SCOPE The "License Grant" part is a central part of any software license agreement, as it details the precise scope and nature of the rights being granted to the licensee. There can be several variations or permutations to this part based on the type of software, the needs of the licensor and licensee, and the specifics of their agreement. Here are a few permutations, with examples: Exclusivity : A non-exclusive license means the licensor retains the right to grant licenses to other parties. On the other hand, an exclusive license grant would give the licensee sole rights to use the software, barring the licensor from granting other licenses. For example, a software company might grant an exclusive license to a major client, providing them with unique access to a proprietary software product. Territory : The territory part dictates where the license can be used. For instance, a software provider might grant a company the license to use its software only within the United States. Duration : The duration part determines for how long the license will be provided for. A license could be granted for a limited period, such as one year, after which it must be renewed or it can be a perpetual license. Transferability : A license might be "transferable" or "non-transferable". In a transferable license, the licensee would have the right to transfer their license to another party. For instance, if a company was sold, they might transfer their software licenses to the new owner. Sublicensing : Some licenses explicitly permit sublicensing, which allows the licensee to grant licenses to use the software to third parties. For example, a large multinational corporation might sublicense software to its subsidiaries. Usage : The license might be granted for "internal business purposes", or it could be granted for personal use, commercial use, educational use, etc. For example, a video game company might grant a "personal, non-commercial" license to end-users of its games. - Software licenses often include other limitations relating to how, where, and by whom the licensed software can be used. These limitations are designed to protect the licensor's interests, prevent misuse of the software, and ensure proper compensation for the use of the software. Here are a couple of examples: Limitations relating to the site where the license can be used : These restrictions limit where the software can be installed or used. For instance, the license might be limited to use at a specific physical location, such as a business's main office, a specific department, or even a specific computer or server. This can be helpful in situations where the licensor wants to restrict usage to specific locations due to security concerns or to maintain control over where the software is used. Limiting the license to named users : This restriction specifies that only certain named individuals are allowed to use the software. For instance, a company might buy a software license that only certain employees are permitted to use. This is often used in business environments where the software is needed by a select few individuals, and it can also help ensure that only properly trained individuals have access to the software. It also limits the licensor's exposure to widespread use of their software without corresponding compensation. Limiting the license to a number of seats : A "seat" typically refers to an installation of the software on a device. Limiting a license to a certain number of seats means the software can be installed on that many devices, regardless of who is using it. For instance, a business might purchase a 100-seat license for a piece of software, allowing them to install the software on 100 computers within their organization. This is a common model for business software licensing and allows for flexibility in who can use the software while still controlling the overall usage. Limiting the license to a number of concurrent users : This restriction limits how many users can be using the software at the same time. For example, a business might buy a license allowing a maximum of 50 concurrent users. This means that while the software might be installed on many more machines, only 50 people can use it simultaneously. This can be useful for software that is needed sporadically by a large number of users, such as a database tool or design software. - RESTRICTIONS Software license agreements often contain a number of other restrictions to protect the rights of the software's creators and maintain control over the software's use. Examples of these restrictions include: Sublicense, lease, rent, loan, disclose or otherwise make available the Software and Documentation : This restriction is about controlling the dissemination of the software. The licensee cannot provide the software to another party through any means, such as sublicensing, leasing, renting, or loaning. For example, if a company has a license to use a specific software, they cannot then rent out access to this software to another company. Access, read, analyze or otherwise use any part of the Source Code : This restriction is designed to protect the intellectual property of the software developer. The source code is the 'blueprint' of the software and contains proprietary algorithms and information. So, an analytics company, for instance, wouldn't be allowed to read and analyze the source code of the licensed analytics tool they use to uncover its algorithms. Use the Software for service bureau or time-sharing purposes and allow third parties to exploit the Software : This restricts the licensee from using the software in a manner where they would effectively be reselling the service to third parties. For example, a cloud service provider can't use licensed software to provide a SaaS-based offering to its clients without express permission from the licensor. Reverse assemble, decompile, disassemble or otherwise attempt to derive Source Code or the algorithmic nature of the Software : This restriction refers to the active attempt to break down the software to understand its working and underlying algorithms. For example, a software development company can't decompile a licensed game engine to see how it handles graphics rendering. Produce its own version of the Software : This part is to prevent the licensee from creating a software product that essentially mimics the licensed software, even if they don't directly copy the source code. For instance, a technology company can't study a licensed project management tool and then produce their own tool that has the same features and interfaces. Remove or circumvent any protection of the Software : This is to prevent the licensee from tampering with the software's built-in security features or protective mechanisms. For example, a user can't bypass a software's license key mechanism to use the software on more machines than allowed. - UPDATES Including provisions in a software license agreement that address updates to the software is critical for several reasons: Technological Advancements : Software technology is always evolving. As new technologies become available, software needs to be updated to keep it current and effective. The agreement should specify who is responsible for performing these updates and when they should occur. Security : As new threats emerge, it's essential that software is regularly updated to address potential vulnerabilities and to protect against security breaches. A software license agreement should clarify the responsibility of providing these security updates. Compatibility : As other systems and technologies change, software may need to be updated to remain compatible. An agreement can specify how and when these updates should be made. Enhancements and new features : The license agreement can clarify how enhancements and new features are provided, whether they are part of regular updates or require additional fees. Generally, the Software License Agreement will differentiate between "maintenance releases" and "new releases": Maintenance Releases : These are updates that generally focus on resolving issues or bugs in the software, improving security, and ensuring the stable operation of the software. They are usually incremental updates that don't add significant new features or functionalities but are essential for the smooth functioning of the software. For example, a maintenance release might address a security vulnerability or fix a bug that causes the software to crash under certain conditions. New Releases : These often contain substantial changes, such as new features, improved user interface, enhanced performance, or entirely new functionalities. New releases typically come with a change in the major version number of the software. For instance, when Microsoft moved from Windows 7 to Windows 8, that was a new release. - Typically, under a software license agreement, maintenance releases are provided to the licensee at no additional cost during the term of the agreement, while new releases might be offered at an additional cost or under a new license agreement. This is, however, dependent on the specific terms agreed upon between the licensor and licensee. - CUSTOMER OBLIGATIONS Often you will also find certain obligations placed on the licensee regarding the Software. For example, the Customer must: Ensure the Software and the Documentation are protected at all times from misuse, damage, destruction or any form of unauthorized use, copying or disclosure : This part requires the customer to implement adequate security measures to protect the software and its accompanying documentation. For instance, this may mean storing the software and documentation securely, restricting access only to authorized individuals, and implementing network security measures to prevent hacking or unauthorized access. Maintain all proprietary notices on the Software and the Documentation : This requires the customer to keep intact all copyright notices, trademarks, or other proprietary notices within the software and documentation. For example, if the software starts up with a screen that says "Copyright (Year) by (Company)", the customer is not allowed to remove or alter this notice. Not transfer, assign or otherwise deal with or grant a security interest in the Software, the Documentation or the Provider’s rights under the Agreement : This part prevents the customer from transferring their rights to the software or documentation to another party. For instance, the customer cannot sell or lend the software to another person or company. This also prohibits the customer from using their rights to the software as collateral for a loan. Not challenge the Provider’s ownership, or the validity, of the Software, the Documentation or any other item or material created or developed by or on behalf of the Provider under or in connection with the Agreement : This part requires the customer to accept the provider's ownership of the software, documentation, and any other intellectual property provided under the agreement. The customer cannot, for example, claim that they have the right to modify the software because they've paid for it, nor can they dispute the validity of the provider's copyright or patent rights. Notify the Provider in writing immediately after it becomes aware of any circumstance which may suggest that any person may have unauthorized knowledge, possession or use of the Software or the Documentation : This part requires the customer to promptly notify the provider if they become aware of any unauthorized use of the software or documentation. For instance, if the customer suspects that a former employee retained a copy of the software after leaving the company, they would need to notify the provider of this situation. - These obligations are designed to protect the provider's intellectual property rights, ensure proper use of the software, and maintain a clear line of communication between the provider and the customer.

