Whether a software license trade is properly constructed for a transaction depends on a range of factors. Of course, supervision of intellectual property proprietary for the copyright owner is a key area for close consideration. This entails defining the territory - ordinarily countries - for the use of the software.
Software amelioration Contracts
A key indicator for complexity is either the software licence is or will be part of a larger trade to build software from scratch - that old-fashioned word bespoke may ring a few bells. When computer software is industrialized under a contract, the proper advice is that a document specifying what the software will do at the end of the day should be incorporated into the agreement. either it is referred to as the functional specification, functional requirements or the requirements document is immaterial. What is prominent is that it defines with reasonable clarity what the software will do; and of course on a functional level.
Packaged Software Contracts
On the other end of the spectrum is a software licence for packaged software. In this case, the software is not to be built to any person's single specification, but rather the software victualer has gone to trouble of identifying a need in a market and constructed the software to fill the gap in the market. Sometimes - and more frequently - niche software is built with configuration options to deal with a broad array of configurations to suit separate flavours of businesses. So, an accountancy container may be tailored to businesses from 10 habitancy to 1,000 people. The point is this: software of this nature is fundamentally packaged and is sold as it is. There may be a requirement for extended configuration to suit the single client's needs, but in the end it is packaged and not software built to anyone's single specification, as is the case with software amelioration contracts.
The divergence may be positive in this regard, but time and time again the wrong compact is used due to misconception as to the underlying nature of what is being delivered.
After determining the underlying nature of the software, some of the other matters that are frequently dealt with in so called software license agreements are:
1. The provision of maintenance and keep service
2. Premise and testing
3. Aid level agreements, delivery of improvements (whether they are updates or upgrades, rather than hot fixes). The software linked services may be agreed in a isolate document or they may be incorporated into the same trade as the software licence. We return to these below.
Intellectual property Rights
Terms of License
Assuming that the software victualer does not intend to assign the copyright in the software to the licensee, the terms of the licence are of crucial point to software suppliers' supplementary exploitation of the software.
On the most generic level, there are 3 types of licences that may be granted: non-exclusive licences, sole licences and exclusive licences. Licences though, as they are only 'permissions' may be framed in anyway the parties wish. A software victualer will often wish to licence their software to a amount of clients. In this case, the licence will be a non-exclusive licence as the software victualer grants a non-exclusive right to the licensee to use the software. Sole licences do not appear too often, and they simply mean that the licensor (the software supplier) grants a single licence to a party to use the software, and they keep the right to use the software themselves. On the other end of the licensing spectrum is the exclusive licence. In the event that a software victualer wishes to grant the licensee the right to use the software to the exclusion of all others, an exclusive licence is granted. Some care needs to be taken when granting exclusive licences, as courts will look at the terms of the exclusive licence and decide either it is in substance an assignment. If it is, then a court will order that the licence term was not at law a licence at all, but rather an assignment and thus divesting the software victualer of all proprietary in the software.
Here is a brief example of the complexity that can be introduced in granting licences.
Suppose a victualer designs and constructs software that manages couriering of documents from office to office of business. It is potential for the software victualer to grant non-exclusive licences to businesses in a single trade, say banking to use the software. Those licences may be restricted to use in a single geographic region such as the City of London. The software victualer may then grant non-exclusive licences to businesses in the financial sector in Manchester to use the software. Further, the software victualer may grant an exclusive licence to a man to build the source code to accomplish supplementary functions. This exclusive licence would deprive the software victualer from supplementary developing the source code himself. So licensors of software are able to flexibly grant permissions to use the software, and restrict its use geographically, by commerce and any other basis that appeals to them.
Extensions of these types of licensing are non-transferable and non-assignable licences, which effectively forestall licensors from selling or licensing others to use the software. One of the exclusive proprietary of the copyright owner is the distribution right - the right to licence others to distribute software. This is the foundation of the reseller agreements, whereby third parties are authorised to licence software on the software suppliers' behalf. Most software licences do not grant the licensee the right rehearsal the distribution right as it would allow them to sell licences for the software.
