1. Scope and Purpose. This Section deals with an important contractual relationship in information industries that resembles, but differs from "installment" contracts in Article 2. The similarity lies in that more than one performance occurs under the contract. The difference is that the performances involve a grant of rights followed by delivery of a copy, while installment contracts deal with sequential deliveries of copies.

The section distinguishes between (1) agreements where a grant to use informational property rights vests independent of any copy, and (2) agreements where the purpose is to obtain rights associated with a copy of information. It deals only with transactions in which, under the agreement, the vesting of rights to use informational property is independent of delivery of a copy. The Section describes the relationship between a tender of a copy in such cases and cancellation the entire contract or cure of the tender. Consistent with Section 2B-601, it indicates that refusal of the copy does not necessarily permit or result in cancellation of the contract. This is because the independent grant of rights (already vested) is an independent, performed part of the agreement and the copy may be a non-material aspect of the transaction.

If the refused tender of a copy does not materially breach the entire contract, the tendering party has a right to cure the defective tender by acting in a commercially reasonable time. That right is cut off only if tender and a failed or delayed cure constitute a material breach of the whole agreement.

2. Nature of the Transaction. The section applies only if the grant to use the informational property rights vests and can be exercised without receipt of a copy. Whether or when this circumstance exists depends on the agreement. It is, however, a routine type of transaction in information industries, especially with respect to distribution relationships and performance rights. In cases where this form of transaction exists, the parties view any copy as a mere conduit to complete an already vested conveyance. In such cases, a court must not view a material defect in the copy as necessarily material to the entire contract.

In contrast to cases under this section, if the agreement does not create a prior vesting of intellectual property use rights and the transaction does not entail an installment contract, a material defect in the copy and associated rights to which the transaction pertains is more often material to the entire transaction. This may benefit or disadvantage either party depending on the circumstances. Thus, if the contract is for rights associated with a copy, the licensee that refuses the copy is left solely with an action for damages; refusal in essence cancels the contract. If the intellectual property rights have vested by agreement independent of a copy, the licensee can refuse the copy and still (1) expect and insist on performance and (2) exercise rights under the non-cancelled contract.

Illustration 1. IBM grants ABC the right to distribute up to twenty thousand copies of its Fast-Pace Internet software in the United States over a one year period. Several weeks after the contract becomes enforceable, IBM delivers a master disk of the software for ABC to its use in producing copies for distribution. The master disk contains a manufacturing flaw that prevents making any copies from it. On learning of the defect, IBM replaces the disk. The contract is within this section. ABC can refuse the copy since the defect was material as to the copy, but cannot cancel the entire contract unless the defect and the delay was material to the entire contract. If it was not, ABC can still recover damages for the delay, if any.

Illustration 2. Houston orders a one hundred person site license from Micro for its operating system software, agreeing to the price for the license. Micro ships a copy of the software, but the copy is warped and defective and arrives several weeks later than agreed. This contract does not come within this Section because there was no vested right to use informational property rights independent of the rights associated with the copy to be delivered. The issue is solely whether the tender was a material breach as to the copy and, if so, Houston's rejection also cancels the contract.

Illustration 3. Warn grants Theo an exclusive license in Chicago to show the movie "Bond" during June, 1999, also giving Theo the right to display clips from the movie for advertising purposes. A copy of the movie is to be delivered one week before the first showing. Warn delivers several days late and the copy is technically defective and cannot be used. Theo refuses the copy. The contract falls in this Section because the grant of rights is independent of the copy. Refusal is not cancellation of the contract. Theo can continue to advertise using clips. Warn can cure in a reasonable time unless it delays to the point that it creates an incurable material breach of the entire contract.