[ View the detailed guide on indemnities ↗ ] - In the realm of software license agreements, indemnity clauses serve a fundamental role for both software providers (licensors) and software users (licensees). They manage risk, shield against potential liabilities, and lay the groundwork for dealing with unforeseen issues during the use of software. Here's an exploration of why both parties would want to include indemnity clauses in their agreements: Intellectual property infringement: Indemnities for third-party intellectual property infringement claims are vital in protecting the software user from potential legal complications if the licensed software infringes on existing patents, copyrights, trademarks, or trade secrets. For example, if a software provider inadvertently includes patented algorithms in their software, the indemnity block shields the software user from financial liability resulting from a third-party infringement lawsuit. Third-party claims: Collaborations with other parties, such as other software providers or third-party service providers, are common in software usage scenarios. Indemnities against third-party claims can protect the software user from financial liability if a collaborator alleges that the provider's actions caused harm or loss. For example, if a software provider breaches a contract with a third-party data provider, leading to a lawsuit against the user, the indemnity clause would require the provider to cover the user's legal expenses and any damages awarded. - In conclusion, indemnity clauses are crucial for both software providers and licensees in software license agreements. They offer risk mitigation, foster trust, and ensure financial predictability for both parties, promoting a smoother and more efficient software usage experience.

[ View the detailed guide on termination provisions ↗ ] - The inclusion of termination provisions in software license agreements is crucial for several reasons. These provisions offer a clear framework for addressing potential issues, protecting the interests of both parties, and ensuring an organized and amicable end to the licensing relationship. Some of the key reasons to include termination provisions in software license agreements are: Clarity and predictability: Termination provisions outline the circumstances under which the license agreement may be terminated and the processes to be followed. This clarity helps both parties understand their rights, obligations, and expectations, reducing the risk of misunderstandings and disputes. Protecting interests: Termination provisions help safeguard the interests of both parties in case of breaches or changes in business requirements. For example, a licensor may want to terminate an agreement if the licensee fails to adhere to the usage limits or infringes upon proprietary rights. Conversely, a licensee may want to end the contract if the software does not function as warranted or if there are persistent bugs that the licensor fails to resolve. Flexibility: Termination for convenience provisions allow for flexibility in the business relationship, providing options for both parties to exit the agreement if circumstances change or if the partnership is no longer beneficial. For instance, a licensee may need to terminate the contract due to a shift in business strategy, while a licensor might want to end the agreement due to new opportunities or resource constraints. Managing risks: Termination provisions help manage risks associated with software licensing, which can be unpredictable and subject to various challenges. By establishing clear termination criteria, both parties can mitigate potential damages and losses in case of unforeseen issues, such as new legal or industry regulations that render the software unusable. Legal compliance: Termination provisions can help address changes in legal or regulatory environments, allowing parties to terminate the agreement if compliance becomes impossible or unduly burdensome. For example, if new data protection regulations make it difficult for a licensee to continue using the software, a termination provision can offer an exit strategy for both parties. - In summary, termination provisions in software license agreements play a vital role in managing risks, protecting interests, and providing a clear framework for navigating potential challenges or changes in the licensing relationship.

