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Key Clauses in A Software Licence Agreement

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Software is a vital asset for many companies, sometimes serving as a foundation of their operations. Suppliers licensing their software to customers must implement robust protection measures to protect this valuable asset from misuse. One effective tool for ensuring protection is a robust software licence agreement. This article will explore critical clauses a supplier should include in its software licence agreements.

What Is the Purpose of a Software Licence Agreement?

Savvy software businesses can create lucrative and prosperous software tools that could thrive in our technologically advancing society. A software licence agreement acts as a vital legal safeguard to protect the owner’s rights in the software. 

A software licence agreement is a legally binding contract between the supplier (the licensor and often the software owner) and its customers (the licensees).

The agreement outlines a range of legal terms regarding using your software, such as how many devices the customer may install it on and how much it costs the customer to use.

A clear and well-written software licence agreement will help the licensor avoid various potential issues later down the line, such as:

  • Misuse: the agreement can specify how the customer may use the software, preventing unauthorised activities such as copying or reverse engineering.
  • Unpaid bills: Clear payment terms ensure prompt payment.
  • Costly legal battles: The agreement can define your obligations and limit your liability, potentially saving you from costly legal disputes.

A robust software licence agreement protects your valuable software assets and business from legal and commercial risks. 

Software Licence Agreement Drafting Challenges

Drafting an effective and robust software licence agreement needs careful attention. This is because the use of software presents various risks, and these agreements can be complex and technical. 

Drafting a software licence agreement requires a thorough understanding of the intellectual property rights subsisting in software, industry terminology and a practical understanding of the different software licensing models.

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Each software licence agreement will be unique and present its challenges and nuances. 

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Key Clauses in A Software Licence Agreement

However, here are some key clauses which typically appear in software licence agreements:

  • A definition of the software and how it is licenced: Your agreement must clearly define which software you are licensing to ensure expectations are met. You should also set out how the software will be licensed, for instance, whether you will install it on the customer’s premises or licence it as a service via the internet (commonly referred to as ‘SAAS’). 
  • Defining the term: It is vital to determine exactly how long the customer can access the software. This may be for a specific term or an automatic renewal basis, depending on what you have agreed to or how you generally licence software. If a customer terminates early, you may seek to include fees for early termination, such as additional changes. 
  • Your obligations: If your business agrees to provide additional support services, you should define the scope of the services to avoid misunderstandings. 
  • Clauses to protect your software: Your agreement should lay out your company’s ownership of intellectual property rights in the software. It should set clear boundaries on the scope of use of software by the customer, along with consequences for breaching licensing terms. This will help ensure your software is protected and you have legal remedies. For instance, you can include various restrictions and limitations regarding the customer’s permitted use of the software. As part of this clause, you can have clear rules around how many individual end users may access the software. You must also lay out whether the agreement is exclusive or non-exclusive.
  • Clauses to ensure the customer pays you on time: Software is a valuable asset, and you must ensure you are paid correctly and on time by customers. Licence fees must be included according to your agreed payment terms. 

Further Clauses to Consider in a Software Licence Agreement

Here are some further clauses to consider within software licence agreements:

  • Clauses to handle disputes: Incorporating provisions for resolving disputes and determining precise requirements to mitigate conflicts is vital. This helps prevent disagreements and ensures smoother business processes.
  • Clauses to ensure you have an exit route: As a software owner, your agreement should specify the licence term as explored above, but you should also have the power to end the licence in certain circumstances—for instance, if the customer misuses your software. 
  • Clauses to limit your liability exposure: A limitation of liability clause is key for protection from risk. For example, your agreement can include a clause specifying various losses for which your business will not be liable if you breach your obligations. You can also include a maximum monetary cap on your liability, so you have assurance over the maximum financial sum a customer can claim from your business for breaching your contractual obligations. 
  • Clauses around data protection: The treatment of customer data is vital in software licence agreements, particularly where the licensor will have access to personal data. In this case, mandatory data processing clauses may be necessary to comply with data protection laws. 

These are some typical clauses we would expect in a software licence agreement. However, the specific terms your business needs in its agreement will depend on the nature of the software, the nature of its licence, and your business intentions. If you need clarification on what clauses you require in your agreements, you should seek legal advice from an experienced solicitor.  

Key Takeaways

Software is often a critical and valuable business asset which requires protection. When licensing software to third parties, a software licence agreement is crucial. This is a niche agreement setting out terms under which a party can use the software. The software licence agreement must include well-defined and clear key clauses to protect the software licensor. For instance, provisions which define the scope of the licence, restrictions on its use, payment terms, and limitations on liability.

Software licence agreements can be complex and technical, so you should seek legal advice from an experienced lawyer to help you draft an agreement to safeguard your software adequately. 

If you need help with a software licence agreement, LegalVision’s experienced IT lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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Sej Lamba

Sej Lamba

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