Furthermore licences may be set for a fixed term or the grant of licence may be perpetual - allowing the licensee to use the software forever branch to any other conditions imposed by the licensor.
Tracking Licences
When the software is licensed on a per use basis, it is a good idea to furnish that a register be maintained of copies made of the software, in expanding to monitoring software use by Active Directory on Windows systems. Such implementations facilitate denying software use by electronic means. If this is to be done however, the licensor must be informed in the compact document.
Intellectual property proprietary Indemnities
In software licence agreements, these indemnities are geared to protect the licensee from primary liability for infringement where their use of the industrialized software would infringe patent proprietary or copyright. As innocence is no defence to infringement, a user of the software infringes intellectual property proprietary simply by using it. It is worthwhile to note however that the innocence may be taken into inventory in the estimation of damages. These indemnities are becoming more prominent to licensees as an incidental corollary of the popularity in obtaining patent rights. Patented inventions may be combined with other inventions, and although in patent cases infringement may be difficult to prove in the absence of great expense, the existence of patent proprietary in software is the best form of protection, because there is no defence that the software was independently created. That defence is only ready in copyright infringement cases.
In order to claim the benefit of an indemnity, the indemnifier should need that they have escort of the defence of the infringement defence proceedings and insist on the cooperation and assistance of the indemnified party in defending the claim. This to some extent allows the indemnifier to control their costs and run the defence in their best interests. The software victualer is in the best position to run the defence in any event due to their knowledge of the amelioration of the software and the sources drawn on in developing it.
Usually together with intellectual property indemnities are provisions requiring the software victualer to replace infringing aspects of the source code and failing this, pay the expenses of the licensee in doing so.
Payment for Licences
Owing to the nature of the proprietary of the licensor in granting software licenses, the licensor is able to structure the payment for licences to build in flexibility to payment structures.
Restrictions may also be placed on the use of software over a network, per machine, single use, on specified equipment, per user, per site, worldwide, by territory or any composition of these.
The most basic form of licence seems to be a fixed sum for an organisation. Extensions of this form of licence may be for a set amount of users with supplementary licences incurring an supplementary fee for a fixed period. For multifaceted software, separate fees may be applied for separate the types of licences required. For instance, an organisation may need supplementary supervision licences or data processing licences each of which would attract a separate price point.
Where licences granted are not intended to be perpetual, the timing of renewal payments should be set out and the method of calculation of the sum falling due. Properly drafted contracts should allow for price rises over the course of the licensing duration together with price rises in materials and human resources. Also, the parties should consider either they want the licence to renew automatically, or to automatically lapse.
It is worthwhile providing for interest rates where payments are late, but failing that the Late Payments of industrial Debts (Interest) Act 1998 will apply for those late payments.
Other Payments
Where software has been commissioned, there may well be hardware requirements to host the software or other expenses such as staff costs, other materials and tour expenses that should be dealt with in the agreement. For clarity, either the prices are inclusive or exclusive of Vat it should be made clear to avoid doubt as to who will be liable for the tax in the event it becomes payable in unexpected circumstances.
Additional Services and Improvements (Upgrade Services)
Provision may be made in software license agreements for supplementary amelioration and/or customisations by the software supplier. These are ordinarily dealt with in two ways. Firstly, the victualer may be required to furnish a quote for the amelioration services requested by the licensee or alternatively the software victualer may be granted entitlement to charge time and materials at published rates. It is rare in this day and age for suppliers to be given a blank cheque to accomplish supplementary services for licensors wishing to enhance the functionality of the software.
In packaged software and commissioned software licence agreements, especially in the case where the software is licensed on a non-exclusive basis and constantly improved and developed, licences often entitle the licensee to improvements for a fixed period. In the case that a licensor has uniquely funded the amelioration but receives the software at a reduced price, more favourable proprietary to receive improvements are ordinarily encountered.
