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What is a Software Licence Agreement?

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Software and software products are often critical and valuable business assets. As such, they require robust protection in a legal contract when rights to use software are granted. A software licence agreement is a crucial document your software company needs to have. This document ensures that your users can utilise your software and you have peace of mind knowing your software is safeguarded. A well-drafted software licence agreement can help achieve this. This article will explain what a software licence agreement is and some key issues to consider when drafting these crucial agreements. 

What is a Software Licence Agreement?

Software licence agreements are vital commercial contracts to protect a software owner’s software assets. Software comprises various types of intellectual property rights, which require protection from misuse. 

A software licence agreement is typically between the software owner (the licensor) and the software customer (the licensee). The agreement sets out the terms on which the software will be licenced and any parameters around its use, together with commercial points such as payment terms. 

Without a robust software licence agreement, you as the software owner could face various adverse consequences, including your:

  • software being misused, such as reverse-engineered; 
  • customers failing to pay the licence fees, resulting in financial loss; and 
  • unlimited financial liability to a customer in a legal claim, far exceeding the relevant licencees fees the customer paid. 

What Key Issues Should I Consider for My Software Licence Agreement?

There are a range of issues you should consider when drafting a software licence agreement, as we explore below.

1. Considering Which Type of Software Licensing Agreement You Need

There are various ways you can choose to license your software. For example, your software could be licenced on a:

  • one-to-many basis, whereby standard software is licenced to multiple customers on the same terms. For example, software-as-a-service models usually adopt this process; or 
  • bespoke basis, where a software licensor licences niche software for a particular business and its specific requirements. 

The software licensing contract you will need will depend on your business. 

Implementing the wrong software licence agreement can cause various negative repercussions for your business. For instance, your software may not be appropriately protected. Additionally, your customers could complain or raise disputes if your contracts are too ambiguous.

As such, it is vital to ensure you fully understand your licensing model. Further, it is imperative your software licence agreement adopts a form that is conducive to your business model. An IT lawyer can assist you in determining which form your software licence agreement should adopt.

2. Paying Necessary Care and Attention When Drafting Software Licence Agreements

Drafting effective software licence agreements often requires special care and attention, as well as specialised knowledge. This is due to the niche and complex nature of software and its associated risks. 

Software licence agreements require an understanding of software, industry vocabulary, unique licensing methods, and intellectual property protection. As such, you should ensure whoever drafts your software licensing agreement has an appreciation of all these areas. 

3. Protecting Your Software With Permitted Use Terms

Your agreement should clarify your ownership of intellectual property rights in the software. Clear restrictions on the scope of use of software by the customer should be outlined, along with penalties for breaching licensing terms. For instance, clauses that forbid reverse engineering. This will help ensure the protection of your software. For example, you can include various parameters and limitations regarding the customer’s permitted use of the software. You can consist of clear rules around how many users may access the software as part of this clause. 

4. Having Clear Payment Terms 

Licence fees must be clearly defined according to your preferred payment terms. For instance: 

  • whether any fees will be due upfront; 
  • how you will charge for ongoing use of the software; and
  • any additional technical support or maintenance services. 

Clear payment terms in your software licence agreement will help to reduce the likelihood of a dispute being you and the software user. 

5. Developing a Process for Resolving Disputes 

Unfortunately, at some point it is likely that you and your software users are going to be involved in a dispute. Regrettably, most disputes end up in legal action. Legal action is a crucial risk for a business and both parties to the agreement. As such, your software licence agreement should contain clear dispute resolution terms. Incorporating these clauses in your agreement is key to amicably resolving disputes. Your agreement should mandate both parties are required to attend ADR before taking the matter further. This helps prevent conflicts and ensures smoother business processes.

6. Ensuring Termination Rights

No software licence agreement is complete without termination rights. Your software licence agreement should specify the term and the amount of time a user has to use your software. That said, you should have clear powers to end your users’s licence in certain circumstances. For instance, your user may have breached the permitted use terms. In this case, you will want to have the power to terminate their licence. 

7. Limiting Liability 

A limitation of liability clause is vital to protect your software business from undue risk. Your software licence agreement should specify what losses your business is not liable for if your business breaches the agreement. For example, your users may be unable to recover against you any losses of profit they sustained due to your breach. You can also include a maximum financial cap on your liability. Consequently, you have certainty over the maximum amount a customer can claim from your business if you breach your obligations.

8. Protecting Your Users’ Data 

Crucially, your software licence agreement needs to have data processing terms that align with the UK General Data Protection Regulation (UK GDPR). This will help ensure that your software licence agreement complies with relevant data protection rules. Ensuring your software licence agreement complies with the UK GDPR will also build trust and confidence among your users. Your users will have peace of mind that safeguards are in place to protect their data.

These are some general considerations. However, the specific terms you require in your software licence agreement will depend on the type of software, how it is being licenced and your commercial objectives. 

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Key Takeaways

Software is an essential and valuable tool for businesses and a significant asset for software owners. Software licensing can be complex, requiring robust legal agreements. A software licence agreement is a crucial document to protect your software from misuse. Various considerations are made when licensing software, including using the correct document and including bespoke provisions to protect your software from the risk of misuse. When drafting your software licence agreement, you should consider: 

  • which form your agreement will take; 
  • whether your agreement is being drafted with due care, attention and skill; 
  • if your agreement has permitted use terms; 
  • whether your agreement has clear payment terms; 
  • whether your agreement has an adequate process for dealing with disputes; 
  • if you have termination rights; 
  • if the agreement limits your business’s liability; and
  • whether there are terms in place to protect your users’ data. 

If you need help appreciating the complexities of a software licence agreement or creating a software licence agreement, contact our experienced IT lawyers 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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