Understanding Essential Terms and Conditions in Software Licensing Agreements

Introduction

Software licence and ownership agreements fall within the broad category of technology contracts. A software licence agreement is an agreement between one party, say a software developer or licensor and another party, a customer/licensee for the use of the software being licensed. In essence, this agreement allows the licensee to use the software and prescribes how it should be used.  Other issues that a software licence agreement may cover include the customer’s ability to modify or redistribute the software, its price and licensing fees and the number of computers on which the software may be installed on. The software agreement may fall within two classes – a development agreement between the developer and the client or one that transfers intellectual property rights in an already completed software from the seller to the buyer or the customer. The rights and obligations that exist under a software license agreement should be a matter of interest to both software developers and customers especially in order to ensure the protection of intellectual property rights of the developer, provide for dispute resolution and to secure the licence rights of the licensee.

 

The Case for a Software Licence Agreement?

While the protection of intellectual property rights is of critical importance to the software developer, there are other weighty reasons why insisting on a well-drafted software licence agreement should engage the attention of both developer and customer. These are:

  • Prevention of software abuse;
  • Allows for licensing and sale;
  • Allows for Disclaimer of warranties;
  • Reduces Developer’s liability;
  • Allows for termination/suspension of the agreement;
  • Defines the nature and process of resolving disputes arising from the agreement.

 

 

Terms and Conditions of an Agreement/Contract

While a software agreement may contain several representations by each party, it is the terms and conditions which relate to the agreement under reference that define the nature and extent of the parties’ liabilities, rights and obligations under the relevant contract. As a matter of law, failure to comply with a term of the agreement would entitle the innocent party to a remedy.  The various terms under an agreement however do not carry equal weight – conditions, for example carry more weight than warranties.  Mcendrick[1] defines a condition as an essential term that goes to the heart of the contract. A warranty, on the hand is a lesser god in the scheme of things. To emphasis the difference between a condition and a warranty, Mcendrick notes that a breach of a condition enables the innocent party either to terminate performance of the contract and obtain damages for any loss suffered as a result of the breach, or to affirm the contract and recover damages for the breach. On the other hand, a breach of warranty only entitles the innocent party to claim damages; in other words, he cannot terminate performance of the contract (on grounds of breach of warranty) and must therefore continue to perform his obligations under the contract. Yet still, there is a third class of terms known as innominate or intermediate terms – these lie between a condition and a warranty, as per the judgment of Lord Diplock in Hong Kong Fir Shipping Co Ltd[2], are usually assessed by the courts on a case-by-case basis. Parties to an agreement should therefore be clear in their minds which pre-contractual contractual representations carry the weight of conditions and those which do not.

 

Sections of a Software Licence Agreement

Generally, software license agreements are divided into four sections, each section dealing with different sets of information relating to the execution of the agreement. While there may be differences and the number of sections, the following are major sections into which a software licence agreement may be divided:

[1] Mcendrick,E, Contract Law 6th Edition, p211

[2] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 70 – “There are many contractual undertakings which cannot be categorised as being ‘conditions’ or ‘warranties’… Of such undertakings all that can be predicated is that some breaches will, and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it has intended that he should obtain.

 

  • The General Information Section – The General information section sets the tone for the entire agreement by stating the execution date, the life period of the agreement and the nature of the agreement.
  • The Section Identifying the Parties Involved – This section identifies the parties that are entering into the agreement and includes their details, address, whether an individual or a company.
  • Terms of the Agreement Section – This section covers all the terms of the contract, including the agreed price, whether or not the software code would be provided to the customer alongside the licence, and if it is a site licence. Site licences allow the customer to use the software licence on more than one computer, but only at one location. Issues with regards to whether or not maintenance, support or refunds will be offered would be detailed under this section.
  • The Fine Details Section – This section may also be referred to as the miscellaneous section, where all other details not covered in the previous sections are included. These are usually information that are germane or specific to the particular agreement under reference and not general or broad terms. Signatures, dates and whether or not notarisation is required, would normally find a place here.