[ View the detailed guide on warranties ↗ ] - Incorporating warranty provisions in a software license agreement is crucial for various reasons, as it helps establish a solid foundation for the business relationship, protect both parties' interests, and ensure the successful usage of the licensed software. Here are some key reasons why warranty provisions are important in a software license agreement: Quality assurance: Warranty provisions in a software license agreement guarantee that the licensed software will meet specific quality standards, be free from material defects, and function as outlined in the Documentation. Clear performance expectations: Warranty provisions set clear expectations for software performance, ensuring that both parties understand the minimum requirements for the software. This can help prevent misunderstandings or disputes about the software's functionality or performance upon installation or during usage. Defined remedies: Warranty provisions outline the available remedies in case the software fails to meet the agreed-upon specifications. This can include bug fixes, software updates, or even refunds in certain cases. Having these remedies clearly defined helps streamline the resolution process and avoids prolonged disputes or legal battles. Risk allocation: Including warranty provisions in a software license agreement helps allocate risks between the licensor and the licensee. The licensor is responsible for providing a functional product that meets the specified requirements, while the licensee must ensure they use the software in accordance with the terms of the license. This risk allocation establishes a fair and transparent business relationship. Enhancing reputation: For software licensors, offering warranties can enhance their professional reputation, demonstrating a commitment to quality and customer satisfaction. This can lead to increased trust and potentially more business opportunities. - In summary, warranty provisions in a software license agreement are essential for assuring quality, setting clear performance expectations, defining remedies, allocating risks, providing legal protection, and enhancing the licensor's reputation. Including well-crafted warranty provisions in software license agreements helps create a solid foundation for a successful software use and a healthy business relationship between the parties involved.

[ View the detailed guide on confidentiality ↗ ] - Including confidentiality provisions in a software license agreement is crucial for several reasons. These provisions protect sensitive information, maintain competitive advantage, safeguard intellectual property rights, and promote trust and collaboration between the parties involved. Here are some reasons why confidentiality provisions are important in a software license agreement: Protection of sensitive information: Licensing software often involves the exchange of valuable and sensitive information, such as the software's technical specifications. Confidentiality provisions ensure that both parties are legally obligated to protect this sensitive information from unauthorized disclosure or use, thereby reducing the risk of potential harm or misuse. Maintaining competitive advantage: A licensor's competitive advantage often relies on the confidentiality of its proprietary software and technologies. By incorporating confidentiality provisions in a software license agreement, licensors can ensure that their trade secrets and unique software are protected, helping to maintain their competitive edge in the market. Safeguarding intellectual property rights: Confidentiality provisions can help protect the intellectual property rights of both parties involved in the software licensing process. These provisions can clarify the rights and obligations concerning the use and disclosure of the licensed software and any related intellectual property. Trust and collaboration: Confidentiality provisions help promote trust and collaboration between the parties involved in the software licensing process. By agreeing to protect each other's sensitive information, both parties can confidently engage in the licensing relationship, fostering a cooperative environment that is conducive to success. Legal recourse in case of breach: In the event of a breach of confidentiality provisions, the affected party can seek legal recourse, including damages and injunctive relief, to address the harm caused by the unauthorized disclosure or use of confidential information. This provides a safety net for both parties and reinforces the importance of adhering to confidentiality obligations.

[ View the detailed guide on dispute resolution ↗ ] - Incorporating a dispute resolution block in a software license agreement is essential for several reasons. It provides a clear framework for resolving disputes that may arise during the course of the software licensing relationship, ensuring that both parties understand their rights and obligations in the event of a disagreement. Here are some key reasons why including a dispute resolution clause is crucial in a software license agreement: Clarity and predictability: A well-drafted dispute resolution block sets out the process to be followed if a disagreement arises between the parties, such as a breach of contract, intellectual property disputes, or disagreements over licensing terms. This clarity helps the parties understand the steps to be taken in the event of a dispute, reducing confusion and facilitating a more efficient resolution. Cost and time savings: Alternative dispute resolution (ADR) methods, such as mediation and arbitration, are often faster and less expensive than traditional litigation. By specifying an ADR method in the dispute resolution block, parties can save time and resources by avoiding lengthy court battles and focusing on resolving the dispute through a more streamlined process. Confidentiality: ADR methods like mediation and arbitration typically provide for greater confidentiality than court litigation. Including a dispute resolution block that specifies the use of an ADR method can help protect sensitive information, such as trade secrets, proprietary software, or confidential licensing terms, from public disclosure during the dispute resolution process. Control over the process: A dispute resolution clause allows parties to tailor the dispute resolution process to their specific needs, such as choosing the governing law, location of dispute resolution, and the qualifications of the mediator or arbitrator. This flexibility enables the parties to select a process that is best suited to the nature of the software license agreement and their specific requirements. Preservation of business relationships: ADR methods are generally less adversarial than litigation, focusing on collaborative problem-solving and achieving a mutually satisfactory resolution. By including a dispute resolution clause that encourages negotiation, mediation, or arbitration, parties can work to resolve disputes amicably and preserve their business relationships. Enforceability: A dispute resolution block can help ensure that any decision or settlement reached through the dispute resolution process is enforceable in court. This provides both parties with greater certainty and confidence in the outcome of the dispute resolution process.

The Complete Guide to Drafting Software License Agreements

Q: Financial stability

[ View the detailed guide on financial stability ↗ ] - This block refers to the financial health of the parties involved in the software development agreement. It may require each party to maintain a certain level of financial stability to ensure the project's successful completion and mitigate risks associated with insolvency or financial distress.

Q: Audits

[ View the detailed guide on audits ↗ ] - An audit block allows one party to inspect and review the other party's use of the Software. This is done to ensure compliance with the agreement, identify issues or discrepancies. The block may specify the frequency, scope, and requirements for conducting audits.

Q: Compliance with laws and regulations

[ View the detailed guide on compliance with laws ↗ ] - This block requires the parties to adhere to all applicable laws, regulations, and industry standards related to the software development project. This may include data protection laws, intellectual property laws, and employment laws. It ensures that the Software is compliant with the relevant legal requirements.

Q: Boilerplate

[ View the detailed guide on boilerplate ↗ ] - Boilerplate bocks, while often considered standard, play a vital role in shaping the overall legal framework of a contract. As such, it is imperative to give these provisions careful consideration and ensure they align with the parties' intentions and objectives. Neglecting the importance of boilerplate block can lead to unforeseen consequences and potential litigation.

