Negotiating a contract for your awesome software? Warranties, good industry practice, disclaimers, limitation of liability, consequential loss – all a little bit fuzzy? Help is here! Read on to discover our tips for negotiating your next software contract.
4 EXPERT TIPS FOR NEGOTIATING SOFTWARE CONTRACTS
As the saying goes, actions speak louder than words. But hold up, when it comes to the wording (or drafting) in your software contracts, your words hold immense weight. And getting them wrong can mean you're carrying a whole lot of risk (unnecessarily) – and who wants to lug that around all day?
So stick with us to discover our top 4 tips for negotiating software contracts.
Think of warranties like a seal of approval. It's a promise that your software will perform in an agreed manner – in accordance with a specification – for a fixed period of time. And as a customer, it's perfectly reasonable (and common place) to expect a warranty.
But it's important that the limitations on performance are clearly set out in the specifications. This will stop customers from thinking your software will turn their start-up into an overnight unicorn, make them the next Steve Jobs or build the next Atlassian.
What's just as important: ensure that any warranties regarding performance only apply for a set period ("Warranty Period"). And if anything goes wrong outside of the Warranty Period, then be clear that you will be entitled to charge a fee to fix the issue.
You may also want to include a requirement for the customer to provide all information that maybe reasonably necessary to demonstrate the defect or fault in the warranty claim. This will help you determine whether the claim is actually a breach of a warranty – or if they're taking you for a ride.
2. GOOD INDUSTRY PRACTICE
It's common to see warranties in software contracts drafted so that services performed or workmanship is to be conducted in accordance with "good industry practice" or "best industry practice." But what does that even mean?
We're glad you asked.
If the contract does not define these terms, what constitutes good industry practice will be up to the parties to determine (and prove in Court based on evidence). So should you define these terms in your contract or not?
If your area of technology is rapidly evolving, it may be beneficial to not define "good industry practice" or "best industry practice." That's because the standards or expectations in your field may be vastly different at the beginning of the contract compared to the end of the warranty period.
On the other hand, if you want to maintain some control over what "good industry practice" or "best industry practice" is, include a definition. Any definitions of "good industry practice" should include that the practice is conducted with the degree of skill and care that would ordinarily be expected from an appropriately skilled person, who is performing services that are substantiality similar to the services you provide.
In other words, you're comparing apples with apples and these apples have the skills for the job.
3. DISCLAIMERS AND LIMITATION OF LIABILITY
Many software contracts include a disclaimer, which is a clause that sets out the circumstances when a software provider will not be responsible for the performance of the software.
A disclaimer regarding the software will usually include things like:
- the services may not always be completely accurate or continuously available
- the software provider will not be liable where the customer is unable to access the service as a result of their actions, or
- the software provider will not be liable for any damage caused by unauthorised access to the software.
Having disclaimers could mean that if anillegal third party damages your customer's software, it's not your fault. Or if a customer locks themselves out of your software after sharing their login and password? That one's on them.
It's important that any disclaimer contains the words "to the maximum extent permitted by law" to ensure that the disclaimer does not affect the enforceability of the contract by attempting to restrict mandatory warranties.
For example, mandatory guarantees under the Australian Consumer Laws ("ACL") apply if you provide services to a "consumer". If the amount paid for software does not exceed A$40,000(this will increase to A$100,000 from 1 July 2021) the customer may be a consumer under the ACL and mandatory warranties may apply.
Another way to limit your risk under a software contract is to put a cap on your (or your customer's) liability. A liability cap often involves extensive negotiation. It's common to see liability capped at the total fees you are paid for the software under the contract, or fixed to a set dollar value. Where you agree on a specific amount, it's important that you negotiate this amount so it's in line with the level of insurance coverage you have.
Disclaimer clauses, together with a limitation of liability provision, are a great way to set boundaries around what you will and won't take responsibility for.
4. CONSEQUENTIAL LOSS
A word of warning: if you breach one of the warranties you have given under the contract, the customer may be entitled to sue you for damage. Yikes. The law on damages for breach of contract excludes losses that are too remote; that is, losses that the parties could not have foreseen when they made the contract.
These are often described as "consequential" or "indirect" losses.
For example, say you provide the point of sale software for a retail store. If the software goes down for a day, you don't want to be liable for their lost profits for the day.
In recent times, the cases before the Courts have given rise to uncertainty about what the phrase "consequential loss" actually entails. So, it's good practice to ensure your contract clearly defines the types of damages you intend to be recoverable, and the types of liabilities you want to exclude. You might exclude things like loss of profit, loss of revenue, loss of business opportunity and so on.
Time to put your software contract at the top of your to-do's
Before you send off your next contract, make sure you get your warranties, good industry practice, disclaimers, limitation of liability and consequential losses in order. You'll feel a lot lighter when you're not carrying all that extra risk.