IP Carve-out Clauses in New Zealand: When and How to Use Them

If you are signing a services agreement, software deal, agency contract, investment document, or sale agreement in New Zealand, an intellectual property carve-out can decide who actually owns the value created under that deal. Businesses often get caught by three common mistakes. First, they assume a broad IP assignment does not touch their pre-existing templates, code, designs, or know-how. Second, they rely on a side conversation instead of spelling out what is excluded from the transfer. Third, they agree to a vague exception without dealing with licences back, improvements, or future use rights.

An IP carve out agreement, or an IP carve-out clause inside a broader contract, is there to prevent those problems. It separates the IP that should stay with one party from the IP that is being assigned, licensed, or otherwise dealt with under the main agreement. If you are a founder, agency, software provider, manufacturer, or investor, this guide explains when carve-outs matter, what to check before you sign, and how to avoid wording that creates expensive disputes later.

Overview

An IP carve-out is a contractual exception that identifies intellectual property not included in a transfer, assignment, or licence. In New Zealand, it is commonly used where a contract would otherwise give one party broad ownership of work product, technology, branding elements, or confidential know-how.

The goal is simple: keep ownership lines clear before you sign a contract and before anyone builds on assumptions that later prove wrong.

• Define the pre-existing IP each party brings into the deal.
• State exactly what is carved out from any assignment, transfer, or exclusive licence.
• Deal with improvements, modifications, and derivative works.
• Check whether the other party still needs a licence to use the carved-out material.
• Make sure confidential information, data rights, and trade marks are handled separately where needed.
• Match the carve-out wording with the commercial reality, especially in software, design, R&D, and branded goods arrangements.

What IP Carve Out Agreement Means For New Zealand Businesses

An IP carve-out protects the assets you already own, or never intended to give away, when a contract uses broad ownership language.

In practice, that matters because many commercial contracts are drafted to favour the paying customer, investor, buyer, or principal. You might see wording that says all IP “created in connection with” the agreement belongs to the other party. That sounds straightforward until the work includes your background materials, internal processes, code libraries, design systems, brand elements, templates, or specialist methods.

A well-drafted IP carve out agreement draws a line between:

• background IP, meaning material, know-how, systems, brands, and content a party already owned before the deal,
• project IP or developed IP, meaning new material created specifically under the deal, and
• third party IP, meaning tools, software, stock assets, or licensed components neither side can freely assign.

Where businesses usually use IP carve-outs

Founders usually meet these clauses before they sign a contract with a customer, supplier, collaborator, investor, or buyer. The same issue can arise in many ordinary business documents.

• Software development agreements where a client wants ownership of deliverables, but the developer needs to retain ownership of existing code, frameworks, APIs, and reusable modules.
• Agency and creative services contracts where the client expects ownership of campaign assets, but the agency wants to keep templates, production methods, and internal tools.
• Manufacturing and product development deals where a customer funds a product iteration, but the supplier has pre-existing processes, moulds, technical drawings, or know-how.
• Business sale or asset sale agreements where some IP is sold with the business, but the seller wants to retain certain brands, licences, systems, or shared technology.
• Shareholder, investment, or founder arrangements where the business is meant to own core IP, but one party claims pre-existing rights or wants to exclude separate side projects.
• Research, collaboration, and joint venture agreements where each party contributes existing technology and wants clear boundaries around future ownership.

Why this matters under New Zealand contract practice

New Zealand law generally gives significant weight to the contract wording the parties agreed. If the document says all intellectual property created, supplied, adapted, or used in connection with the services is assigned, that wording can be read broadly unless there is a clear limitation.

This is where founders often get caught. The commercial understanding may have been, “the client gets the final logo files” or “the customer owns the custom build”. The contract may instead sweep in the designer’s base templates, the developer’s reusable modules, or the supplier’s technical methods. Sorting this out after the relationship sours is much harder than fixing it before you sign.

Carve-out versus licence, assignment, and ownership split

An IP carve-out is not always a standalone promise that one party owns something. Often it works alongside other clauses.

• An assignment transfers ownership.
• A licence gives permission to use IP without transferring ownership.
• A carve-out excludes specified IP from an assignment or licence that would otherwise be broader.

For example, a software provider might agree that the client owns the bespoke workflow configuration created for that client, but carve out the provider’s pre-existing source code, platform architecture, analytics engine, and documentation framework. The client then receives a licence to use those carved-out components only as needed for the solution to function.

That is often the most commercially sensible result. The client gets certainty that it can use what it paid for. The provider keeps the building blocks it needs for other customers.

