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
Who is the licensor? Are they reputable and trusted in the
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
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
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
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
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.
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.
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
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