SOFTWARE LICENSING AGREEMENTS

When a customer requires software on a non-exclusive basis, the supply agreement will normally be in the form of a software licence. The terms of the licence should be carefully considered and preferably checked by your lawyer, as it is usually difficult to amend an agreement once work has commenced.

Although there will be some issues which are common to all software licensing agreements, it is difficult to have a universal agreement which will adequately cover all software licensing situations. The terms of a software licensing agreement that will probably vary from project to project will probably include:

• Definitions of each important term used in the agreement to avoid confusion or ambiguity, for example: what do you consider to be your confidential information; what is the intellectual property; and what is to be defined as library code?
• The supplier's details
• The customer's details (you may need to conduct an appropriate search at the Australian Securities and Investments Commission, for Australian businesses, or the equivalent in your country)
• What is the licensed software and its documentation?
• What is the scope and duration of the licence, for example:
• a one year licence for use in Australia only; or
• a perpetual licence for designated equipment; or
• a five year (renewable) company wide licence; or
• a perpetual 500 “seat” licence.
• Does the supplier have the right and authority to grant the licence?
• Does the supplier offer any warranty that the use of the software will not infringe a third party's rights?
• Is there to be any transfer of title or ownership to the customer apart from a one-off licence?
• Who is to be the owner of any modifications and enhancements made to the software
• Does the supplier warrant that the software will perform a particular function?
• What are the program's operational requirements?
• What happens if the customer changes its operating system and the software no longer works?
• What documentation will the supplier provide to the customer?
• Can the customer make copies of the software and the documentation, for backup, for off-site storage, and/or for training?
• What is the supplier's liability if there are errors in the software and the documentation?
• Does the supplier have to provide updates for the software and documentation?
• Is the customer allowed to make modifications or alterations to the program?
• Is reverse engineering allowed?
• What are the customer.s obligations to oversee the use and control of the software and associated documentation?
• What after-sale service is provided, for example: warranties, support; maintenance; and training?
• What support is to be given, from when must the support be provided and what is excluded?
• Does support include free “upgrades”?
• What happens if a customer does not want to “upgrade”?
• What are the fees and charges stipulated by the supplier and what are the terms of payment?
• Is there an acceptance test that must be passed before payment is due? What happens if an acceptance test is failed?
• Is there a trial period?
• What are the customer.s duties with respect to confidential information and intellectual property belonging to the supplier?
• What is the liability of the supplier for faults and consequential loss and damages? Can the supplier “cap” or “limit” its liability?
• Is the customer able to sub-licence the program? Can the customer transfer or assign its licence?
• Can the supplier sub-contract any part of the agreement, for example, installation and support?
• When may the licence be terminated? What happens upon termination?
• Has source code escrow (third party source code storage) been considered?
• What are the insurance obligations of the parties?
• A well worded dispute resolution clause can make or break the profitability of seeking legal recourse if something does go wrong.
• How do shrinkwrap licences work and are they suitable for your project?

As you can see there is quite a bit to consider. The more detail your answers to the above points include, the tighter the documents will become. Trying to use a blanket agreement for all projects may leave you exposed to many risks that you could easily avoid.

In Australia there is no legal requirement for a software licence to be in writing, but if it is not, there can easily be a dispute as to what restrictions apply. It would be difficult to enforce details for each of the above mentioned points if you had to rely solely on oral evidence.

Software developers need to consider the following additional points that may not be included in an agreement, which is supplied by the customer. These include:

• Is the copyright to be assigned?
• Do you wish to reuse your development libraries?
• When has the customer accepted the product?
• How are variations handled?
• How will you charge new release fees?
• What are the support fees and normal support hours of operation?
• Does the agreement adequately address confidentiality issues and intellectual property ownership?
• Have you considered disaster planning and source code escrow?
• Does your insurance cover software failure and professional negligence?

An increase in custom software development and the globalisation of the software market has increased the importance of having a well drafted software licence and software development agreement, in recent years. The developer needs to reach a balance between minimising its exposure and loosing a potential customer due to insisting on the inclusion of clauses, which may be too oppressive for the customer. As with all commercial agreements, if given the opportunity to draft the engagement agreement, the wording chosen should give you the best protection possible. It is likely that the customer will request amendments that will reduce the protection afforded to the developer. It is then a matter of weighing the commercial risk against the importance of securing the engagement to determine how insistent the developer will be to keep to the original prepared agreement.

STEVE WHITE
WHITE SW COMPUTER LAW
AUGUST 1999

www.computerlaw.com.au © White SW Computer Law 1999 This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.