In today’s digital world, software is vital to business performance and success. As a software supplier (for example, a developer or owner), you can monetise your software in several ways, including by licensing it to customers. You will need a robust software licence to protect your business from legal risks and avoid disputes.
We will explain how an appropriately drafted licence agreement will enable your business to manage the use and distribution of its software in business-to-business transactions.
For help tailoring software licences to meet the needs of your business, speak with our expert team of commercial law solicitors.
Contents:
What is a software licence and why do you need one?
A software licence is a contract setting out the rules under which you, as the software owner, allow third parties to use your software. Software contains intellectual property (IP) rights and is protected by copyright, meaning a licence is needed to protect it when permitting third parties to use it.
Software licences are essential for both suppliers and customers; however, we are examining licences solely from the software supplier’s perspective. As a supplier, you need your licence to:
- Set out the rules on how your software can and cannot be used by your customers
- Cover your commercial terms, such as payment and delivery, and
- Protect your business from potential legal risks.
Software licences come in a variety of forms and address a wide range of circumstances. Examples include on-premises licences, individual user licences, company-wide licences that allow organisations to install as many licences as needed, Software-as-a-Service (SaaS) agreements, and End-User Licence Agreements.
Our focus here is on-premises licences, where software is licensed to customers to install and run on their local systems. An on-premises licence is more suitable for customers who require a niche product specific to their business and critical to their operations.
By contrast, in SaaS models, the software is hosted on the supplier’s systems, rather than being installed on the customer’s machines. Here, we provide a guide to SaaS agreements.
If you’re unsure, our expert IT solicitors can help you decide what type of software licence best fits your circumstances and will ensure that the appropriate form of licence is used.
What should be considered in a software licence agreement?
Consider these key issues for your on-premises software licence:
Intellectual Property (IP) Rights:
You will need robust IP provisions to protect your rights in the software. The licence must make clear that all IP in the software is your property as the software owner, and that the customer doesn’t acquire any rights in it other than a limited licence to use it for specific purposes.
Typically, the software licence grants the customer a non-exclusive, non-transferable right to use the software. This is crucial, as your business must:
- Retain the right to licence its software to other customers, and
- Prevent the customer from giving other third parties the right to use your software.
If you do agree on exclusivity (which is rare), special considerations apply when drafting the licence terms, and you should seek legal advice.
Your IP provisions must be carefully considered and tailored to the specific type of software being licensed. For example, you may need to grant your customer a licence to use third-party IP if any third-party code forms part of the licensed software.
Customers typically request an indemnity (a promise to compensate them) for any third-party intellectual property infringement claims that may be brought against them due to their use of the licensed software. You should take legal advice to ensure that the indemnity doesn’t go too far, and check that your business insurance covers any indemnities you give.
Scope of rights granted to the customer
It is crucial that software suppliers carefully consider what they are licensing to customers and the scope of those rights.
The software licence should cover key issues such as:
- What software is being licensed – often, including a technical specification, can help define what software the customer is being licensed.
- What the customer can do with the licence – commonly, the use of the software will be limited to the customer running the software for its business purposes and making a backup copy. Any bespoke permissions agreed upon with the customer (for example, the right to modify the licensed software) must be expressly stated in the licence agreement. Furthermore, the licence should clearly state what customers are prohibited from doing with the software. For example, licences often include strict restrictions against the customer reverse-engineering software or licensing it to third parties.
- The licence duration and territory – the licence should state which countries the customer can use the software in and whether it will be a fixed-term, rolling or perpetual licence.
- User permissions – it is critical to set out who can use the software, for example, whether the software will be used by one entity, or a group of entities and how many authorised users are permitted to use it.
Liability
Liability is a critical issue in software licences. Your contract must include a robust provision limiting your liability to the customer for breaching the agreement.
Without a carefully drafted limitation of liability clause, you could face unlimited liability, which means that there would be no financial limit on the level of damages a customer could claim against your business if things go wrong.
For example, a software supplier licences to a customer the use of a booking platform for the customer’s website. The software has a fault, meaning the customer can’t receive bookings for two weeks, and misses out on several new business opportunities. In this scenario, the supplier will want to avoid or limit its liability for the losses its customer suffered when the software wasn’t working. Having a substantial limitation of liability clause could help.
Unsurprisingly, it is common for customers to push back on limitation clauses. Whether or not you are prepared to negotiate will depend on factors such as the value of the deal and your bargaining power. Liability issues can be high-risk; for example, customers often request unlimited liability for data breaches. Always seek legal advice if you are asked to negotiate a limitation clause, and don’t forget to check with your insurers that your policy covers your potential risk exposure.
Warranties
Customers generally expect a warranty regarding the software's performance. Typically, a supplier warrants, at the very least, that the software will perform in all material respects according to its specification, for a fixed period (depending on the nature of the software). Give careful consideration to what warranties are both appropriate and practical to offer your customers.
Payment Terms
Payment terms must be tailored to the type of software licence and what the parties have agreed. For example, a one-off licence fee may be payable at the start of the contract, or recurring fees may be charged according to an agreed-upon payment schedule.
You’ll also need stringent remedies for non-payment, such as the right to revoke the licence.
Customer data
Data protection and security are critical if your business has access to customer personal data under the licence arrangement.
As part of its due diligence, your customer may want to review your security standards and procedures and will expect strong data security measures to be in place.
Suppose you are acting as a supplier and a ‘data processor’ when processing the customer’s data. In that case, the licence will need to contain mandatory terms due to the stringent rules under the UK General Data Protection Regulation (GDPR).
Support, maintenance, and updates to the software
Support is a common aspect of software licences, as software is not completely error-free and may need to be kept up to date. Your licence should address matters such as the frequency of updates, whether updates and bug fixes are included in the licence fees, or if they are subject to additional charges.
It is also essential that any service levels agreed with the customer are documented, particularly for software which is business-critical for them. Failing to meet any agreed-upon service levels could result in a breach of contract, so it is essential to establish realistic and achievable service levels.
Audit and termination rights
You should also include these key provisions to protect your software:
- Audit rights – these allow you to investigate and verify the customer’s use of your software, ensuring they comply with the licence terms. Include remedies, so that if you find that the customer has breached the licence terms, you have the right to compensation and to terminate their licence.
- Termination rights – you will need the ability to end the licence in specific circumstances, for example, if the customer commits a serious breach, such as allowing unauthorised people to use the software. Setting out stringent termination rights can be a powerful way to stop customers from misusing the software, particularly if they are heavily reliant upon it.
Other important clauses
There are many other important provisions you will need to consider, including:
- Will the licensed software include any open-source software?
- What is agreed regarding installation and testing?
- Will the customer have access to the source code, and if so, in what circumstances?
- How will cybersecurity be dealt with?
- Is there a dispute resolution procedure in place in case the parties disagree?
Our expert team of commercial technology solicitors can help you navigate through what is required and ensure that your software licence has you covered.
Conclusion
Given the complexities involved in drafting and negotiating software licences, careful planning and strategic foresight are essential to ensure that licences are robust, clearly tailored, and fit for purpose from the outset. Poorly drafted software licences can leave valuable intellectual property exposed, waste time and resources, and increase the risk of costly disputes.
If you require advice or support with licensing your software, please don't hesitate to contact our experienced commercial law solicitors – we would be pleased to assist.
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