given the technology's proprietary nature, the licensor has good leverage and insists on limited liability towards the owner (and other project contractors/financiers). The licence may contain a process guarantee, detailing the licensor's responsibilities if the technology does not work. However, as is often the case, the guarantee may be capped in quantum or qualified in other ways that limit its utility (eg by allowing the cost of rectification works to count towards the licensor's cap, which may then be quickly exhausted).

In our example, let's assume the technology is well known, well tested and the licensor is a reputable company with a large balance sheet. In this context, the owner and financiers may agree to assume some degree of risk of a technology failure.

Moreover, the engineering, procurement and construction (EPC) contractor engaged to build the plant may agree to take on responsibility not only for EPC but also for a failure of the technology, often referred to as a 'technology wrap'. This gives the owner and financiers comfort that if something goes wrong, the EPC contractor will bear the risk—ie there is only one throat to choke. With a technology wrap, the EPC contractor will require some recourse to the technology licensor for a technology failure (eg by taking a temporary novation of the technology licence); however, ultimately, the technology licensor still assumes relatively limited risk.

Innovative technology: where old methods fall short

Now, let's apply the same lens to emerging technologies.

In this case, let's assume the prospective plant owner wants to license an innovative waste-to-energy or recycling process technology, which may not have been widely proven. While not being a startup, the licensor may not have a substantial balance sheet that would be comparable with a large traditional industrial and energy technology licensor's.

In this context, 'customary' liability positions will likely not be fit for purpose. There is potentially a greater risk that the technology may fail, and less certainty (both from a reputational and financial perspective) that the licensor will stand behind its technology. A technology licence with very limited liability for the licensor and qualified process guarantees will (or should) be of concern to a prospective owner. Additionally, it is less likely that an EPC contractor will agree to provide a technology wrap, and even if it is willing to do so, the cost to the owner may be unworkable. Having limited recourse to the licensor may also raise bankability issues for the project as a whole.

Building resilience: key risk mitigation in modern practice

So, where does this leave an organisation wishing to license emerging technology?

Emerging technology owners still enjoy a fair degree of leverage, due to the proprietary nature of their technology. This is especially so with decarbonisation and circular economy technologies, given the pressure on organisations to decarbonise and improve their sustainability.

However, it is critical that the associated technology risks are appropriately handled in the contract suite. Emerging technology licences need customisation, rather than a one-size-fits-all approach.

Key risk mitigants for prospective licensees of emerging technology include:

  • Conducting thorough due diligence on new technologies before vendor selection to ensure the technology's appropriateness for, and adaptability to, the specific circumstances.
  • Where feasible, giving preference to technologies offered as part of a 'turnkey package' by EPC contractors – allowing for greater and easier recourse if the technology fails.
  • Structuring payments/royalties to licensors in a way that incentivises technology success (eg by tying royalties to actual production).
  • Negotiating more favourable liability and performance guarantee provisions than may customarily be included in licences for more well-established technologies.
  • Exploring whether insurance could serve as a backstop where there is a process technology failure – ensuring a financial safety net if things go awry.

Where emerging technology is involved, considering the particular project's specific technology risks and crafting commercial and (potentially creative) contractual frameworks to address them, are essential steps to ensuring the project is a success.