The key provisions in contracts licensing packaged software and software licensing agreements are the parties, the price, the deliverable, warranties, indemnities, limitations of liability and termination. These are the main operative provisions of such contracts. Admittedly there are other important clauses, however these clauses define the transaction and make it unique.
The objective of a software license agreement is to grant the licensee an unencumbered right to use the software while ownership is retained by the licensor. To achieve these ends software license agreements should:
A licence to use a packaged software may also require the right to use associated software, such as a database engine, a report writer such as Crystal Reports, or other utility software. Licensing for this additional software should be considered as a bundle in the head software licence and this relies on the third party vendor to do so. One would usually expect the licensor to warrant that they have the power to grant sub-licenses this incidental related software.
The warranties expected in software license agreements include provision that for the operating environment, including network specifications and other infrastructure, operating system and system limitations and restrictions; that defects discovered by the licensee will be rectified within a reasonable or specified timeframe; that the software conforms to recognised standards and software components supplied by the licensor are suitable for use in conjunction with one another. The Sale of Goods Act UK applies to software licences, and terms are automatically implied by law as to ownership, fitness for purpose and merchantability. These provisions of the Sale of Goods Act may be disclaimed in commercial contracts, but not in packaged software sales to consumers.
The licensed software may need to be implemented on specified hardware and platform, and in packaged software licensing the responsibility for determining the suitability of the software in terms of compatibility with existing infrastructure is left to the licensor.
Performance
Licensees may take measures to safeguard their interests and ensure that the software will meet their performance requirements. Part of this due diligence process will be to obtain warranties for response times and run times which are benchmarked in peak periods.
The manner in which fees may be calculated varies. There is a diversity of different methods that may be used to calculate fees. A common methods in determining license fees for packaged licensing are based on the number of seats. Rare are the suppliers who will not give volume discounts.Site licensing may appropriate in large projects.
Provisions are commonly included for renewal fees and the right of the licensor to revise fees over time. It is in the licensees’ interests to link price increases to performance or some other quantifiable measure. More sophisticated payment structures should be set out in a schedule.
New versions of the software may be released from time to time, as well as patches, updates, upgrades and hotfixes to rectify bugs - commonly referred to as defects in the legal industry. The licensee should usually attempt to secure an entitlement to refreshment on a periodic basis. Other considerations that may be addressed are:
The option for the licensee take new versions at their convenience.
Whether the software will be maintained over time and for what cost, and if so whether the supply of sufficient to justify a separate maintenance agreement, and/or
Whether the licensor provide updated user and technical documentation, for each update or full sets of new documentation?
In larger software procurement projects, more care is required due to the heightened consequences of a failure to perform on time and licensees may look to the licensee to commit to service levels, service level compensation where the service levels are not met and disaster recovery plans
Rare is the occasion that software should be delivered without comprehensive documentation to allow users or at least administrative staff to operate the software licensed without third party assistance. This is in the interests of both the licensor and the licensee as it reduces maintenance and support time for the licensor and provides a definitive point of reference for the licensee to use the software in . It used to be said that functionality incorporated into software that is not used does not exist. The documentation is one means - and there are others, namely UAT - to make clear to the licensee that those features in the functional requirements, user requirements or the functional specification (whatever name it may bear in the project) have been delivered.
It also may assist the licensee obtain maximum benefit of the software.
Other items that may deserve consideration are:
Who will be responsible for installing the software and what are the terms and conditions of doing so?
If third party solutions are incorporated into the package who will take responsibility for integration faults and the proper functioning of the third party solution?
If a help desk service is to be supplied, what is their performance criterion and how will their performance be assessed? The licensee will usually wish to play a role at second level user support, rather than dealing with all enquiries arising from an organisation.
Is a time line required for rectified of bugs?
Is a service level agreement justified, and what is the quantum of service level compensation for failing to meet them? Most importantly, what are the exceptions to collecting service level compensation credits?
Should the source code be placed in escrow in the event that the supplier enters insolvency?
A large part of the implementation of IT systems turns on managing change. Risk management embodies elements legal risk and commercial risk. Legal risks may be covered by sound legal advice. Properly managing commercial risk depends on leadership within a company's implementation team, making a sound assessment of the complexity of business process change and human change. It makes sense to avoid projects that are intended to run for more than 12 - 18 months as circumstances invariably change within a company, the industry and technologies of the day. Major implementations bring with them a number of 'firsts', which heightens risk and adds to the possibility of delays in implementations. Management of IT projects in large companies should be managed to some by senior management, as the entire enterprise may be threatened by its failure; which necessarily means engaging people with a mix of business and technology expertise.
Contract Terms – Improvements and Upgrades - Software License Agreements - Part 5
Intellectual Property Protection – Briefing Note - Protection of Computer Software - A Synopsis of Intellectual Property Rights
Trade Marks – Blimey - Was FCUK Lawful?
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