Canada: A Practical Guide To Software License Agreements: Governing Law And Dispute Resolution

Software license agreements usually contain provisions that specify the law that governs the agreement and a procedure for resolving disputes relating to the agreement. Those provisions can have a significant effect on the rights and obligations of the software vendor and customer. The software vendor and customer should select a governing law that is appropriate for the agreement and a dispute resolution procedure and venue that are appropriate and fair to both parties.

Governing Law

To properly negotiate a software license agreement, and to perform obligations and exercise rights under the agreement, both the software vendor and the customer must know the legal rules that govern the interpretation and enforcement of the agreement. Those legal rules will be determined primarily by the law of a particular jurisdiction (i.e. a country or province/state), which is commonly called the "governing law". The governing law is important because different jurisdictions have different legal rules relevant to software license agreements, and even a small difference in legal rules can have a significant effect on the rights and obligations of the software vendor and the customer.

Under Canadian law, a software license agreement is usually governed by the law specified in the agreement or, if the governing law is not specified, the law of the jurisdiction that has the most real and substantial connection to the agreement. If a software license agreement with connections to multiple jurisdictions (e.g. the contracting parties are in different countries) does not specify the governing law, then a court or arbitrator will determine the governing law if there is a dispute regarding the agreement.

It is usually best if the software vendor and customer include in the software license agreement a provision that specifies the governing law, so that the vendor and customer know with certainty the law that will govern the agreement. Most software vendors and customers prefer their respective local law to be the governing law, but a different law might be better. The software vendor and customer should select a governing law based on careful consideration of the potential effect of the law on all aspects of the interpretation and enforcement of the agreement. The selection of a governing law presents considerations of cost and risk, because a contracting party that is not familiar with a proposed foreign governing law must either obtain legal advice from a qualified foreign lawyer or accept the risk that the foreign law is materially different from the law of the contracting party's jurisdiction.

Dispute Resolution

Software license agreements often specify a procedure for the resolution of disputes between the software vendor and customer. Dispute resolution procedures can include some or all of the following:

  • informal negotiation – one or more rounds of direct negotiation by representatives of the vendor and customer, with each round of negotiation involving more senior representatives.
  • mediation – negotiation facilitated by an independent and experienced neutral person  (a "mediator")  who  assists the vendor and customer to try to achieve a negotiated resolution of the dispute but does not have authority to impose a binding decision.
  • arbitration – formal dispute resolution through a private adversarial process in which the vendor and customer present evidence and argument to one or more independent decision makers ("arbitrators") who have authority to impose a binding decision that is subject to review by a court in limited circumstances.
  • litigation – formal dispute resolution through a public adversarial process in the applicable court system in which the vendor and customer present evidence and argument to an independent decision maker (a "judge") who has authority to impose a binding decision that is subject to review by an appeals court.

Each kind of dispute resolution procedure has advantages and disadvantages, including varying degrees of privacy/confidentiality, timeliness/speed and finality. The optimal dispute resolution procedure will depend upon the nature and circumstances of the software licensing transaction and the preferences of the software vendor and customer.

The location (also known as "venue") of a dispute resolution process can impose significant costs and logistical burdens on either or both of the disputing parties. Dispute resolution in a local venue can provide a significant home field advantage. The dispute resolution venue does not have to be in the governing law jurisdiction. A software vendor and customer might negotiate a compromise on this issue by selecting a neutral dispute resolution venue or agreeing that the party commencing dispute resolution proceedings will do so in the other party's local venue.

Recommendations

The governing law of a software license agreement should be selected based on appropriate legal advice and consideration of the potential effect of the law on all aspects of the interpretation and enforcement of the agreement. A dispute resolution procedure should be selected based on consideration of the comparative costs and benefits of each kind of procedure. A dispute resolution venue should be fair to both the software vendor and customer.

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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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