Q: Error correction service levels

[ View the detailed guide on service levels ↗ ] - Error correction service levels are critical in software licensing agreements because they establish a clear process and timeline for addressing and rectifying any defects or malfunctions in the software. - The nature of software is such that even with rigorous testing and quality assurance, errors can still occur once the software is in use. These errors can disrupt the customer's operations, resulting in potential financial loss and damage to their reputation. - By establishing error correction service levels, both parties agree on the expected response times and corrective actions, thereby minimizing the impact of any software issues on the customer's operations. Furthermore, these service levels provide assurance to the customer about the provider's commitment to maintaining the quality and reliability of their software product, which can foster trust and confidence in the business relationship.

Home » Building Blocks » Foundation » The Complete Guide to Drafting Software License Agreements

Martin Kotze
Updated: November 11, 2023

The Complete Guide to Drafting Software License Agreements

A detailed guide on creating a Software License Agreement using foundation, primary, secondary and schedule building blocks.

Intro

Software License Agreement

A Software License Agreement is fundamentally a form of a copyright license that governs how a user can interact with a piece of software. It is an agreement between the software owner (often the developer or company that created the software) and the end user, typically the customer. This type of agreement gives the user specific rights, which are limited by the terms and conditions outlined in the Software License Agreement itself.

–

Typical rights provided under a Software License Agreement are the right to use, copy, and reproduce the software. An example of this could be Microsoft Office Suite. When you purchase this software, the Software License Agreement permits you to install and use it on your personal computer. However, if the licence is a single-user licence, making additional copies to install on multiple machines would typically be a violation of the agreement.

–

The right to distribute the software is another key component of the Software License Agreement. This means that the user can share the software with others, under the stipulated terms and conditions. An example might be a company purchasing a site license for a software product, which allows the company to distribute copies of the software to employees within that company. However, the company would be prohibited from distributing the software outside of the organization.

–

Another right often found in Software License Agreements is the right to modify, translate, or create derivative works of any part of the software. An example here could be open-source software such as Linux. The Software License Agreement (in this case, the General Public License) allows users to modify the source code of the software to meet their own needs and create new, derivative software based on the original. This has led to the creation of countless “distributions” of Linux, each customized to meet the needs of different users.

–

The Software License Agreement might also provide the right to display or perform in any media and through any technology the software. An example of this might be a video game streaming service, which allows users to stream video games they’ve purchased to various devices. The Software License Agreement would permit this as long as it doesn’t violate the terms and conditions (e.g., using the service for commercial purposes without permission).

–

In conclusion, the Software License Agreement is a critical legal document that spells out the rules for how software can be used, modified, and shared. Despite granting several rights to the user, these rights are always subject to restrictions as per the Software License Agreement.

Different types of Software Licensing Agreements

There are several different types of software license agreements, each providing different rights and limitations. Here are some of the most common ones:

Proprietary license: This is the most common type of software license. It gives the user the right to use one or more copies of the software, but ownership of those copies remains with the software publisher. Users are typically prohibited from modifying the software or creating derivative works. Examples include most commercial software products like Microsoft Office or Adobe Photoshop.
Open-source license: This type of license allows users to view, modify, and distribute the source code of the software. Open-source licenses foster collaborative development by allowing anyone to contribute changes and improvements. Examples of this include the GNU General Public License (GPL), which is used by software like Linux, and the MIT license, which is used by a wide range of software projects.

Build your own custom Software License Agreement now!

Foundation

Parties

The typical Software Development engagement will be a work-for-hire engagement in which the Developer provides certain software development services to the Customer.

The scope of engagement can be A-Z. For example, the Developer must design, develop, create, test, deliver, install, configure, integrate, customise, and otherwise provide and make fully operational Software.

Alternatively, the Developer must integrate Software XYZ with Software DEF.

The “engagement block” creates the primary engagement. The details of what needs to be done are then added to the Schedule – Services.

Background / recitals

The typical Software Development engagement will be a work-for-hire engagement in which the Developer provides certain software development services to the Customer.

The scope of engagement can be A-Z. For example, the Developer must design, develop, create, test, deliver, install, configure, integrate, customise, and otherwise provide and make fully operational Software.

Alternatively, the Developer must integrate Software XYZ with Software DEF.

The “engagement block” creates the primary engagement. The details of what needs to be done are then added to the Schedule – Services.

Software License

SCOPE

The “License Grant” part is a central part of any software license agreement, as it details the precise scope and nature of the rights being granted to the licensee. There can be several variations or permutations to this part based on the type of software, the needs of the licensor and licensee, and the specifics of their agreement. Here are a few permutations, with examples:

Exclusivity: A non-exclusive license means the licensor retains the right to grant licenses to other parties. On the other hand, an exclusive license grant would give the licensee sole rights to use the software, barring the licensor from granting other licenses. For example, a software company might grant an exclusive license to a major client, providing them with unique access to a proprietary software product.
Territory: The territory part dictates where the license can be used. For instance, a software provider might grant a company the license to use its software only within the United States.
Duration: The duration part determines for how long the license will be provided for. A license could be granted for a limited period, such as one year, after which it must be renewed or it can be a perpetual license.
Transferability: A license might be “transferable” or “non-transferable”. In a transferable license, the licensee would have the right to transfer their license to another party. For instance, if a company was sold, they might transfer their software licenses to the new owner.
Sublicensing: Some licenses explicitly permit sublicensing, which allows the licensee to grant licenses to use the software to third parties. For example, a large multinational corporation might sublicense software to its subsidiaries.
Usage: The license might be granted for “internal business purposes”, or it could be granted for personal use, commercial use, educational use, etc. For example, a video game company might grant a “personal, non-commercial” license to end-users of its games.

