4 top tips for software suppliers when negotiating software contracts

In this blog, our legal experts delve into their 4 top tips in key areas of software contracts, providing practical examples to help you navigate each aspect in software negotiations. Let's go!

1. Protect your intellectual property (IP)

• Clarify if you will be licensing or assigning IP: When your customer will use your IP as part of the services, it's important to establish whether you will license or assign the IP to the customer.

  Inadvertently transferring ownership (also known as assigning) of your IP can limit your ability to use it for other customers. Consider if licensing, which allows you to retain ownership while granting the customer specific rights, is more appropriate.

  If you will be creating bespoke software for your customer, will ownership of the custom-made IP be transferred to the customer? If so, you should also determine when ownership will be transferred to the customer. Typically, suppliers prefer to receive full payment before transferring ownership of the bespoke IP, while customers may prefer it upon creation.

• Define the licence scope and restrictions: If you will be granting a licence to use your IP, it is important to provide a detailed and precise licence scope.

  Clearly outlining the permitted uses of the IP is essential, i.e. the number of users, timeframe (i.e will the customer have the right to use the IP forever or just for the length of the contract?) and if the licence is exclusive to the customer or if the supplier can grant similar licences to other parties. It is also important to establish boundaries for the use of the IP, such as restrictions on sub-licensing or the ability to modify the IP.

  You may also want to consider including a minimum user requirement that the customer must comply with annually. This requirement provides the supplier with certainty regarding revenue and software usage.

2. Ensure your liability is appropriately limited

When negotiating software contracts as an IT service provider, it's crucial to effectively limit liability to protect your business. Limiting liability means reducing your legal and financial responsibility in specific situations. This is usually achieved in the 'limitation of liability' clause in software contracts, which sets boundaries or caps on the losses the supplier must pay if issues arise. By following the below key strategies, suppliers can avoid being held accountable for uncontrollable risks and ensure their liability aligns with the contract's value.

• Excluding unwanted liabilities: Carefully review the software contract to identify any liabilities that you do not wish to be responsible for. While certain liabilities cannot be excluded by law, such as those related to personal injury caused by negligence, there are other types of liabilities that can be negotiated and explicitly excluded in the agreement. Consider the specific circumstances and scope of the software being provided to identify areas where liability exclusion is appropriate.

  For example: if the customer is responsible for backing up its own data, then you may want to ensure that your software contracts exclude the supplier’s liability for any potential data loss. By clearly defining responsibilities and limiting liability to the appropriate party, you can mitigate potential risks.

  
  

• Capping liability: In the absence of a limitation or cap, each party's liability under English and Welsh law remains unlimited, irrespective of the contract's value. To ensure that liability is proportional and manageable as a supplier, it is crucial to establish caps or limitations that align with the value of the contract and the risk involved.

  It is also important to ensure that any liability caps do not exceed your insurance cover limits (especially when it comes to indemnities, which are contractual promises to be responsible for losses if triggered by a certain event). You must also make sure that any limitations of liability are fair and reasonable.

  For example: if your insurance cover limit is set at £250,000, you should ensure that any liability caps are equal to, or below that amount. If you agree to liability caps that exceed your insurance coverage, the supplier will be responsible for covering the additional liabilities. This approach ensures that your financial responsibility is in line with the insurance coverage you have in place, protecting your business from excessive liabilities that could arise.

3. Only offer realistic service level agreements (SLAs)

SLAs are commonly used in software contracts to establish clear expectations, define the quality of service and provide metrics for measuring performance. Well-drafted terms relating to service levels will typically outline the minimum service levels, remedies if they are not met and performance metrics. Consider the following key factors to protect your interests if you will be including SLAs in your software contracts.

• Clearly define service levels: You should ensure that your software contract template reflects the levels of service that you offer. It’s important not to over-promise on service levels, as depending on the wording of your software contract template, you’ll be in breach of contract if you fail to meet them.

  For example: When reselling third-party software, it is essential to align your SLAs with the vendor's promised service levels. For example, if the third-party vendor guarantees a 99% uptime SLA, you should refrain from committing to a higher uptime in your software contracts. This alignment with established SLAs ensures clarity for customers and prevents unrealistic commitments.
  

• If service levels are not met, resist offering service credits: Service credits are a financial tool for suppliers to guarantee that a minimum standard of service levels will be met. Customers may ask for service credits but suppliers should always exercise caution when agreeing to service credits, as they can result in financial loss for suppliers. Service credits can be in the form of refunds, discounts, extended service periods or sometimes a promise of additional services to compensate for the failure.

  For example: If you will be reselling a third party’s IT services, unless service credits can be flowed down by the third party provider, then you should consider including other remedies for failing to meet SLAs in your software contracts, such as correcting the service level failure. Suppliers should focus on meeting realistic SLAs and delivering reliable services to establish trust and customer satisfaction.

4. Consider saving time with auto-renewal terms

• An auto-renewal clause enables the contract to automatically renew for subsequent periods unless terminated by either party. This can streamline future engagements and create a more efficient contract management process, saving time and effort for all parties involved. It can also ensure that the software subscription or services continue without any interruptions. This is beneficial for suppliers as they can better predict revenue and resource allocation when contracts will automatically renew based upon the same terms.

Final thoughts

Negotiating software contracts as a supplier requires careful attention to key aspects such as limitations of liability, intellectual property, service level agreements and efficient contract renewals. By addressing these areas strategically, you can protect your business interests, safeguard your software, deliver reliable services and streamline future engagements.

With these considerations in mind, you can navigate software contract negotiations successfully and establish strong, long-lasting partnerships with your customers.

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