Customized Software Agreements: The need of the hour
Authors: Utkarsh Mishra & Rakshit Rautela
Designation - Student, Symbiosis Law College & Faculty of Law, University of Delhi
E-mail - firstname.lastname@example.org
Software, in this era of the internet, is the backbone of every business, from the manufacturing-based industries to the service-based ones. This is due to the digitalization of every aspect related to a business, such as advertising, payment facilitation, data storage, or even procurement of raw material, and for every such function, there is software associated.
Due to this large-scale trend of digitalization and the inherently associated demand of software by almost everyone, the need for a contractual framework specifying the terms of the usage and the inherent limitations to be agreed upon between both the client and the service provider have become rather important. The need for contractual obligations is also becoming more and more important because the current generation of information technology has advocated for the subscription-based model as compared to a one-time payment contract. This is because a subscription-based model offers flexibility, a better scope for changes and improvement, saving of costs through little or no upfront costs, and greater accountability in cases of breach of data or faulty service.
This article talks about the important pointers to be kept in mind while drafting software agreements:
Understand the need for the type of agreement that is required by the party. If the software is one where you login through the internet browser with an id and access the service, then there may be a need for a Software as a Service (SAAS) Agreement while if the software is downloaded directly to your computer, then you might need an End User License Agreement (EULA). Also, take note of hybrid software that might require both SAAS and EULA Agreements.
Despite all the technical know-how and expertise, one of the most important things in an agreement is to make sure the details are covered in the first part itself so as to make the agreement comprehensive and efficient. The important details are the date of the commencement of the license and its termination, the cost of the license, the exact service or right being licensed out, and the scope of the license.
Specifying the Licensor and Licensee is a very important step and has to be done clearly since Software agreements are non-transferable and thus, the person or the organization is given the license should be clearly specified. The definition of the Licensee should be carefully outlined so that there is no fiscal loss and unwanted users such as subsidiaries of an organization should not be roped into the definition.
Enterprise License Models which generally purchase software on the number of users should be carefully worded so as to prevent any ambiguity in defining the term “user”. Also, an emphasis should be placed upon the procedure of variation in the number of users or to the limitation of rights to license grants.
Geographic Restrictions should be employed to prevent issues related to export and IPR Indemnification. Thus, a specific country should be clearly mentioned in the software agreement.
Clear and specific details related to the software or service are to be provided in the agreement. The revenue model, functionality, features, and employed technology are all to be clearly outlined so that their workability is not shrouded and the whole idea behind the software or service is communicated.
The characteristics of the software such as its exclusivity, assignability, and perpetuity should be clearly mentioned. The inclusion of a software’s source code should also be mentioned.
Privacy protection - The contract should also possess the required mechanism related to storage, deletion, and use of data along with the user right. Importing data that already existed on the system is also a structural mechanic that is to be clearly outlined.
A confidentiality clause should be present and should extend to both parties. However, documentation and other software-related confidentiality should be dealt with specifically under the head of use restrictions.
A warranty clause is especially necessary and should be well-drafted. Shorter warranties with maintenance coverage should be preferred as a long-standing warranty of 1- or 2-year clause gives a way to seek a refund on account of material breaches by the licensee in many cases.
A specific provision regarding failed repairs or maintenance efforts and the associated refund should be placed because there have been instances where the unlimited liability has been placed on account of consequential damage and its exclusion clause being nullified.
A warranty disclaimer clause should be put in the contract so that there is no doubt as to the limits of the exercisable warranty, failure to state which, there may be claims related to the effectiveness of the software to conduct its function or even its merchantability.
Indemnity clauses should be well-drafted and they shall be separated from risk allocation clauses. This is because indemnity clauses address the third-party concerns which are not in control of either party while risk allocation addresses mutual conflicts between the parties under contractual terms.
Breach of warranty clauses and the associated damages or penalty should be specifically described in such a contract. Also, remedies associated with such issues should be careful so as to be equitable in nature.
Lastly, Jurisdiction and Dispute Resolution clauses should be strictly construed and should not be a midnight clause (ambiguous) so as to prevent frivolous litigation and multiplicity of suits in cases of a dispute.
SAAS agreements have viable and standard templates all across the Internet, however, the inherent enactment of the Privacy Data Protection Act in the near future, as well as EU-GDPR guidelines always make the drafting of a customized Privacy agreement a need to be prioritized. This benefits the organization immensely and can protect organizations dealing with the data of millions safe from any liability accruing out of the data misuse and other associated issues. Also, a clear and outlined set of conditions between various data intermediaries and data processors that an organization deals with on a daily basis helps carve out a niche as the impending penalties for violations are abysmally huge.