–

Software licenses often include other limitations relating to how, where, and by whom the licensed software can be used. These limitations are designed to protect the licensor’s interests, prevent misuse of the software, and ensure proper compensation for the use of the software. Here are a couple of examples:

Limitations relating to the site where the license can be used: These restrictions limit where the software can be installed or used. For instance, the license might be limited to use at a specific physical location, such as a business’s main office, a specific department, or even a specific computer or server. This can be helpful in situations where the licensor wants to restrict usage to specific locations due to security concerns or to maintain control over where the software is used.
Limiting the license to named users: This restriction specifies that only certain named individuals are allowed to use the software. For instance, a company might buy a software license that only certain employees are permitted to use. This is often used in business environments where the software is needed by a select few individuals, and it can also help ensure that only properly trained individuals have access to the software. It also limits the licensor’s exposure to widespread use of their software without corresponding compensation.
Limiting the license to a number of seats: A “seat” typically refers to an installation of the software on a device. Limiting a license to a certain number of seats means the software can be installed on that many devices, regardless of who is using it. For instance, a business might purchase a 100-seat license for a piece of software, allowing them to install the software on 100 computers within their organization. This is a common model for business software licensing and allows for flexibility in who can use the software while still controlling the overall usage.
Limiting the license to a number of concurrent users: This restriction limits how many users can be using the software at the same time. For example, a business might buy a license allowing a maximum of 50 concurrent users. This means that while the software might be installed on many more machines, only 50 people can use it simultaneously. This can be useful for software that is needed sporadically by a large number of users, such as a database tool or design software.

–

RESTRICTIONS

Software license agreements often contain a number of other restrictions to protect the rights of the software’s creators and maintain control over the software’s use. Examples of these restrictions include:

Sublicense, lease, rent, loan, disclose or otherwise make available the Software and Documentation: This restriction is about controlling the dissemination of the software. The licensee cannot provide the software to another party through any means, such as sublicensing, leasing, renting, or loaning. For example, if a company has a license to use a specific software, they cannot then rent out access to this software to another company.
Access, read, analyze or otherwise use any part of the Source Code: This restriction is designed to protect the intellectual property of the software developer. The source code is the ‘blueprint’ of the software and contains proprietary algorithms and information. So, an analytics company, for instance, wouldn’t be allowed to read and analyze the source code of the licensed analytics tool they use to uncover its algorithms.
Use the Software for service bureau or time-sharing purposes and allow third parties to exploit the Software: This restricts the licensee from using the software in a manner where they would effectively be reselling the service to third parties. For example, a cloud service provider can’t use licensed software to provide a SaaS-based offering to its clients without express permission from the licensor.
Reverse assemble, decompile, disassemble or otherwise attempt to derive Source Code or the algorithmic nature of the Software: This restriction refers to the active attempt to break down the software to understand its working and underlying algorithms. For example, a software development company can’t decompile a licensed game engine to see how it handles graphics rendering.
Produce its own version of the Software: This part is to prevent the licensee from creating a software product that essentially mimics the licensed software, even if they don’t directly copy the source code. For instance, a technology company can’t study a licensed project management tool and then produce their own tool that has the same features and interfaces.
Remove or circumvent any protection of the Software: This is to prevent the licensee from tampering with the software’s built-in security features or protective mechanisms. For example, a user can’t bypass a software’s license key mechanism to use the software on more machines than allowed.

–

UPDATES

Including provisions in a software license agreement that address updates to the software is critical for several reasons:

Technological Advancements: Software technology is always evolving. As new technologies become available, software needs to be updated to keep it current and effective. The agreement should specify who is responsible for performing these updates and when they should occur.
Security: As new threats emerge, it’s essential that software is regularly updated to address potential vulnerabilities and to protect against security breaches. A software license agreement should clarify the responsibility of providing these security updates.
Compatibility: As other systems and technologies change, software may need to be updated to remain compatible. An agreement can specify how and when these updates should be made.
Enhancements and new features: The license agreement can clarify how enhancements and new features are provided, whether they are part of regular updates or require additional fees.

Generally, the Software License Agreement will differentiate between “maintenance releases” and “new releases”:

Maintenance Releases: These are updates that generally focus on resolving issues or bugs in the software, improving security, and ensuring the stable operation of the software. They are usually incremental updates that don’t add significant new features or functionalities but are essential for the smooth functioning of the software. For example, a maintenance release might address a security vulnerability or fix a bug that causes the software to crash under certain conditions.
New Releases: These often contain substantial changes, such as new features, improved user interface, enhanced performance, or entirely new functionalities. New releases typically come with a change in the major version number of the software. For instance, when Microsoft moved from Windows 7 to Windows 8, that was a new release.

–

Typically, under a software license agreement, maintenance releases are provided to the licensee at no additional cost during the term of the agreement, while new releases might be offered at an additional cost or under a new license agreement. This is, however, dependent on the specific terms agreed upon between the licensor and licensee.

–

CUSTOMER OBLIGATIONS

Often you will also find certain obligations placed on the licensee regarding the Software. For example, the Customer must:

Ensure the Software and the Documentation are protected at all times from misuse, damage, destruction or any form of unauthorized use, copying or disclosure: This part requires the customer to implement adequate security measures to protect the software and its accompanying documentation. For instance, this may mean storing the software and documentation securely, restricting access only to authorized individuals, and implementing network security measures to prevent hacking or unauthorized access.
Maintain all proprietary notices on the Software and the Documentation: This requires the customer to keep intact all copyright notices, trademarks, or other proprietary notices within the software and documentation. For example, if the software starts up with a screen that says “Copyright (Year) by (Company)”, the customer is not allowed to remove or alter this notice.
Not transfer, assign or otherwise deal with or grant a security interest in the Software, the Documentation or the Provider’s rights under the Agreement: This part prevents the customer from transferring their rights to the software or documentation to another party. For instance, the customer cannot sell or lend the software to another person or company. This also prohibits the customer from using their rights to the software as collateral for a loan.
Not challenge the Provider’s ownership, or the validity, of the Software, the Documentation or any other item or material created or developed by or on behalf of the Provider under or in connection with the Agreement: This part requires the customer to accept the provider’s ownership of the software, documentation, and any other intellectual property provided under the agreement. The customer cannot, for example, claim that they have the right to modify the software because they’ve paid for it, nor can they dispute the validity of the provider’s copyright or patent rights.
Notify the Provider in writing immediately after it becomes aware of any circumstance which may suggest that any person may have unauthorized knowledge, possession or use of the Software or the Documentation: This part requires the customer to promptly notify the provider if they become aware of any unauthorized use of the software or documentation. For instance, if the customer suspects that a former employee retained a copy of the software after leaving the company, they would need to notify the provider of this situation.