Change Control
Effective convert control provisions are imperative to forestall scope creep, but in order to be effective, a functional specification or other document must be incorporated into the trade to furnish a point of reference for convert control. convert control provisions also allow an elegant mechanism for the software victualer to enlarge the delivery time scales. Where scope creep occurs, the victualer may not have a problem performing the supplementary work, but to accomplish the work in the same timeframe as primary work is unrealistic. The focus in this sense is compact management: managing the deliverables, and when they are to be delivered. convert control is not to be underestimated.
Factory Acceptance Testing
In order for a software victualer to ensure their products are fit for purpose, Premise acceptance testing must take place before a software goods is released.
For off the shelf products the onus is solely on the software victualer to ensure the goods meets the functional requirements and is bug free to avoid having to patch copies of software already released to market.
However, in more bespoke or customisable solutions the accountability for thriving Premise acceptance testing prior to issue falls on both parties. The majority of the accountability falls on the software victualer to ensure that the goods is tested in house prior to release.
Time pressure to deliver often reduces the actual time spent on this phase of software amelioration to a minimum. This is a cause of a far greater amount of faults being reported in the user acceptance testing phase which is a more precious rehearsal for both parties.
To ensure Premise acceptance testing occurs and is performed adequately obligations must be placed upon the software victualer to deliver test documentation to the customer for recite prior to the customer signing off to receive a release. The test results should contain positive numbers of test iterations over the whole software suite.
Obligations must also be placed upon the customer to deliver in a timely manner items such as a suite of test data and test scripts to the software supplier. Forcing this co-operation through contractual trade creates a balance in the compact to focus the parties minds on the job in hand thereby reducing the time spent user acceptance testing on a customer's site thereby reducing cost.
User Acceptance Testing
Released software invariably involves some degree of acceptance testing and the methods of conducting it are more or less onerous on the software supplier. To properly escort acceptance testing, the purchaser should be given the occasion to prepare their own test data and test scripts. The acceptance testing should be conducted in the nearnessy of the software victualer so that instances of apparent defects may be dealt with immediately, and if the tests are thriving procure the acceptance certificate immediately, as acceptance certificates are the precursor to payment. Provision for retesting should be set out to allow a fast process in the event that a genuine fault is identified during acceptance testing process. Warranty periods for software maintenance arising from defects should run from the acceptance date and not before.
Documentation Requirements
As businesses become more sophisticated in respect to the delivery of computer software, so does the requirement for cogent user documentation.
This is a minimum requirement for packaged and commissioned software. In the event that the intellectual property proprietary are to be assigned to the commissioner of the software, delivery of build documents, scheme supervision documents and user requirements documents are likely to be required to be delivered at the windup of the amelioration project, to enable the commissioner of the software to build the software in its own right.
Usually there is no industrial fancy to grant proprietary to entrance these amelioration documents where the software is branch to a container licence, or where the licensee is simply entitled to use the software.
Training
Training may take a variety of forms. In the case of commissioned software, the software victualer may need to 'train the trainer' of the licensee as a minimum requirement, or for supplementary fees, escort formal training sessions for end users. Much depends on the complexity of the software and computer literacy of the intended user base.
Escrow Arrangements
Escrow agreements are geared to protect the licensee paying a software victualer to build and build software that meets their single needs. These agreements are relied upon when the software house loses the means to continue to keep the software either through liquidation or lack of will. Escrow contracts are premised on the state of affairs that the licensee is never in proprietary of the source code, and to that extent, the licensee is exposed to the risk that if the software victualer or software house fails, they have recourse to the source to vocalize and build that source code. The conditions for issue of the software to the licensee may be made as single as the parties wish to make them. The more formal flavour of escrow agreements involves an independent trusted third party who specialise in providing escrow services. They take proprietary of the source code for the software, and undertake by compact to issue the source code to the licensee only in the specified circumstances. The licensee gains some comfort in managing their risk in investing in the software amelioration in the first instance.
