Software Licence Agreements are unique types of contracts with clauses and commercial terms that address the use of software that is not owned by the end-user.
A contract where the owner (or ‘licensor’) gives someone else (the ‘licensee’) the right to use software is called a Software Licence Agreement or End User Licence Agreement.
Author: Farrah Motley, a commercial lawyer with experience in writing international supply agreements and helping Australian businesses to reduce legal risks
An overview of software licence agreements
Software licences are used in many different contexts, for instance:
- many individuals use Microsoft Office applications, and these are granted by Microsoft under the terms of their software licence terms
- businesses seeking to provide employees with specialised software that is targeted towards their profession and the business
- businesses granting software licences to other businesses for the purpose of developing bespoke software based on a core application
The use of cloud-based applications to distribute software to end-users are more commonly known as SaaS Contracts. ‘SaaS’ stands for ‘Software as a Service’.
SaaS contracts allow the software owner to use a cloud-based software application to connect customers with their software. This can be contrasted with the traditional model of providing end-users with access to the software itself, which can run the risk of customers duplicating the code or otherwise misusing the software.
It is important to engage a commercial contract lawyer to review your software licence agreement.
A software licence agreement is a technology agreement that enables the owner of the software to:
- ensure that the rights granted to the end-user are specific and well-defined
- limit the possibility that unintended, implied rights are granted to end-users
- ensure that the owner has robust, broad and enforceable legal rights
Clauses in Software Licence Agreements
The terms of a Software Licence Agreement depend on:
- the software that is being licensed
- the intended use of the software
- the amount of technical support required
- the licence fee (including timing and amounts)
Some of the clauses commonly used in software licence agreements include:
The Software Licence Fee
The terms of the software licence fee clause will depend upon the model. For example, whether the software is subscription-based or a one-time licence fee.
In the payment clause, it is important to describe:
- how the fee is to be paid (for example, by electronic funds transfer)
- when payment is to be made
- what happens if payment is late or the fee is not paid
- whether the fee is subject to change and on what basis
Free Trials to Use the Software
Sometimes, software developers or providers offer free trials to potential customers.
If you are offering a free trial, you must ensure that the terms and conditions of the free trial are clearly expressed in the software licence agreement. For instance, the agreement may address the limitations of the trial period, whether the trial period can be extended and whether payment for use of the software will be automatically debited after the trial period ends.
Technical Support for Users
Many software applications require technical support. Depending on the complexity of the software, the sophistication and requirements of the end-users and the level of interface between the software and third-party systems (to name a few), a significant amount of technical support may be required.
Clauses that deal with technical support may address matters such as:
- whether technical support is available at set times or 24/7
- how end-users can contact the support service
- whether technical support is limited, and in what way
- whether end-users have to pay an additional fee for particular aspects of technical support
- the rules for escalating ongoing technical issues
- whether and how end-users will be compensated for down-time
Commencement and Termination of the Software Licence
The software licence agreement should also consist of all the provisions and policies in detail about when the licence comes into effect and the situations that may lead to its termination. This is important for all technology agreements.
Renewal of the Software Licence
When software is licenced for a fixed period, then it is necessary to describe the renewal period and the process for voluntary or automatic renewal.
Intellectual Property Rights in Relation to the Software
The owner or licensor of software owns the copyright in the source code under the terms of the Copyright Act 1968 (Cth). An intellectual property clause can be written to address the way in which the licensor gives away its ownership and grants limited rights to end-users.
Technology agreements always need to include robust intellectual property clauses.
Data Transaction and Transfer
Some software may require interface with the end-users systems, or data inputs from third parties or the licensor.
Clauses that address the type of data required, whether that data will impact the timing and roll out of the software and other matters, are important to consider for inclusion in a software licence agreement.
A clause dealing with confidentiality may be necessary. It is always advisable to include a confidentiality clause to ensure that sensitive information that passes between the licensor and the licensee is subject to a term of confidentiality.
Warranty in relation to the Software
The licensor may warrant that the software is free from serious defects that may adversely impact the end-user.
If the Australian Consumer Law applies, the consumer warranties will apply and the end-user will have certain legal rights. It will not be possible to contract out of the Australian Consumer Law and for this reason, it is important for licensor’s to ensure the software complies with those warranties.
Limitation of the Software Licensor’s Liability
Software licence agreements commonly include a clause that seeks to limit the licensor’s liability. The extent to which a limitation of liability clause will be valid and enforceable depends on the context of the software and the wording of the clause.
You must also ensure that a wholesale review of how the software collects, uses and stores personal data is carried out and that your business complies with data protection laws.
The Importance of a Software Licence Agreement
If you have invested a significant amount of time and resources to developing software, it is important to ensure that you have appropriate safeguards in place to protect that investment. This can be done through a carefully drafted software licence agreement.
Prevent Misuse of the Software
If you do not want others to copy, duplicate, reverse engineer or otherwise misuse your software, you need to ensure that you have robust rights under the terms of the software licence agreement.
It is also important to remember that, just because you have legal rights, this may not be enough to prevent or deter users from misusing your software.
Because of this, it is important to ensure that you have the ability under your technology agreements to:
- monitor user activity
- identify misuse of software by users
- immediately suspend use of the software
You will Licence it and not Sell it
There is a big difference between licencing and selling your software.
When you grant a licence in relation to software, you are giving users a limited right to use that software on the terms of the software licence. You retain ownership and (provided the terms of the software licence are properly written), you can grant licences to an infinite number of potential users.
Disclaiming Warranties in Relation to Software
There are different types of customers and all of them have different expectations from the same product or software. You can not meet all of their expectations like a guarantee for no bugs in the software or no downtime or others.
You can also add a disclaimer into your technology agreement that requires the user to accept the software as it is. However, you need to engage a lawyer to ensure that any such disclaimer is legally enforceable and complies with the Australian Consumer Law (if applicable).
How Can Prosper Law Help?
Prosper Law provides legal services to technology-based businesses and entrepreneurs. If you need a commercial contract lawyer to prepare, negotiate or review a software licence agreement or an end-user licence agreement, contact us today.
Want to continue reading? Check out How to Write a Letter of Demand.
Farrah Motley | Legal Principal
PROSPER LAW – Australia’s Online Law Firm
M: 0422 721 121
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