–

These obligations are designed to protect the provider’s intellectual property rights, ensure proper use of the software, and maintain a clear line of communication between the provider and the customer.

Primary Blocks

Limitation of liability

[View the detailed guide on limitation of liability ↗]

–

In the sphere of software license agreements, the limitation of liability blocks plays an essential role for the software providers (licensors) by governing potential risks and potential financial exposure arising from the implementation and use of the software. Let’s delve into why a Software Provider would favor including such blocks in their contracts:

Protection from excessive financial liability: Licensing software can carry numerous risks and unpredictable complications. For example, the software might not function as expected, or it might cause some unintended adverse effects when used in the licensee’s environment. Limitation of liability blocks safeguards providers from enormous financial liability that could arise from such issues, potentially safeguarding the provider from financial ruin in case of a severe problem.

Allocation of Risk: Limitation of liability blocks allows providers to distribute risk more equitably between them and the licensee. For instance, the provider might limit its liability to the amount paid for the software license, thus ensuring that they’re not shouldering all the potential financial burdens that could arise from software malfunction.

Predictability: Having a clear understanding of the maximum extent of their liability enables software providers to manage their finances more effectively. For instance, if a provider knows their liability is capped at the license fee paid, they can price their software accordingly and maintain proper financial reserves to cover potential liabilities.

Focus on core competencies: By restricting their liability, providers can concentrate more on improving their software, offering better services, and solving customer problems, rather than being consumed by the worry of potentially crippling legal claims.

Indemnities

[View the detailed guide on indemnities ↗]

–

In the realm of software license agreements, indemnity clauses serve a fundamental role for both software providers (licensors) and software users (licensees). They manage risk, shield against potential liabilities, and lay the groundwork for dealing with unforeseen issues during the use of software. Here’s an exploration of why both parties would want to include indemnity clauses in their agreements:

Intellectual property infringement: Indemnities for third-party intellectual property infringement claims are vital in protecting the software user from potential legal complications if the licensed software infringes on existing patents, copyrights, trademarks, or trade secrets. For example, if a software provider inadvertently includes patented algorithms in their software, the indemnity block shields the software user from financial liability resulting from a third-party infringement lawsuit.
Third-party claims: Collaborations with other parties, such as other software providers or third-party service providers, are common in software usage scenarios. Indemnities against third-party claims can protect the software user from financial liability if a collaborator alleges that the provider’s actions caused harm or loss. For example, if a software provider breaches a contract with a third-party data provider, leading to a lawsuit against the user, the indemnity clause would require the provider to cover the user’s legal expenses and any damages awarded.

–

In conclusion, indemnity clauses are crucial for both software providers and licensees in software license agreements. They offer risk mitigation, foster trust, and ensure financial predictability for both parties, promoting a smoother and more efficient software usage experience.

Termination

[View the detailed guide on termination provisions ↗]

–

The inclusion of termination provisions in software license agreements is crucial for several reasons. These provisions offer a clear framework for addressing potential issues, protecting the interests of both parties, and ensuring an organized and amicable end to the licensing relationship. Some of the key reasons to include termination provisions in software license agreements are:

Clarity and predictability: Termination provisions outline the circumstances under which the license agreement may be terminated and the processes to be followed. This clarity helps both parties understand their rights, obligations, and expectations, reducing the risk of misunderstandings and disputes.
Protecting interests: Termination provisions help safeguard the interests of both parties in case of breaches or changes in business requirements. For example, a licensor may want to terminate an agreement if the licensee fails to adhere to the usage limits or infringes upon proprietary rights. Conversely, a licensee may want to end the contract if the software does not function as warranted or if there are persistent bugs that the licensor fails to resolve.
Flexibility: Termination for convenience provisions allow for flexibility in the business relationship, providing options for both parties to exit the agreement if circumstances change or if the partnership is no longer beneficial. For instance, a licensee may need to terminate the contract due to a shift in business strategy, while a licensor might want to end the agreement due to new opportunities or resource constraints.
Managing risks: Termination provisions help manage risks associated with software licensing, which can be unpredictable and subject to various challenges. By establishing clear termination criteria, both parties can mitigate potential damages and losses in case of unforeseen issues, such as new legal or industry regulations that render the software unusable.
Legal compliance: Termination provisions can help address changes in legal or regulatory environments, allowing parties to terminate the agreement if compliance becomes impossible or unduly burdensome. For example, if new data protection regulations make it difficult for a licensee to continue using the software, a termination provision can offer an exit strategy for both parties.

–

In summary, termination provisions in software license agreements play a vital role in managing risks, protecting interests, and providing a clear framework for navigating potential challenges or changes in the licensing relationship.

Warranties

[View the detailed guide on warranties ↗]

–

Incorporating warranty provisions in a software license agreement is crucial for various reasons, as it helps establish a solid foundation for the business relationship, protect both parties’ interests, and ensure the successful usage of the licensed software. Here are some key reasons why warranty provisions are important in a software license agreement:

Quality assurance: Warranty provisions in a software license agreement guarantee that the licensed software will meet specific quality standards, be free from material defects, and function as outlined in the Documentation.
Clear performance expectations: Warranty provisions set clear expectations for software performance, ensuring that both parties understand the minimum requirements for the software. This can help prevent misunderstandings or disputes about the software’s functionality or performance upon installation or during usage.
Defined remedies: Warranty provisions outline the available remedies in case the software fails to meet the agreed-upon specifications. This can include bug fixes, software updates, or even refunds in certain cases. Having these remedies clearly defined helps streamline the resolution process and avoids prolonged disputes or legal battles.
Risk allocation: Including warranty provisions in a software license agreement helps allocate risks between the licensor and the licensee. The licensor is responsible for providing a functional product that meets the specified requirements, while the licensee must ensure they use the software in accordance with the terms of the license. This risk allocation establishes a fair and transparent business relationship.
Enhancing reputation: For software licensors, offering warranties can enhance their professional reputation, demonstrating a commitment to quality and customer satisfaction. This can lead to increased trust and potentially more business opportunities.