Penalty Payments for Failure to Deliver
Rather than be forced to launch litigation in order to recover damages and to cut the menagerial cost of compact management, incorporation of penalty payments (liquidated damages) clauses into software license agreements is increasingly commonplace. Already, liquidated damages clauses are frequently used as the means for recovery for failure to meet agreed Aid levels. These liquidated damages payments come in the form of Aid level credits. The difficulty with liquidated damages clauses to setting the damages to be paid in the event of breach or non-performance to a level that does not qualify as a penalty or a forfeiture, which are unenforceable in the English legal system. The linchpin in determining either a liquidated damages clause will be determined a penalty or forfeiture is either the sum of liquidated damage is a genuine pre-estimate of the loss that will be suffered as a corollary of the breach that leads to the right for liquidated damages to be paid. Agreeing sums to be paid by way of liquidated damages however does not limit the payee to accept the specified or calculated sum in the event of a breach, as they may still sue for damages at large.
Termination
The two provisions that cater for termination in practically every expertly prepared document - where the parties have near equal bargaining power - are that either party may end in the event of a material breach or where one party enters liquidation or is otherwise insolvent.
Incorporating other proprietary to end largely relies on the nature of the services to be provided. Having right to end the contractual obligations assumes that there are lasting obligations under the contract. If the compact simply grants a perpetual software licence for a fixed fee, then it stands to fancy that there is wee need for proprietary to terminate. The contemporary style of compact drafting, even for packaged software (which are ordinarily instances of a perpetual licence grant ion) ordinarily exist in software licence agreements, and ordinarily recite to the failure of the victualer to meet specified minimum Aid levels.
Consequences of Termination
In the case of outsourced software services, exit supervision provisions are considerable to ensuring a timely and expert handover of the outsourced services. In the context of software industrialized and subsequently licensed, it may be that it is appropriate for the licensor to
1. Hand back user documentation
2. Delete all copies of the software residing on servers and workstations
3. Deliver up copies of the software on backup media and
4. Destroy confidential information.
Certificates of yielding may be used to procure confirmation that the post-termination requirements of the compact have been adhered to.
On a linked issue, this is where managing software licensing by electronic means is a useful tool to forestall use of the software. This is an under utilised portion by licensors to ensure that the computer software cannot be used.
Limitations of Liability
Limiting liability can be one of the most competitive issues in negotiating licence terms. The purpose of limitations of liability is to exclude or otherwise limit liability that arises in a party in the event of a breach of compact or negligence in performing the contract. Liability that cannot be excluded should be insured and there is a good case for employing other means to conduct corporate liability and protect the assets of a company, which simply includes intellectual property assets. Liability arising from negligence that causes personal injury or death cannot be wee or excluded in any case. The types of liability that may be excluded contain property damage; loss of profits, company or revenue; consequential or incidental loss; loss of goodwill and the damage caused by the loss and destruction of data.
In technology contracts that use facilities such as the Internet that are exterior the control of the parties, force majeure clauses may be used to absolve the parties of liability when something goes wrong. Force majeure clauses may refer to named events as well as a normal type of event. The corollary is to avoid the instance of a party being in breach where the events are exterior their control.
The basic checklist for some of the provisions that are often sensibly incorporated into software license agreements is:
1. The Parties
2. The Price
3. Obligations of the Software Supplier
4. Obligations of the Licensee
5. User Acceptance Testing Procedures prominent to Acceptance, including warranty periods that will apply thereafter
6. Additional Services
7. Change Control
8. Training Requirements
9. Escrow Agreement
10. Service Levels
11. Service Level Compensation
12. Liquidated Damages
13. User Documentation
14. Rights to Improvements
15. Confidentiality obligations
16. Intellectual property Rights
a. Branding rights
b. Terms of licence
17. Confidentiality obligations
18. Termination clauses
19. Consequences of Termination
20. Limitations of Liability
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