Many New Zealand businesses (whether small or large) will have entered into some form of software licence agreement. But as software becomes more advanced and complex, so too can software licensing arrangements. This article aims to identify some important issues that all businesses should bear in mind when considering licensing software.
With software licence agreements (also known as End User Licence Agreements or EULAs), more so than other types of business contracts, there may be a temptation to simply sign up without giving it much thought. We all want the latest software to allow us to run our businesses more efficiently and keep a step ahead of our competitors. But before you sign on the dotted line, ask yourself the following questions and consider the key provisions of software licence agreements described below.
What does the software do? Consider how your business will benefit from this software and whether the cost of licensing the software is worthwhile (i.e. do you really need the software? Are there alternative options?)
How much is the licence fee and what will you get in return for that fee? Consider whether the fee is reasonable for the software and whether maintenance, upgrades and support are included in that licence fee or whether such support carries an additional cost.
Who is the licensor? Are they reputable and trusted in the industry?
Has the product been rigorously tested and approved? If the product is untested, there is a risk that it may be unreliable and costly to your business.
Key provisions of a software licence agreement
1. Grant of Rights: The most important clause in any software licence agreement is the Grant of Rights clause. This describes the scope of, and limitations to, your rights to use the software. The Grant of Rights clause will usually look something like this: “The Licensor grants the Licensee a [type of rights] to [use] the software”. The “type of rights” granted and the “use rights” may vary a lot. Below are some of the elements you should consider.
Type of rights
Exclusive vs non-exclusive: an exclusive licence to use software means that you are the only person or organisation with the right to use that software, even at the exclusion of the licensor. Exclusive licences are rare; most licences will be non-exclusive, meaning that many others can also use that software.
Royalty vs royalty free: You will usually be required to pay a licence fee for the right to use the software. If so, check that your licence is royalty-free, as you should not be required to pay additional royalties.
Territory vs global: Often a licence may allow the licensee to use the software only in a specific territory or country (such as New Zealand). If you may need to access the software while overseas, check that there are no territorial restrictions on your right to use the software.
Term vs perpetuity: Are you paying for a term licence (i.e. for a limited period of time) or a perpetual licence? If the licence is for a limited time, consider the renewal rights (if any). Ideally, as a licensee, you would want renewal rights at your discretion. If renewal rights are only by mutual agreement of the parties, this could give the licensor significant bargaining power when it comes time to renew the licence. The licensor may try to increase the licence fee or impose other restrictions on your use of the software as conditions to granting you a renewal, particularly if you rely on that software and there are no readily available substitutes.
Transferable/sub-licensable: It is important to check whether you are allowed to sub-licence or transfer your rights to a third party. If you allow any other group companies, sub-contractors and the like to use the software when they are not permitted to do so, you may be liable for breach of contract and/or penalty fees.
The “use rights” can vary considerably. In addition to the general right to use the software, you may also be granted rights to copy, modify, adapt, create derivate works and so on. In most cases, you will probably only need the right to use the software (and perhaps have a copy for backup purposes), but if you may need further rights as listed above, ensure that the software licence agreement grants you those rights.
2. Maintenance and support: You should ensure that the licensor has agreed to provide on-going maintenance and upgrades to the software and helpdesk support, should you have any problems. If you are simply licensing an off-the-shelf product with no maintenance and upgrades, the product may not remain useful for very long. These services are typically provided in addition to the grant of licence and, therefore, at an additional cost.
3. Governing law: Finally, as it is common to obtain software from an overseas based licensor, software licence agreements will often be governed not by the laws of New Zealand, but by the laws of the state or country in which the licensor is based. You should consider the implications of this, in particular as to how you can enforce your contractual rights under the foreign law and the extent of your liability for breaching the terms of the licence.
If you are interested in hearing more about software licence agreements or any other business law matters, please contact a member of our Business Team. Our Business Team members specialise in commercial contracts, start up businesses, business sales and acquisitions, restructuring and advising on business compliance.
Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.