The building blocks of a Software Licence Agreement
In this article, we have a look at some of the important aspects that must be kept in mind when drafting a Software Licence Agreement
What is a Software Licence Agreement?
A Software Licence Agreement is, in essence, a copyright licence. The bundle of rights associated with this type of copyright generally includes the exclusive rights to:
- use, copy and reproduce the Software;
- distribute the Software;
- modify, translate or create derivative works of any part of the Software; and
- display, or perform in any media and through any technology the Software.
The Software Licence Agreement, therefore, provides the Customer with the right to do the above (subject to the restrictions as per the Software Licence Agreement).
Scope of Software Licence
To learn more about the specific building blocks of a Software Licence grant clause follow this link.
The Provider would want to have the narrowest grant of rights. The Customer, on the other hand, would typically want broad licence. As a result, the scope of the license is among the most commonly negotiated provisions.
Another aspect often the subject of negotiation is whether the Licence grant is subject to the payment of the license fees under the Agreement. Furthermore, the Provider may also want to make the licence grant subject to the Customer's compliance with all terms and conditions as per the Agreement.
Support and training
The Provider may provide support and training to the Customer's Users. If this is the case, the terms of the support and training must be detailed in this section.
If training services are included as part of the Software Licence Agreement, ensure that the commercials relating to these services are unambiguously stipulated within the Agreement.
Generally, the Parties will retain their intellectual property rights and the Provider will own any new Intellectual Property Rights relating to the Software.
An aspect that will, however, need to be addressed in the Software Licence Agreement is feedback rights. In other words, if the Customer provides the Provider with feedback relating to the Software, will the Provider be able to use the feedback to improve the Software and make these improvements available to other Customers?
The default position is usually that the Provider may use all feedback freely without restriction or obligation.
Read more on building intellectual property clauses.
The payment provisions will detail payment terms, overdue amounts, method of payment, setoff, taxes, payment disputes etc.
Both Parties would generally want to protect such sensitive information, which, if disclosed to certain third parties, will be detrimental to their business. The confidentiality provisions provide which information must be regarded as confidential, obligations relating to handling confidential information, and what happens if there are unauthorised disclosures.
Limitation of liability
Unrecoverable losses and maximum liability are generally dealt with under the limitation of liability provisions. Unrecoverable losses may include, for example, consequential losses, and claims relating to breach of data protection provisions may be limited under the maximum liability amount to a fixed amount.
Reps & Warranties
The Customer and Provider will usually provide certain mutual warranties. These may include, for example, that they have the legal capacity to enter into the Agreement and that they have not offered unlawful or prohibited inducements to the other Party or any other person in connection with the Agreement.
Then there will also be warranties related to the Cloud Services that will be provided.
Typical warranties will include that no viruses will be introduced into the Cloud Services, the Cloud Services does not and will not infringe on any third party intellectual property rights, the Cloud Services will be updated as necessary to comply with applicable laws etc.
Breach of the warranties will also need to be addressed, and the disclaimers that relate to the warranties.
An indemnity often found in a Software Licence Agreement is an indemnity relating to Intellectual Property infringement claims that a third party may institute against the Customer.
The indemnity provisions need to identify what will be regarded as indemnified losses (what will be covered), what will trigger the indemnity and the claims procedure.
Where the licence is limited to, for example, the number of users, the Provider would want to have the right to conduct audits on the Customer's use of the Software.
With the audit clause, aspects often addressed include notices of audits, the number of allowed audits, confidentiality and what happens if there is an adverse finding.
Term and termination
The Parties may conclude the Software Licence Agreement for a fixed term or it may be a perpetual licence. If it is a fixed-term period licence, there may also be auto-renewal of the Term, which must also be detailed within this section.
The termination provisions detail when a Party can terminate the Agreement before the Term ends and may also provide for termination assistance the Provider must provide if the Agreement is terminated.
How will the Parties deal with disputes? Through a Court process or alternative dispute resolution? Are there different processes for different disputes - For example, expert determination for disputes relating to technical aspects of the Cloud Services?
The boilerplate clauses will include the provisions relating to public disclosure, third-party beneficiaries, how amendments will be dealt with, how notices under the Agreement must be provided, assignment etc.
What is the difference between a Cloud Services Agreement and a Software Licence Agreement?
Cloud Services are usually provided under a subscription-based model where access to the Software is provided to the Customer through an online login. No copy of the Software is provided to the Customer, and there is no need for a licence.
Read more about Cloud Services Agreements.
When it comes to a Software Licence, the Software is installed on the Customer's computers.
What is the difference between a Software Development Agreement and a Software Licence Agreement?
With a Software Licence Agreement, there may be small modifications as part of the support and maintenance services.
If new Software or extensive changes to existing Software is required, a Software Development Agreement will be a more appropriate agreement.
Read more about Software Development Agreements.
What is the difference between a End-User Licence Agreement (EULA) and a Software Licence Agreement?
A End User Licence Agreement (EULA) is for licensing a commercial or off-the-shelf (that is, without modification or customization) Software. The term "EULA" commonly refers to an agreement that is not negotiated or signed by the parties.
Must Acceptance Testing provisions be included in the Software Licence Agreement?
Generally, Software Licence Agreements do not include any Acceptance Testing provisions.
However, there are situations where a Customer may require changes to the Software. In such cases, it may be appropriate to include Acceptance Testing provisions.
Must Software Escrow provisions be included in the Software Licence Agreement?
There may be a situations where the Software is "mission critical" to the Customer. In such cases, it may be appropriate to provide for certain escrow arrangements.
Martin Kotze is a commercial lawyer with over 10 years of experience. He specialises in transactional work within the Tech, Financial Services and Property industries.
He is also one of the co-founders at DocNinja and regularly advises companies on how to contract better with their customers and vendors.
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