 

Key Clauses Contained in Software Licence Agreements

Every type of contract or agreement has its peculiar language and standard terms, and software licence agreements are no exception.  To be certain that your rights are well protected under the agreement, there are several essential clauses that the parties must include in the agreement, some of which are detailed below:

  • Non-exclusivity Clause – The non-exclusivity clause simply means that the software licence being granted to the present customer is not exclusive to them, and that the licensor reserves the right to grant licensing rights to other parties for financial gain.
  • Non-transferability Clause – As a licensor, you may want to restrict the number of people to whom your customer can transfer the licence right, and this is key to ensuring that you have other customers coming for licensing rights from you and not from your customer. This clause ensures that the developer has an enforceable right against the licensor/customer, if they breach this clause.
  • Retention of Rights Clause – This is a critical clause of the agreement where the licensor should state that the rights to the software remain his/her property even after the agreement is executed. These rights include the rights to the actual software, its name, the copyright, intellectual property right and the distribution rights. This is important to secure the product from being sold, distributed or pirated without the developer’s permission.
  • Modification Clause – The modification clause section allows the software developer to state whether or not he would permit any modification to the software after it has been licensed to the customer. Where he permits modification, it is advisable to clearly state the nature and scope of the modification. For license agreements, it is not commonplace to allow modifications to the software.
  • Breach of Contract Clause – As noted above, some terms of an agreement go to the very heart of the agreement, breach of which entitles the innocent party to either terminate the contract and/or claim for damages. Some representations are considered ‘mere puffs’ and do not carry the weight of either a condition, warranty or innominate term. It is important that those clauses that are conditions are clearly stated in this clause.
  • Device Usage Clause – The device usage clause states whether or not the licensee or customer can install and use the software on multiple devices in the same business location. For the developer or licensor, this clause of the agreement presents him an opportunity to restrict the usage to the agreed number of device(s), thereby saving the licensor the loss of potential revenue, in terms of future customers.
  • Limitation of Liability Clause – The limitation of liability clause is important for the licensor/developer because it defines and limits the extent of his liabilities under the agreement. By way of prescription, this clause should state that the customer or licensee of the software is accepting the software ‘as is’, is precluded from suing for damages for any fallouts from the use of the software, and that the developer/licensor makes no warranty for the software and its usage. However, software developers/licensors may not be able to limit their liability for damages resulting from the software not being fit-for-purpose, especially when they are acting in “the normal course of business” with the licensee/customer. It should also be borne in mind that limitation of liability must not be unfairly couched to the detriment of the licensee. As suggested by Matt Karlyn, the templates most developers use for licensing agreements often include limitations of liability that disproportionately favor the vendor. This pitfall must be avoided.
  • Terms of Termination Clause – The terms of termination clause should detail the action(s) that should be taken by the licensee in the event that the agreement is terminated. It may be a termination clause, for example, for the licensee to destroy the software or uninstall it from their device(s) upon the termination coming into effect. It would be in the interest of the developer/licensor, to state that they can terminate or revoke the software license at any time without giving reasons and without any consequences. Such a clause must however not offend the jurisdiction’s unfair contract terms laws or regulations.
  • Governing Law Clause – It is advisable to detail the law that should govern the agreement, especially with respect to dispute resolution. It is prudent for the developer/licensor to choose the jurisdiction of his business domicile.

 

Conclusion

Software licence agreements are important to secure the rights of the developer and/or licensor of a software. The convergence of technical IT issues/language and legal rules in the drafting of such licences demands that software developers seek counsel from legal experts before entering into such agreements. Legal counsel should also make it a point to understand the nuances of technology contracts in general and the specific requirements of their clients, in order that they can draft bespoke agreements that effectively protect their interests. As technological developments continue to gallop at amazing speeds beyond the match of the law, lawyers have a duty to ensure that they keep abreast of emerging technology language, concepts and regulation in order to provide sound and up-to-date advice to their clients.

 

Major Selasie Atuwo (Rtd) is a lawyer and has keen interest in Cyberspace Laws and Regulations, ICT Law, Privacy and Data Protection Law, FinTech, Artificial Intelligence and laws relating to National and Private Security.

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