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What are Key Risk Clauses in a Software Licence Agreement?

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Software can be a critical asset for many companies, sometimes serving as the foundation of their operations. Suppliers licensing their software to customers must use robust software licence agreements to safeguard their software assets from potential misuse. However, various clauses in a software licence agreement can present high risks for a software owner. This article will explore some key risk clauses in a software licence agreement that software owners should understand and take legal advice on if necessary. 

Why Are Software Licence Agreements Vital for Software Owners?

In our tech-driven world, software is a crucial asset. Accordingly, safeguarding a software owner’s rights within said software becomes vital. This is where a software licence agreement offers valuable protection as a crucial legal tool.

In short, a software licence agreement is a binding legal contract between a software supplier (often the licensor and owner) and its customers (the licensees). It sets various legal terms governing software usage, such as:

  • installation;
  • users permissions; and
  • pricing and payment terms.

A well-drafted software licence agreement is a risk-prevention tool for addressing potential issues. The agreement can safeguard valuable software assets and protect owners from risk by specifying:

  • permissible software uses;
  • facilitating prompt payment; and 
  • mitigating legal disputes.
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What are Key Risk Clauses a Customer Could Request?

In negotiating software licence agreements, savvy business customers often seek to tailor the terms. This is to align with their specific needs and requirements, especially when dealing with bespoke or high-value software. It may involve negotiating various aspects of the agreement. This ensures that their concerns are adequately addressed whilst providing maximum protection if things go wrong. 

Here are some of the critical risk clauses that customers could request:

High Liability 

A liability clause in a software licence agreement can limit the liabilities for which a software owner will be responsible for breaching the agreement. For instance, it can limit the types of losses the business will be ‘on the hook’ for. In addition, it can reduce the maximum amount the customer can claim from them for breaching the agreement.

In a software licence agreement, a customer may push for the software licensor to have very high or unlimited liability or be liable for a range of losses. However, this is high risk. Therefore, it is essential to carefully negotiate for reasonable liability limitations that protect the software owner from excessive financial exposure while ensuring a fair and balanced agreement for both parties.

An experienced lawyer can provide valuable guidance in navigating these negotiations and drafting a liability clause. They can assist you in striking an appropriate balance between what you are comfortable with commercially and what keeps the customer happy. 

An Indemnity 

Customers could request an indemnity clause in a software licence agreement. This clause obliges the licensor to fully compensate customers for specific claims or losses arising from using the software. 

The indemnity clause could cover your business compensating the customer for claims related to intellectual property infringement or breach of contractual obligations. This may include instances where the customer’s use of the software infringes upon third-party rights, leading to legal action against them. Or, where relevant, it could cover losses arising from data breaches caused by your business as a data processor. 

By agreeing to an indemnity clause, the licensor assumes responsibility for various losses, which could be significant and costly. Agreeing to an indemnity could mean your business is at risk of substantial financial obligations. This may be far greater than the licence fee the customer has paid. Therefore, careful consideration and negotiation are essential to mitigate indemnities adequately. For instance, you could seek to negotiate a maximum financial cap on your indemnity obligations.

Again, a lawyer can support you with this – particularly as indemnity negotiations can be extremely complicated. 

An Exit Route 

Customer termination rights allow customers to terminate the software licence agreement under certain circumstances. A customer may, for example, seek to terminate the agreement for convenience at any point. However, this may present risks for your business, such as loss of anticipated revenue.

As such, you should carefully review and negotiate termination rights that your company is comfortable with. Ensure you check termination clauses proposed by a customer in a software licence agreement before agreeing to them. 

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How Can a Lawyer Help Your Business Navigate These Risks?

These issues can be complex for a software owner to understand and navigate. An experienced lawyer can play a crucial role in assisting you in negotiating such risk clauses in a software licence agreement. By leveraging their negotiation skills and practical experience, a lawyer can help protect your interests. They will seek to strike a balance that satisfies both parties while mitigating risks to an acceptable level. 

Key Takeaways

Safeguarding valuable software assets is vital for businesses licensing their software to customers. Software licence agreements are crucial legal instruments to protect software owners from potential risks. However, negotiating these agreements requires careful consideration and attention.

Specific clauses concerning risk and liability pose significant dangers for software owners. These provisions can impose substantial liability and financial obligations on licensors. Therefore, software owners should seek legal guidance when navigating these terms during negotiations with customers.

If you need advice on licensing your software and customer negotiation of software licence agreements, LegalVision’s experienced IT lawyers can assist you 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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