The dramatic increase in new technologies has made software contracts one of the most common forms of contracting in commercial relations, both nationally and internationally.
In this type of contract, the owner of the software (Licensor) grants the right of use to a person or company (Licensee) in exchange for an economic remuneration.
It is important to point out that, as in other licensing contracts (manufacturing, trademark, etc.), the granting of a use license does not entail the transfer of ownership over the software. The owner of the software will continue to be the Licensor.
There are two main types of software contracts:
Two types of software contracts are mostly distinguishable:
Software License Agreement: In this agreement, the owner of the rights to use a software (Licensor) authorizes a third party (Licensee) to use it as an end user, in exchange for a price.
These are usually contracts made from the perspective of the Licensor and include general conditions, which the Licensee has to accept and can hardly negotiate with the licensor, unless adaptations are made to his measure, which may be usual, when the contract is made for a company that needs a specific application or use.
Software Distribution Contract: in this contract, the owner of a software (Licensor) exclusively assigns, for a specific territory (usually a specific geographical area or country), the exploitation rights of the software to a third party (Distributor) who in turn sells them to end users (Licensees).
In return, Licensor receives an initial amount for the assignment of rights and royalties on each of the software licenses sold by Distributor in the assigned territory. It is the most common form of software marketing in international markets.
The main clauses of this type of agreement are mentioned and explained below, distinguishing between the Software License Agreement and the Software Distribution Agreement.
The personal data of the companies or persons concluding the contract must be included.
It is very important to point out that the parties refer to the companies or professionals that license the software and, therefore, in the case that one of the parties is a company (mercantile society) it will be necessary that the person who signs the contract on behalf of said company accredits that he legally represents the company and that he has sufficient powers to sign the contract.
In the Software License Agreement the Licensee can be a company or also a natural person, whereas in the Software Distribution Agreement, it is almost always a company.
With the aim of establishing the terms in which the contract will be developed, this section will establish the definitions of those technical concepts, in English or unclear that the parties use in the contract for their relationship, avoiding possible conceptual disagreements on new concepts.
It is possible to define as many concepts as deemed appropriate, especially in cases in which the concepts, due to their novelty, may lead to confusion between the Parties and, with it, to disagreements that could lead to the termination of the Contract. Some of the terms that are commonly defined in this type of contract are: “Software Materials”, “Source Materials”, “Product Code”, “Intellectual Property Rights”, etc.
Purpose of the Contract
The object of the License Agreement is the authorization by the holder of the exploitation rights (Licensee) to a Licensor or client, to use a certain software under the terms set forth in the license of use. In the case of the Distribution Agreement is the transfer of use of those rights for the Distributor to transfer them to end users (Licensees) in a given territory.
From the point of view of the customer or Licensee it is interesting to include in an annex the description of the product, as well as the manuals or the instructions and requirements of the software.
With respect to the duration of the contract, a clause may be included provided that the Parties are interested in the nature of the software. Depending on the type of software, it may not make sense to establish a period of time as the evolution of the software is very fast and in a few years they become obsolete or new versions are released.
However, if the intention of the parties is to establish a certain duration, consideration should be given to the possibility of establishing extensions. If a duration is established, it is normally 5 years, both in License and Distribution contracts.
Another important element will be to establish the possibility or not that the Licensee will have to assign to a third party the license of use that it has acquired. Normally, the License Agreement is granted without the possibility for the licensor to assign or resell it at a later date.
On the contrary, in the Software Distribution Agreement, as its name indicates, the Distributor is granted the possibility to commercialize the license, selling it to third parties, normally in a limited territorial or geographical area; that is, the Distributor may exploit the license, only in a specific area or country.
Remuneration is the price paid by the licensee for the use of the software. Usually the consideration for the license to use the software will be unique or annual and such payment will be made at the time of purchase of the software. Normally in the License Contracts the price is closed in the contract, i.e. it is not negotiable, unless adaptations are made according to the user’s needs.
In the Distribution Agreement, the Licensor receives an initial amount for the assignment of rights and royalties on each of the software licenses sold by the Distributor in the assigned territory. Both concepts are negotiable according to the market potential (number of possible Licensees) in the territory that has been assigned exclusively to the distributor.
This clause may provide a warranty by Licensor with respect to the proper functioning of the software, limiting in turn its liability for possible damages that may result from the use of the software.
The extent of the warranty is normally limited in the event that the customer or Licensee, or a third party as directed by the customer, modifies the software. Licensor will not guarantee the proper functioning of the software in the event that a third party or someone under its direction modifies the program.
It is also important that some clause be established that limits the liability of the Licensor. Liability cannot be absolutely non-existent. Such clause shall be deemed to be acceptable to the Courts of Justice if it contains elements that do not render the Licensor absolutely irresponsible.
Intellectual Property Rights
The intellectual property clause will determine the ownership of the software program. Normally, a clause will be included stating that all Intellectual Property Rights (including trademarks) belong to Licensor and are not transmitted to Licensee or Distributor.
With respect to trademarks, in the Software Distribution Agreement, it must be specified that the Distributor will not use any trademark in any country, including the territory (geographic area or country) that is exclusively licensed, until such trademark has been duly registered by Licensor.
Furthermore, it is also advisable to provide that in any use of a trademark, such trademark shall not be combined with any other trademark, trade name or denomination of the Distributor, unless Licensor expressly authorizes the Distributor in writing.
Termination of Contract
The causes of termination of the Contract that the Parties agree upon shall be established: passing of time, breach of the obligations of each Party, extinction of legal personality, etc. You can establish as many as you wish, trying to limit to the maximum any contingency for which you want to terminate the Contract.
Normally, the inclusion of this type of termination clauses are established in the event of fraudulent use or in breach of the obligations established in the Contract itself.
This clause will specify the different means or channels of communication that will have effects between the Parties, as well as the addresses, telephones, etc., to which they will have to send their notifications.
Expenses and Taxes
Normally this clause does not appear in License Agreements but it does appear in Distribution Agreements. It is convenient to put on record in writing that the obliged to pay the expenses and taxes derived from the celebration of the Contract is the Distributor who is the one who resells of the Software to the final users (Licensees).
Applicable Law and Competent Jurisdiction
The law applicable to the Contract shall be established. The competent Jurisdiction shall determine which courts may hear controversies arising from the Contract for any of the foregoing clauses or for violation of the general regulations that have been determined to be applicable law.
This last jurisdictional clause may be substituted by the agreement of the Parties to submit to arbitration by a specific body (Chambers of Commerce, Arbitral Tribunals or others) that will resolve the controversies and will have binding force between the Parties.
In Software License Agreements, where the user (Licensee) is a consumer the competent jurisdiction will be that of his domicile; conversely, if it is a company for which custom software has been developed, it will normally be the jurisdiction of Licensor.
The Software Distribution Agreement usually provides for the jurisdiction that is best suited to Licensor, which is usually the jurisdiction of your country.