Don’t Enter into A Software Licence without Reviewing these clauses!
Purpose – The purpose of this checklist is to give you an overview of items to look for when reviewing a software licence, in an effort to expedite the review process
No Order of Importance – the items raised in this list are raised in no particular order.
This article assumes you are signing up to vendor terms and conditions:
1. Overriding Objective – the main issue in reviewing any contract of this nature is to check that the software licence reflects what you understand the arrangement to be, most often they don’t and need to be modified so that they accurately reflect what you require, e.g. no of licensed users sometimes isn’t clear , what are the support arrangements etc.
2. Term – when looking at the term of the agreement check the term that you are signing up for. Is this the length of time that you require? Don’t forget that if the term is a long one, say 3 or 5 years, that is not so bad, as long as you can terminate the contract at any time for convenience (this in essence means you still have a way out of the agreement, regardless of how long it is meant to go for.)
3. Termination for Convenience – in line with the comment above, you should ensure you have a right to terminate the contract when you choose without requiring the consent of the other party.
This is particularly important if there is no set term specified in the agreement or where there is a set term and that set term is lengthy (say 3 or 5 years) or there is a short set term (say 1 year) but at the end of that 1 year period the agreement then continues on indefinitely. Agreements with a rolling term, for instance continuing on a month to month basis after the expiry of 1 year, should have a clause that allows you to terminate when you choose (on notice of say 14, 30 or 60 days). This ensures that you can get out of the agreement and are not bound by the licence forever.
4. Licence Rights – Check the licence being offered to you to ensure that you has the right to use the software for the purposes it requires, this will mean:
4.1. Users – check who can access the software, how many, when and from where. If you run a medium to large business using contractors then the definition of ‘user’ should extend to allow contractors (and not just employees of you) to use the software.
4.2. Installed – Understand what the software does and where it will be installed, i.e. is it cloud based or is it installed on a your servers.
4.3. Geographic Limitations – if the software is to be installed on your servers, where the software is installed is relevant to ensure that an geographic limitations in the licence are not contravened.
As an example some licences may say that you users in head office can use the software, this would mean that the software could not be used by anyone outside the head office building, but this might:
4.3.1. Not be accurate – as other members of you in other states and territories or overseas may need to use the software; or
4.3.2. Inadvertent breach – this could lead to a mistaken breach of contract by you where you install the software in such a way that it allows people outside head office access to it.
4.4. Archival or residual licence – (if required – as this will depend on the software being licensed) ensure that you have a right to keep a copy of the software to allow archival access. Most often once a licence to use software ends all traces of the software must be removed from the relevant systems. Keeping a copy of the software that can be accessed by say 1 or 2 users for archival purposes is not always standard in licence agreements and so may need to be specifically negotiated by you.
5. Warranty Period – all software vendors will try and provide the shortest warranty period available. There are two issues with warranty periods:
5.1. 6 months – Try and get the longest warranty period you can; suggest a 6 month minimum; also
5.2. Commencement – pay particular attention to when a warranty period starts, you only want it to commence when the software has gone live or is in the production environment and not before. For example – in one case the warranty period (3 months) commenced when the software was delivered, but it took 7 months to configure the software to be able to work with the client’s other software. Thus by the time the client could use the software it was out of warranty.
6. Support and Maintenance – understand what support and maintenance is being provided and whether it fits the organisation’s requirements. It is common for support and maintenance to be paid annually in advance.
7. Help Desk – if a help desk is being provided check that its hours of operation are compatible with your office hours and geographic location. This may not be relevant if the software is not of major importance to you and as such the Help Desk will be infrequently, if ever, used.
8. Audit – most software vendors retain the right to come in an conduct an audit of the software to make sure it is being used by the correct numbers of people. Ideally this should be avoided but as a matter of fairness (given that it is the vendor’s software) usually an audit right is acceptable. You should however limit the number of audits to no more than 1 per year, and the vendor should always be responsible for the cost of the audit.
9. Choice of Law Clause and Dispute clause – it is better from a risk perspective for you if the law which governs the software agreement is Australian law and if the disputes clause refers to disputes being dealt with in Australia. This is not an issue if the vendor is an Australian software company.
However if the vendor is based in another country and is a large company (think Microsoft) then unless you has significant leverage (i.e. large volume purchase, or the vendor is small and hungry for the business) most vendors will not agree to these changes. In any event should a dispute arise it can be dealt with in a manner other than stipulated in the contract (assuming the parties agree.)
One client we helped had a dispute that arose because they breached the number of permitted users allowed under the licence. The disputes clause and the choice of law clause both referred to state in the United States. However the issue was resolved by way of email and phone conferences and so neither clauses were ever called upon.
10. IP Warranty – ensure that the vendor is giving you an IP warranty that in essence says that your use of the software will not infringe the intellectual property rights of another party. Given its their software and they created it this should not be an issue. If there is not such warranty in the licence or they refuse to give you one along these lines then alarm bells should start going off!
11. Infringement indemnity – coupled with the warranty above the vendor should also indemnify you should your use of the software infringe another party’s IP. This means that any cost or loss you suffer because their software infringed another party’s IP is covered by them, which is reasonable because you are the innocent party (you have paid a licence fee to use their software product and you should be entitled to assume that they haven’t copied or stolen the software that you are using).
12. Indemnities – most software licences include an indemnity clause where you would agree to indemnify the vendor in relation to your use of the software. In other words if your use of their software causes them a loss then you should pay them for that loss. This is generally a reasonable clause to agree to.
13. Advertise that you are a client – some software vendors like to promote the fact that certain clients have licensed their product, in an effort to increase sales. You should consider whether you want this known, for instance if you are acquiring certain software to gain a competitive advantage over your competitors then you do not want the software vendor to be telling the world at large (through a press release) that you are using their software.
We know that is more than 10 items but we got carried away with excitement!
Knowing all this you should be fully armed to review your next software licence!