Software licensing is one of the most effective ways to generate recurring income from your intellectual property, but it also comes with legal complexities that must be carefully managed.
As a software supplier (for example, a developer or owner), you can monetise your software in several ways, including licensing it to customers. You will need a software licence to protect your business from legal risks and avoid disputes.
Whether you are licensing to customers, resellers, or partners, our commercial law solicitors can help you design and negotiate agreements that define usage rights, set clear terms on support and liability, and ensure your IP remains fully protected throughout the licence's lifecycle.
Contents:
- What is a software licence and why do you need one?
- What legal risks should software companies consider when licensing products?
- What should be considered in a software licence agreement?
- How can I prevent customers from copying or sharing my software?
- Do software licences need GDPR clauses?
- Should software licences include automatic renewals?
- Licensing your software securely and strategically
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 required for suppliers and customers, but we focus on the supplier’s perspective in this article. As a software supplier, your licence needs 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
- Protect your business from potential legal risks
Software licences come in various 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 for their day to day operations.
By contrast, in SaaS models, the software is hosted on the supplier’s systems, rather than installed on the customer’s machines.
If you are unsure, our expert IT solicitors can help you decide what type of software licence best fits your circumstances and will ensure that the appropriate licence is used.
What legal risks should software companies consider when licensing products?
Software licensing can expose businesses to a range of legal and commercial risks if agreements are not properly drafted. Common issues include intellectual property disputes, cybersecurity incidents, software performance claims, service outages, and disagreements over how customers are permitted to use the product.
For SaaS businesses in particular, data protection and regulatory compliance are also key considerations. If your software handles personal data, payment information, or sensitive commercial information, your contractual terms should clearly allocate responsibility and manage risk appropriately.
Many software companies also overlook the importance of limiting liability in their agreements. Without carefully drafted clauses, businesses may find themselves exposed to claims that far exceed the value of the contract itself. Licensing terms should also address support obligations, termination rights, payment disputes, and misuse of the software.
As software businesses grow, these risks often become more commercially significant during investment rounds, procurement negotiations, or due diligence exercises.
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. Your business must:
- Retain the right to licence its software to other customers
- 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, if any third-party code forms part of the licensed software, you may need to grant your customer a licence to use third-party IP.
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
Software suppliers must 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 the software the customer is using.
What the customer can do with the licence: Typically, the software is limited to the customer running it for 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. 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 is a fixed-term, rolling, or perpetual licence
User permissions: You should set out who can use the software, for example, whether it will be used by one entity or a group of entities and how many authorised users are permitted to use it
How can I prevent customers from copying or sharing my software?
Software businesses can reduce the risk of unauthorised copying or sharing through a combination of legal protections and technical controls.
Your licence agreement should clearly restrict activities such as redistributing the software, sharing login credentials, reverse engineering, or sublicensing access to third parties. These restrictions help establish the legal framework for enforcement if misuse occurs.
Technical protections are equally important. Many software providers use account authentication measures, licence keys, usage monitoring tools, and device restrictions to control access and detect suspicious activity.
It is also important to ensure your business genuinely owns the intellectual property in the software. If developers, contractors, or external agencies contributed to the product, ownership rights should be properly documented through written agreements.
Liability
Liability is a common issue in software licences. Your contract must include provisions limiting your liability to the customer for breaching the agreement.
Without a carefully drafted limitation of liability clause, you could face unlimited liability, meaning there would be no financial limit on the damages a customer could claim against your business if things go wrong.
For example, a software supplier licences a customer to use 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; 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).
Consider carefully 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 contract's start, 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.
Do software licences need GDPR clauses?
If your software processes personal data, GDPR provisions are likely to be an important part of your licensing documentation. This is particularly relevant for SaaS platforms, cloud-based services, and software products that collect customer or employee information.
Your agreements should clearly explain how personal data is handled, which party is responsible for compliance obligations, and what security standards apply. In many cases, software providers will also need a separate Data Processing Agreement to support their contractual arrangements with customers.
Businesses should also consider how their software deals with international data transfers, breach reporting obligations, and data retention practices. Failing to address these issues properly can create legal, financial, and reputational risks, particularly where enterprise customers are involved.
Customer data
Data protection and security need to be considered if your business can access 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 act as a supplier and a ‘data processor’ when processing customer data. In that case, the licence must 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 updated. Your licence should address points 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 upon with the customer are documented, particularly for software that is business-critical for them. Failing to meet any agreed-upon service levels could result in a breach of contract, so it is important that you establish realistic and achievable service levels.
Should software licences include automatic renewals?
Automatic renewal clauses are widely used in software and SaaS agreements because they help create predictable recurring revenue and reduce disruption for customers.
Renewal provisions should be drafted carefully and presented transparently. Customers should be able to understand when renewals take effect, how pricing changes are handled, what notice periods apply, and how they can cancel if they no longer wish to continue using the software.
Poorly drafted renewal clauses can lead to disputes, customer dissatisfaction, and potential compliance concerns, particularly where consumer protections apply. For many software businesses, the key is striking the right balance between commercial certainty and a positive customer experience.
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 rely heavily on 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 law solicitors can help you understand what is required and ensure that your software licence covers everything.
Licensing your software securely and strategically
A well-structured software licence can unlock value, scale your reach and protect your core codebase, but only if the legal terms are watertight.
Our commercial law solicitors work with tech businesses to draft licences covering everything from source code restrictions to renewal and termination terms, helping you scale confidently and avoid disputes.
Whether launching your first product or expanding globally, we will help ensure your licensing arrangements reflect your goals and protect your position.
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