Software Indemnities, Confidentiality, Limitation of Liability, Insurance

Indemnities.
Similar to the purchase of products, with the licensing of software the licensee will still want the licensor to provide both a general indemnification against personal injury or property damage that is caused by the product of the negligence of the licensor’s personnel. The importance of the general indemnification will vary based upon two factors. One is whether the licensor’s personnel will be traveling to the Licensee’s site and doing business there, such as performing installation. The second factor would be what the risks would be in the use of the application and whether third parties could be impacted. It’s best to err on the side of caution and include it. As software is a copyrighted material, the intellectual property infringement indemnity is important. As with products if there is a claim of infringement you want the licensor to either get a license to use the product, or change the product so that it is non-infringing. For products
the various options to correct the infringement may have a significant cost impact to the buyer so you need to establish a priority in the actions. As the cost to make corrections to software is usually minimal to the licensee, it shouldn’t make any difference whether the licensor gets the rights to use the software or whether they modify it to make it non-infringing as you already have the commitment that it must meet the specification. Licensors may want the right to provide a refund rather than having to license of correct the infringement. They may even want to have that refund be on an adjusted basis where they will pay less, based upon the period during which you used it. In determining whether the refund approach would be acceptable you would need to consider all the investments that you have made to use the software; where and how the software will be used and what the impact would be if you were no longer able to use it. Offering to provide you with a refund in the event of an infringement may only cover a small portion of the cost to you. My preference is to not agree to a refund as a cure for infringement so if they are unable to get the license or are unwilling to make the change it constitutes a breach of the agreement where I can collect damages. To make sure that the types of damages that you can sustain and claim aren’t limited you need to carve the indemnities out of any limitation of liability provision.

Confidentiality.
Most of the time in licensing software the licensee is not sharing any confidential information with the licensor. The licensor in sharing both the software and documentation already has the protection of both of those being copyrighted. As such the only time a licensor should want you to maintain confidentiality responsibilities is when they are providing you with highly sensitive information such as source code or they are allowing you to make copies of the materials. For things like source code a licensor may want you to manage that as confidential. If you were to agree to that, a normal standard would be that you agree to manage that in the same manner as you manage your own confidential information. As to copies you should have the right to make copies for both archival use and for disaster recovery purposes. If you make copies the licensor will also want to protect their intellectual rights in those materials by requiring you to include copyright and proprietary legends on any licensed copies. As the licensor considers those materials to be confidential they will further want you to return or destroy materials upon termination. The exception to that should be for situations where you as the licensee are terminating the license for cause where in your termination for cause provision you would retain the right to use the software and documentation on an as-is basis. If you agree to hold any of the materials as confidential you should establish a term after which they no longer need to be maintained as confidential and you would also want to include the traditional confidentiality exemptions such as the information becoming public through no fault of the licensee.

Limitation of Liability.
Limitations of liability for software licenses are no different than for the purchase of goods. They traditionally involve three elements. What type of damages may be claimed by the parties. Are there any clauses in the license where there is an exception or carve out from the limitation on the types of damages that may be claimed. The last element is whether there is a financial limit on the amount of damages that may be claimed. The indemnifications should be carved out of the limitation of liability as those are not direct damages that the licensee sustains, those are third party claims. Further as they are third party claims the licensee has no ability to control the amount of those claims so all a limitation will do is make the licensee potentially liable for the licensor’s acts. As to other potential sources of liability the licensee should consider the impact a breach may have and the types of damages they might sustain to determine whether other section of the license need to be carved out and what’s appropriate if there is a breach. Licensors may want to limit their liability to what you paid for the license. Licensees need to think about what the financial impact would be if you weren’t able to use the software. The licensee may have much greater invested than what they paid for the initial license fee.

Insurances Required of Licensor
Traditional insurances that a buyer may want a supplier to provide when you purchase goods is no different than what the licensee should want the licensor to provide under a software license. To make them more acceptable or applicable you can always make them conditional requirements. For example a licensor may not want to be forced to carry automobile insurance in the amount you require, especially if they won't be using automobiles in performing work for you. To deal with that you could make that requirement a conditional commitment such as: “To the extent Licensor uses a vehicle in the performance of installation, acceptance testing or performance of services for Licensee, Licensor shall carry automobile liability insurance ……” In establishing it as a condition, if the licensor does none of those they don’t have to maintain the insurance or maintain it at your required limits.