What counts as intellectual property here

When people say “IP”, they often mean copyright, trade marks, designs, patents, confidential information, and know-how. In many business contracts, copyright and confidential know-how are the practical focus, especially for digital products, content, technical documentation, and branding assets.

Trade marks can also matter. If a contract gives a customer rights over packaging artwork or product labels, that does not automatically mean the customer should own the supplier’s trade marks, business name, or brand style. Before you invest in branding or print packaging, make sure the wording separates brand ownership from the deliverables being supplied.

Legal Issues To Check Before You Sign

The key legal question is not whether an IP carve-out sounds fair. It is whether the clause actually identifies the excluded IP clearly enough to work when the relationship is tested.

1. What exactly is being carved out?

General phrases such as “all pre-existing IP remains ours” are better than nothing, but they are often too vague on their own. If the deal is important, list the categories or specific materials being excluded.

Useful drafting often identifies items such as:

• existing source code, libraries, scripts, plug-ins, and development tools,
• templates, style guides, drafts, production methods, and working files,
• trade marks, logos, business names, domains, and brand assets,
• technical processes, know-how, recipes, formulas, and methodologies,
• data sets, models, training material, and internal documentation,
• third party software or licensed assets that cannot be assigned.

The more abstract the project, the more precise you usually need to be.

2. Does the assignment wording override the carve-out?

A carve-out can fail if the rest of the agreement is drafted more broadly and there is no clear hierarchy. Before you accept the provider's standard terms, check whether the assignment clause says things like “despite any other provision” or captures anything “used, developed, adapted, or incorporated” in the services.

If the contract has conflicting clauses, include a statement that the carve-out prevails to the extent of inconsistency. That avoids an argument later that the exception was only partial or descriptive.

3. Who owns improvements and derivative works?

This is one of the most disputed issues. A contract may carve out your background IP, but say any improvements, enhancements, modifications, or derivative works belong to the other party.

That can quietly transfer a lot of value. If your software library is carved out, but every improvement to that library created during the project belongs to the client, your practical ownership may be undermined. The same issue comes up with product formulas, manufacturing methods, design systems, and internal workflows.

Before you sign, decide which of these outcomes reflects the deal:

• each party owns improvements to its own background IP,
• the customer owns project-specific outputs but not changes to the supplier’s underlying tools,
• one party owns improvements but gives the other a limited licence,
• improvements are jointly owned, which is often harder to manage than it sounds.

4. Does the other party need a licence to the carved-out IP?

A carve-out usually preserves ownership, but ownership alone may not let the deal operate smoothly. If the final deliverable depends on carved-out material, the customer may still need a licence.

That licence should cover practical points such as:

• whether the licence is exclusive or non-exclusive,
• whether it can be transferred if the customer sells its business,
• whether subcontractors and related companies can use it,
• whether the licence is perpetual or tied to the agreement term,
• whether the customer can modify the carved-out material.

This is where many disputes start. One side thinks the carve-out preserves ownership but still allows ordinary use. The other side reads the contract as allowing only a narrow internal right.

5. Are confidential information and IP being mixed together?

They often overlap, but they are not identical. A carve-out for IP should not be your only protection for confidential methods, customer insights, pricing logic, datasets, or non-public business processes.

If the agreement involves access to commercially sensitive information, the confidentiality clauses or a non-disclosure agreement should say:

• what information is confidential,
• who can use it and for what purpose,
• how long confidentiality obligations last,
• what happens to copies, notes, and records when the contract ends.

For some businesses, confidentiality protections are just as valuable as the ownership clause itself.

6. Are third party rights dealt with properly?

You cannot always assign rights you do not fully own. This matters where deliverables include stock images, open source software, licensed fonts, SaaS tools, white-labelled components, or contractor materials.

Before you rely on a verbal promise that “everything will belong to you”, ask whether any third party terms limit assignment, modification, or sublicensing. If they do, the contract should reflect that reality and explain what rights the customer actually receives.

7. Have contractor and employee IP rights been lined up?

A business can only promise ownership with confidence if the people creating the work are bound appropriately. If you use staff, contractors, or freelancers, your internal contracts should match the position you are offering externally.

For example, if your agency promises a client ownership of final artwork but your contractor agreement or freelance designer contract does not assign rights to your business, you may have a chain-of-title problem. This is often discovered too late, usually during due diligence, a dispute, or a sale process.

8. Could the carve-out affect a business sale, investment, or due diligence review?

Yes. Investors and buyers want clear evidence that the company owns, or has rights to use, the IP central to revenue. A patchy set of carve-outs can raise questions about whether the business really controls its product, brand assets, content, or codebase.