–

In summary, warranty provisions in a software license agreement are essential for assuring quality, setting clear performance expectations, defining remedies, allocating risks, providing legal protection, and enhancing the licensor’s reputation. Including well-crafted warranty provisions in software license agreements helps create a solid foundation for a successful software use and a healthy business relationship between the parties involved.

Intellectual property

[View the detailed guide on intellectual property ↗]

–

Including intellectual property (IP) provisions in a software license agreement is crucial for several reasons. These provisions help to clarify ownership, protect the interests of both parties, ensure proper use and control of the IP, and provide a basis for resolving disputes.

Ownership and control: IP provisions establish the ownership and control of the intellectual property rights in the licensed software. The licensor typically retains ownership of all IP rights in the software, but grants the licensee a right to use the software according to the agreement’s terms. The licensor controls the nature and extent of this usage right, including any restrictions or limitations.
Protection of interests: Clearly defined IP provisions help protect the interests of both parties. The licensee’s interests are protected as they obtain the necessary rights to use the software to meet their business objectives. The licensor’s interests are protected by retaining ownership of their IP and having the ability to control its use, including the ability to license the software to other users.
Proper use and commercialization: IP provisions in a software license agreement allow for the proper use and commercialization of the licensed software. The licensee can use the software according to the terms of the license, while the licensor retains the ability to license the software to other users or use it for their own projects.
Dispute resolution: IP provisions can also help to resolve disputes related to the ownership and use of the intellectual property. A well-crafted agreement can provide a clear understanding of the rights and obligations of each party, reducing the likelihood of disputes. In the event of a disagreement, the provisions can serve as a basis for resolving the issue, potentially avoiding costly legal battles.

Confidentiality

[View the detailed guide on confidentiality ↗]

–

Including confidentiality provisions in a software license agreement is crucial for several reasons. These provisions protect sensitive information, maintain competitive advantage, safeguard intellectual property rights, and promote trust and collaboration between the parties involved. Here are some reasons why confidentiality provisions are important in a software license agreement:

Protection of sensitive information: Licensing software often involves the exchange of valuable and sensitive information, such as the software’s technical specifications. Confidentiality provisions ensure that both parties are legally obligated to protect this sensitive information from unauthorized disclosure or use, thereby reducing the risk of potential harm or misuse.
Maintaining competitive advantage: A licensor’s competitive advantage often relies on the confidentiality of its proprietary software and technologies. By incorporating confidentiality provisions in a software license agreement, licensors can ensure that their trade secrets and unique software are protected, helping to maintain their competitive edge in the market.
Safeguarding intellectual property rights: Confidentiality provisions can help protect the intellectual property rights of both parties involved in the software licensing process. These provisions can clarify the rights and obligations concerning the use and disclosure of the licensed software and any related intellectual property.
Trust and collaboration: Confidentiality provisions help promote trust and collaboration between the parties involved in the software licensing process. By agreeing to protect each other’s sensitive information, both parties can confidently engage in the licensing relationship, fostering a cooperative environment that is conducive to success.
Legal recourse in case of breach: In the event of a breach of confidentiality provisions, the affected party can seek legal recourse, including damages and injunctive relief, to address the harm caused by the unauthorized disclosure or use of confidential information. This provides a safety net for both parties and reinforces the importance of adhering to confidentiality obligations.

Dispute resolution

[View the detailed guide on dispute resolution ↗]

–

Incorporating a dispute resolution block in a software license agreement is essential for several reasons. It provides a clear framework for resolving disputes that may arise during the course of the software licensing relationship, ensuring that both parties understand their rights and obligations in the event of a disagreement. Here are some key reasons why including a dispute resolution clause is crucial in a software license agreement:

Clarity and predictability: A well-drafted dispute resolution block sets out the process to be followed if a disagreement arises between the parties, such as a breach of contract, intellectual property disputes, or disagreements over licensing terms. This clarity helps the parties understand the steps to be taken in the event of a dispute, reducing confusion and facilitating a more efficient resolution.
Cost and time savings: Alternative dispute resolution (ADR) methods, such as mediation and arbitration, are often faster and less expensive than traditional litigation. By specifying an ADR method in the dispute resolution block, parties can save time and resources by avoiding lengthy court battles and focusing on resolving the dispute through a more streamlined process.
Confidentiality: ADR methods like mediation and arbitration typically provide for greater confidentiality than court litigation. Including a dispute resolution block that specifies the use of an ADR method can help protect sensitive information, such as trade secrets, proprietary software, or confidential licensing terms, from public disclosure during the dispute resolution process.
Control over the process: A dispute resolution clause allows parties to tailor the dispute resolution process to their specific needs, such as choosing the governing law, location of dispute resolution, and the qualifications of the mediator or arbitrator. This flexibility enables the parties to select a process that is best suited to the nature of the software license agreement and their specific requirements.
Preservation of business relationships: ADR methods are generally less adversarial than litigation, focusing on collaborative problem-solving and achieving a mutually satisfactory resolution. By including a dispute resolution clause that encourages negotiation, mediation, or arbitration, parties can work to resolve disputes amicably and preserve their business relationships.
Enforceability: A dispute resolution block can help ensure that any decision or settlement reached through the dispute resolution process is enforceable in court. This provides both parties with greater certainty and confidence in the outcome of the dispute resolution process.

Secondary Blocks

Software escrow

[View the detailed guide on source code escrows ↗]

–

A source code escrow block in a software license agreement is vital, especially when the software being licensed will not be accompanied by its source code.