Software - Fees, Payment, Taxes, Installation, Acceptance

License fees, Payment, Taxes
What is the cost of the license? When you license software one of the things to be concerned about is the life cycle cost if being able to use the application. For example, you
may be required to purchase maintenance service. If you are not required to purchase maintenance services and you elect not to buy it you would be operating the software on an as-is basis one the warranty period has ended. Another thing that will impact your cost is the period of time that the licensor is committed to support the revision you purchased once a newer version is released. That impacts whether you will be forced to purchase upgrades to get continuing support. If you don’t upgrade and they no longer support the revision you have licensed, you would have the right to use it on an as-is basis.

Similar to hardware or equipment in licensing software one of the first considerations is do you need the right or options to purchase additional licenses? If you do, how long will those license fees remain firm?

What are the payment terms for the license, maintenance fees and other services? In most situations the licensee would not want to make payment until such time as the software is installed and accepted. Licensor’s just like suppliers always want payment to occur as soon as possible. The leverage you have in the situation will determine what you can negotiate. The key is if you do need to pay the initial license fee prior to acceptance, you would want to include the right to a full refund in the event the software fails to meet the acceptance test. In software maintenance fees are usually paid annually with the first payment due at the end of the warranty period. This means that you need to take the term of that warranty period into account in figuring out the life cycle cost of the purchase when you are negotiating the fee. The shorter the warranty period, the sooner you need to purchase maintenance. The actual payment term should be based upon what your normal payment terms are. Agreeing to shorter terms both adds to your cost and can cause complications with your accounts payable function.

Obligations of the parties to pay any applicable taxes. Depending upon who you are licensing from and the location of the sale, the license may also be subject to sales or value added taxes. If the software is purchased for use in another country it may also be subject to duties.
If either of those would apply to your license, the licensing agreement should specify which party is responsible to pay for those. Licensees should want to only be responsible for taxes associated with the use or and import if they are requiring import.

Delivery and Responsibility to Install.

What is the lead-time for delivery? As with any item that you purchase or license the first thing you want to know is when will you get it. As production of media and documentation can be almost immediate this is a lesser concern. For consumer applications most are capable of being downloaded immediately.

Whose responsibility is it to install the software (licensor or licensee)? The more complex the application, the more you may want to may want to have the licensor install the application so
there is no doubt that the supplier is fully responsible in the event the application fails to meet the agreed acceptance test. If responsibility is with the licensee, you need to understand what the requirements for customer installation are so that you can comply with them. That ties back to acceptance. If you comply with those requirements and there is a problem with acceptance it is the licensor’s problem. If the licensor will perform the installation you want to know if the installation cost included in the license fee or is that a separate charge? If there is a separate charge, that’s an addition cost to the purchase and the life cycle cost. If the licensor will perform the installation you want to clearly know when the installation will be performed or what is the lead-time for installation that you can rely upon. If you have to pay a portion of the license fee prior to installation or acceptance, you want this period to be short. Otherwise you are paying a fee for something you don’t have the ability to use.

Acceptance / Acceptance Test:
The right to perform acceptance, and have and agreed acceptance test is the way to make sure that the software is actually meeting your requirements that must be included in a specification. Acceptance test should be designed to reasonably show that the product does in fact meet those requirements. For example, if you licensed software to meet certain speed, transaction volume and performance requirements, you want the time to verify that if does in fact meet those requirements. Those would be established as part of the acceptance and test criteria. As part of any acceptance term you would want to establish how long after delivery do you have to commence the acceptance and testing process, and how long you have to complete the testing. If there are material errors discovered, you should establish how long the Licensor has to correct them? If Licensor corrects the defects your agreement should decide whether the test period re-starts giving you the full duration to perform the testing or whether
You just get added the time it took to get the error corrected added to the period. If the licensor fails to correct errors within the period allowed to correct them the licensor should have the right to terminate the license and get a full refund for any fees paid.

Similar to the purchase of goods, the right of acceptance is critical. That’s because once you accept an item you are fully responsible to pay. Once accepted your future rights to correct problems that exist is based upon the rights you have under warranty.