If you are preparing for investment or a sale, keep records of:

• what IP the company owns,
• what was excluded under customer or supplier agreements,
• what licences are in place,
• whether any approvals or consents are needed on assignment.

Common Mistakes With IP Carve Out Agreement

The biggest mistake is treating the carve-out as a small drafting point when it actually controls commercial leverage, future reuse, and business value.

Leaving the carve-out too general

Saying “background IP is excluded” may not settle what counts as background IP. If your business relies on a platform, formula, process, or content system, define it with enough detail that an outsider could understand what stays with you.

This is especially important for tech businesses and creative agencies. A court or adviser reading the contract later was not in the sales meeting. They will look at the words on the page.

Forgetting about embedded materials

A final deliverable can contain both project-specific IP and carved-out background IP. A customer might receive a website, app, marketing campaign, or packaging file that embeds reusable code, fonts, imagery, scripts, production methods, or brand systems.

If the contract does not deal with embedded materials, each side may assume a different ownership outcome. Spell out what is embedded, who owns it, and what use rights are granted.

Ignoring future modifications

Founders often focus on the handover date and forget what happens six months later. Can the customer update the material itself? Can it engage another supplier? Can your business keep reusing the same framework elsewhere? Can either side build improvements?

If those questions are left open, the contract may not support the commercial arrangement either party expected.

Using one-way precedent wording without adapting it

Templates from overseas or from a different industry often contain ownership wording that is far too broad for the actual deal. New Zealand businesses regularly copy terms that were designed for a full custom build and use them for a partially bespoke service agreement, or vice versa.

That is risky because the same phrase can operate very differently depending on the project. A software implementation, a design engagement, and a manufacturing collaboration should not all use the same IP wording without review.

Assuming payment decides ownership

Paying for work does not automatically mean you own every related IP right. Equally, creating something for a client does not always mean you get to keep all underlying materials. Ownership depends on the legal structure of the contract and the facts around the work.

Before you spend money on setup, marketing, packaging, or a product rollout that relies on commissioned material, confirm whether you own it, license it, or only have limited use rights.

Not aligning the carve-out with branding and trade mark strategy

Some businesses commission logos, product names, labels, and packaging without checking whether the supplier retains rights in source files, design systems, or related marks. Others grant a distributor or white-label partner broader branding rights than intended.

If branding is central to the deal, separate these issues clearly:

• who owns the trade mark and business name,
• who owns design files and artwork,
• whether there is any right to alter or adapt the branding,
• what happens when the arrangement ends.

Relying on side emails or verbal assurances

If the signed contract has an entire agreement clause, earlier emails or discussions may carry limited weight. Even where they remain relevant, they are a poor substitute for clear drafting.

Before you sign, push to have the carve-out, licence, and ownership split stated in the agreement itself or in a schedule attached to it.

FAQs

Is an IP carve out agreement always a separate contract?

No. It is often a clause or schedule within a broader services, development, supply, investment, or sale agreement. For larger transactions, the carve-out may be set out in more detail in a dedicated schedule.

Can a customer still use carved-out IP?

Yes, if the contract gives the customer a licence. The carve-out preserves ownership, but a licence can still allow use of the excluded IP to the extent needed for the deal.

Do IP carve-outs only matter for software businesses?

No. They also matter for design, manufacturing, research, e-commerce, food and beverage, product development, franchising, and any business that brings pre-existing know-how or brand assets into a contract.

What is the difference between background IP and project IP?

Background IP is what a party already owned or developed independently of the deal. Project IP is new material created specifically under the contract. The contract should define both because disputes often arise where the two overlap.

Should a New Zealand SME get legal advice on a carve-out clause?

If the IP is central to revenue, branding, technology, or future growth, legal review is usually worthwhile. Small wording changes can affect ownership, resale value, use rights, and whether the arrangement works after the contract ends.

Key Takeaways

• An IP carve out agreement excludes specified intellectual property from a broader assignment, transfer, or licence.
• It is most useful where one party brings valuable pre-existing code, designs, branding, know-how, templates, or technical methods into a project.
• The clause should clearly identify what is carved out, how improvements are treated, and whether the other party receives a licence to use the excluded IP.
• Broad ownership wording elsewhere in the contract can undermine a carve-out if the document is not drafted consistently.
• Confidentiality, third party rights, contractor assignments, and trade mark ownership should also be checked before you sign.
• Clear IP boundaries are easier and cheaper to set before the deal starts than after a dispute, investment review, or sale process begins.

If you want help with contract drafting, ownership clauses, licence terms, and trade mark issues, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.