Updated 15 July 2026

Introduction

In modern supply agreements, IP representations and warranties are critical to managing risks and ensuring smooth business operations. With goods increasingly incorporating embedded software and AI-generated components, suppliers and buyers must address ownership, usage rights, and protection against third-party claims in more nuanced ways. This note outlines best practices, remedies, and risk allocation strategies for drafting effective IP provisions.

Core Representations

• Ownership & Title
  Supplier represents that it owns or has valid licences to all IP embodied in or used to manufacture the goods, including embedded software and AI-generated outputs.
• Right to Supply
  Supplier warrants the legal right to supply goods and grant usage rights, covering both hardware and software elements.
• Non-Infringement
  Supplier warrants that goods, software, and AI-derived components do not infringe third-party IP rights.
• No Encumbrances
  Supplier confirms IP is free from liens, claims, or restrictions.
• Disclosure of Third-Party IP
  Supplier must disclose open-source software, third-party libraries, or AI platforms used, along with compliance obligations.

AI-Specific and Embedded Software Considerations

• Training Data & Outputs
  Supplier must represent that AI models were trained using lawful data, with no misuse of personal or confidential information.
• Ownership of AI Outputs
  Warranties should clarify whether AI-generated deliverables are owned by the supplier or buyer, avoiding ambiguity.
• Model Improvements
  Supplier must disclose whether improvements to AI models trained on buyer data persist beyond contract termination.
• Software Licensing
  Embedded software must be licensed appropriately, with clear terms on updates, patches, and interoperability.
• Operational Continuity
  Representations should cover model validation, documentation, and performance thresholds to ensure reliability.

Drafting Tips

• Avoid Overbreadth: Limit warranties to IP actually used in supplied goods.
• Knowledge Qualifiers: Use “to the supplier’s knowledge” where appropriate.
• Survival Periods: Define how long warranties survive post-termination.
• Tailored Scope: Adjust warranties for raw materials, finished goods, or technology components.
• Cross-Border Considerations: Account for differing IP laws in international supply chains.

Remedies for Third-Party Infringement Claims

• Indemnification: Supplier indemnifies buyer against claims, damages, and costs.
• Defense Obligation: Supplier must defend buyer in litigation or settlement.
• Replacement/Modification: Supplier may replace or modify infringing goods/software.
• Refund/Termination: Buyer may terminate and seek refunds if infringement cannot be cured.

Risk Allocation

• Cap on Liability: Liability caps may apply, but IP indemnities are often carved out.
• Exclusions: Indemnity may exclude claims from buyer misuse or modifications.
• Step-In Rights: Buyer may reserve rights to control defense if supplier fails to act.

Comparison Table: Key Clauses

Conclusion

Supply agreements must evolve to address embedded software and AI-generated components. Clear, tailored IP representations and warranties protect both parties, allocate risks fairly, and ensure operational continuity in increasingly complex supply chains.

References and Further Information

• https://www.offitkurman.com/business-law-transactions/business-law-and-transactions-law-blog/ai-risk-contracts-ma-representations-diligence
• https://www.pertamapartners.com/insights/ai-ip-ownership-contracts-protecting-rights

Disclaimer: This practice note is for informational purposes only and does not constitute legal advice. Parties should consult qualified legal professionals to tailor IP representations and warranties to their specific agreements and jurisdictions.