–

Consider a hypothetical scenario where a banking institution relies on a specific software for managing its customer data. The software is developed by a boutique software firm. The software, as delivered to the bank, is in binary form (object code), not as human-readable and editable source code. This means that the bank does not have the ability to modify or maintain the software on its own—it’s dependent on the software firm for updates, bug fixes, and adaptations.

–

Now, let’s say the software firm suddenly files for bankruptcy. Without a source code escrow agreement, the bank would find itself in a difficult position. It would have no way to update the software or fix any issues that arise. If the software stops working or becomes incompatible with new systems, the bank might be unable to access crucial customer data. This could disrupt its operations and potentially jeopardize its services.

–

However, if the software license agreement between the bank and the software firm includes a source code escrow block, the source code of the software would have been deposited with a neutral third party (the escrow agent). If the software firm declares bankruptcy (which is one of the triggering events usually specified in the agreement), the escrow agent would release the source code to the bank. The bank could then hire other software developers to maintain and update the software, ensuring continued access to their customer data.

–

Thus, a source code escrow block in a software license agreement provides a crucial layer of protection for the licensee, ensuring continuity of operations even if the software provider is unable to continue supporting the software. It provides a level of assurance and risk mitigation in the dynamic and unpredictable world of software licensing.

Financial stability

[View the detailed guide on financial stability ↗]

–

This block refers to the financial health of the parties involved in the software development agreement. It may require each party to maintain a certain level of financial stability to ensure the project’s successful completion and mitigate risks associated with insolvency or financial distress.

Audits

[View the detailed guide on audits ↗]

–

An audit block allows one party to inspect and review the other party’s use of the Software. This is done to ensure compliance with the agreement, identify issues or discrepancies. The block may specify the frequency, scope, and requirements for conducting audits.

Compliance with laws and regulations

[View the detailed guide on compliance with laws ↗]

–

This block requires the parties to adhere to all applicable laws, regulations, and industry standards related to the software development project. This may include data protection laws, intellectual property laws, and employment laws. It ensures that the Software is compliant with the relevant legal requirements.

Boilerplate

[View the detailed guide on boilerplate ↗]

–

Boilerplate bocks, while often considered standard, play a vital role in shaping the overall legal framework of a contract. As such, it is imperative to give these provisions careful consideration and ensure they align with the parties’ intentions and objectives. Neglecting the importance of boilerplate block can lead to unforeseen consequences and potential litigation.

Schedules

Fees and payment schedule

Different types of fee structures can be used in software licensing. The choice of structure largely depends on the nature of the software and the business model of the vendor. Here are the most common fee structures:

Once-off fees: This involves a one-time fee paid by the user to use the software indefinitely. This type of fee structure generally includes updates for a fixed period, for example 1 year.
Recurring fees: Here, the user pays a regular (usually monthly or annually) fee to use the software. The fee typically includes updates and support for the duration of the license.

The “Fees and Payment Schedule” should clearly address the following:

Invoicing: Detail how often invoices will be issued (e.g., monthly, annually), and what information they will include.
Payment Methods: Specify acceptable payment methods (e.g., check, bank transfer, credit card).
Currency: Define the currency in which payments should be made.
Escalations: Explain if and how licensing fees may increase over time, including the method for calculating such increases.
Disputes: Describe the process for handling disputes over charges, including any time limits for raising disputes.
Collection commissions and interest charges: Outline the consequences for late payments, such as collection costs, interest charges, or service suspension.
Taxes: Define who is responsible for paying any taxes associated with the software license.
Refunds: If applicable, provide the conditions under which refunds might be given.
Renewal: Explain how renewal of the license will be handled, including any changes to the fee structure upon renewal.

Error correction service levels

[View the detailed guide on service levels ↗]

–

Error correction service levels are critical in software licensing agreements because they establish a clear process and timeline for addressing and rectifying any defects or malfunctions in the software.

–

The nature of software is such that even with rigorous testing and quality assurance, errors can still occur once the software is in use. These errors can disrupt the customer’s operations, resulting in potential financial loss and damage to their reputation.

–

By establishing error correction service levels, both parties agree on the expected response times and corrective actions, thereby minimizing the impact of any software issues on the customer’s operations. Furthermore, these service levels provide assurance to the customer about the provider’s commitment to maintaining the quality and reliability of their software product, which can foster trust and confidence in the business relationship.

User support service levels

[View the detailed guide on service levels ↗]

–

User support service levels are an essential part of any software license agreement, especially when the software is complex and requires ongoing support. The support service levels define the level and type of service that a customer can expect from a service provider, creating a clear framework for both parties. Here are some reasons why it’s crucial to agree to service levels that address the provider’s assistance to end-users:

User support: Complex software often comes with a learning curve and potential issues that users can’t solve on their own. With agreed-upon service levels, the provider is obligated to offer assistance, training, and troubleshooting to the end-users, reducing downtime and ensuring a smooth user experience.
Setting clear expectations: These service levels establish clear expectations for the level of service to be provided. This includes response times for support requests, resolution times for different types requests, and the availability of customer support (e.g., 24/7, business hours, etc.). Having these expectations set out in an agreement ensures both parties understand their roles and responsibilities.
Remedies for non-performance: The service levels usually stipulate remedies if the service provider fails to meet the agreed-upon service levels. These remedies can include service credits, penalties, or even the right to terminate the agreement in extreme cases. This protects the customer and provides incentives for the service provider to maintain high service levels.
Risk management: Service levels also help manage risk by defining the scope of the services provided, helping prevent disputes about whether a certain service should be provided. This can also help limit the provider’s liability to agreed-upon services.
Enhances customer satisfaction: Effective assistance and support to end-users can significantly enhance customer satisfaction and loyalty. This is particularly important in competitive markets, where customer experience can be a key differentiator.

–

Contract Builder

Build your own custom Software License Agreement now!

Interested in our Contract Builder?

Master contracts now
Elevate your career!

Start building now!

Try for free. No credit card required.

The Complete Guide to Drafting Software License Agreements