Taking some time to review the supplier's terms early on
can help you to avoid contractual traps and get the most from your
software licensing agreement, says Jimmy Desai
Companies' appetites for procuring software have been
reinvigorated recently. However, sometimes not much time is spent
reviewing the terms and conditions relating to the software
supply.
Problems with the contract terms may initially go unnoticed, but
can provide nasty shocks later on. Having the right approach to the
terms can assist with making a project successful.
It is essential to see the terms as soon as possible. Then you
can compare these to the terms of other suppliers, clarify the
supplier's offering - which may differ from what the supplier's
sales force have told you - and avoid early commitment without
knowing the full picture.
Also, the terms are often silent on key customer requirements,
and seeing the terms early allows time for negotiation.
A customer may also be surprised at the supplier's willingness
to change the terms at the start of a deal due to the supplier's
eagerness to secure new business and knowledge that the customer
may be considering other suppliers.
Contractual nasties can be spotted by a lawyer reviewing the
terms for you. However, major points to look for when you initially
look through the terms include:
Price
Although a general price may have been agreed, a customer will
be looking to:
- Pay in arrears if possible.
- Have price caps where prices can only rise, say, once annually
and by no more than a recognised index (such as the retail prices
index).
- Obtain "most favoured nation" clauses - ie clauses ensuring you
are not charged more than any of the supplier's other customers for
the same software.
Limitation of liability
This is a very important clause. The suppler will try to limit
its liability to a specific sum and will typically exclude its
liability for indirect losses.
What this means, in general, is that if the supplier were to
breach the terms, then despite the fact that you may have suffered
huge losses as a result, for example if the software fails, you
will only be able to recover up to the amount which the suppler has
limited its liability.
Where indirect losses have been excluded by the supplier, any
claim you make will be reduced so that all indirect losses will be
stripped out.
Exiting
Customers will want flexibility in their contracts to respond to
changing business needs. Typical termination events include
material breach or insolvency.
However, you may want other exit events including:
- Break points after certain periods, for example, after each
12-month period.
- Terminate for convenience - for example, upon 90 days'
notice. If the supplier is taken over or merges - particularly if
the resulting organisation has a different culture to the original
supplier.
- The ability to keep using some parts of the software but
terminating use of other parts of it.
Software
This is a key definition because it will help to establish:
- Exactly what software is going to be provided.
- Whether the software will include any modifications,
enhancements, new releases and new versions. If not, then these may
cost more.
- Whether any supporting documentation (manuals, technical
specifications etc) will be provided.
- Whether just the object code of the software will be
provided.
Assurances should be sought by the customer, including that the
software is owned by the supplier, that the software has no bugs or
viruses in it and that there is no litigation relating to the
software that could impact on your use of it.
Intellectual property
The customer will want to ensure that the supplier owns all of
the intellectual property in the licensed software. If you are sued
by a third party for using the supplier's software then you will
want to be indemnified by the supplier for any losses suffered.
Support and maintenance
It is important to have a service level agreement (SLA) which
identifies the software services to be provided, the service levels
and target, and any credits which may be payable if targets are not
met.
The software licence and software maintenance provisions should
be agreed at the same time. Otherwise if the software maintenance
deal is agreed later it may contain unfavourable terms, which you
may have to accept if you have already committed to acquiring the
software.
Escrow
Typically the source code to the software will not be provided,
so you should ensure that it is deposited with a third party agent,
for example the National Computing Centre in Manchester.
If the supplier becomes insolvent or is unable to maintain the
software then you will be able to access the source code from the
third party agent in order to continue the maintenance of
software.
Exit plan
If the contract expires or is terminated then there should be a
plan as to how you are allowed to use the software so that there is
an orderly run-off period. Otherwise, if you have to stop using the
software straight away, it could lead to severe business
difficulties.
Boilerplate clauses
These are typical legal clauses at the end of the terms. These
can include:
● Entire agreement clauses: what this means is that the terms
will contain all the terms and conditions relating to the licensing
of the software to the customer and that nothing else will
apply.
This means that any promises made by the supplier prior to the
terms being signed will not be included unless these promises
appear in the terms.
Practically, this means that you have to be very careful to
ensure that all promises and assurances the supplier has made in
respect of the software actually appear in the terms.
Otherwise, except where the supplier has acted fraudulently, you
will not be able to rely on any of these promises and
assurances.
- Waiver and severability: a waiver clause usually states that if
a party decides to waive its rights to claim against the other
party for a breach of the terms, then the party which waives its
rights to claim is not barred from making that claim later
on.
A severability clause usually provides that if any part of the
terms are invalid or unenforceable then those parts will be
stripped out of the terms and the rest of the terms will continue
to apply.
- Force majeure: this provides that a party is not responsible
for failing to perform its obligations under the terms if such
failure is due to events beyond its reasonable control.
For example, this could occur if the supplier fails to provide
maintenance services because the town and building from which it
provides these is flooded.
However, force majeure clauses should be examined carefully. For
example, the supplier may state that strikes are force majeure
events.
However, the customer may argue that strikes are within the
supplier's reasonable control - for example by the supplier paying
its workforce more to avoid strikes. This term could, however, be
amended to say that "industry-wide strikes", such as rail strikes,
qualify as force majeure events.
- Assignment: the terms should allow the customer to assign its
software licences to a third party so that fresh licences do not
have to be purchased by that third party if it purchases the
customer's organisation.
- Third-party rights: the terms will often exclude third-party
rights to enforce the terms. What this means is that where the
customer and supplier are a party to the terms then any other
person that could benefit from the terms - for example end-users -
are prevented from enforcing the terms against either the supplier
or the customer.
- Law: it is very important to make this clause comprehensive.
Not only should it say which law the terms should be governed by -
for example, English law - but it should also state the
jurisdiction where the case is to be heard.
The cost of a misunderstanding
The case of Vogon v the Serious Fraud Office highlighted that
prices can be misunderstood by the parties. This case centred on
the meaning of "database".
Vogon was providing and charging the fraud office on the basis
of the work done by Vogon in respect of each database. The
ambiguity related to whether "database" meant each individual
user's file or the entire server.
The fraud office won on its construction of the word "database",
and therefore only owed Vogon about £20,000, rather than in excess
of £300,000.
However, the whole dispute, including all the time, effort and
costs of litigating this matter, could have been avoided if the
pricing and payment had been clear in the contract at the start and
by including worked examples.
The need to specify jursidiction
In the case of Sawyer v Atari, Chris Sawyer, a computer games
developer, had an agreement with Atari governed by English law when
a dispute arose over royalties.
Atari argued that despite the agreement being governed by
English law, most of the issues involved accounting matters and
that the relevant witnesses and documents were in the US.
Therefore, according to Atari, the dispute should be adjudicated
upon in the US, but using English law.
After consideration by the English court, it was decided that
the appropriate forum was the English court, taking all the
circumstances into account. However, if the agreement had specified
that the jurisdiction should be England then this dispute could
have been avoided.
Steps to success
To ensure your project is sucessful:
- See the terms at the start
- Negotiate key points in the terms
- Get a lawyer to review the terms to spot hidden
dangers
Jimmy Desai is a partner at technology law firm Tarlo
Lyons
Read article:
Case studies: negotiating software
licences
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