7 essential clauses to include in software licensing agreements

In this blog, our Legal team explores the key clauses to include in your software licensing agreements to protect your intellectual property (IP), limit exposure to potential liabilities and maintain control over your software.

1. Scope of software licence

In a software licensing agreement, the scope of the licence terms plays a fundamental role in setting out the rules and regulations of how the customer can use the software. If you’ve spent a significant amount of time and resources creating your software to bring to market - you want to ensure that your customers are using it within the boundaries that you’ve established.

For this reason, these terms should describe very clearly the specific rights granted to customers when it comes to the software, such as how they should access the software, its purpose, how it should be used and how many users are permitted to use the software.

By clearly stating the intended use of the software, both parties understand the extent of their rights and obligations. This ensures that the software is used in line with your intentions and prevents unauthorised use or access beyond the agreed condition set out in the software licensing agreement.

Ambiguous language in software licensing agreements can lead to misunderstandings and ultimately, disputes, so always ensure your scope and usage rights offered to the customer is clear and written in plain English.

2. Restrictions

In addition to the rights granted under the scope of the licence, software licensing agreements should define the limits to restrict the customer’s use of the software. Generally, software licensing agreements will include terms that prohibit users from reverse engineering, modifying or redistributing the software without explicit permission from the software provider.

Imagine this - you create a detailed scope of usage for your software licensing agreements, but forget to mention restrictions on important factors that could affect your business, such as redistribution and modification of the software. This oversight could lead to the customer exploiting and distributing the software without your consent, however, without clearly setting this out in the agreement, it could be harder to enforce these limitations.

Clear and specific restrictions are essential for protecting your software and avoiding potential misuse.

To retain customers and prevent unauthorised use, the restrictions in the software licensing agreement should ensure that your software is not used or exploited by your customers in a way that may cause damage to your business.

3. Intellectual property rights

In addition to setting out the restrictions on the customer’s use of your intellectual property, the software licensing agreement should also set out that the supplier will retain ownership of its IP.

This clause ensures that the supplier maintains complete ownership of its intellectual property (IP) while granting the customer a licence to use the software based on the terms and conditions outlined in the software licensing agreement. Failing to include this crucial clause in your software licensing agreements could result in unintended IP transfer to the customer.

By explicitly stating that all rights, including copyright, distribution rights, and intellectual property rights, belong to the service provider, this clause safeguards the software from any unauthorised use or replication by customers. It establishes clear boundaries and protects your most valuable intellectual assets.

With this clause in place, both parties understand their respective rights when it comes to IP, so everyone is on the same page from the outset.

4. Non-exclusivity

Unless you are creating bespoke software for a specific customer, then you should ensure that you do not limit your ability to sell your software to other customers with an exclusivity provision.

To maintain flexibility and generate profit, it's important to include a clause that states the licensing rights are non-exclusive. This allows you to license your software to multiple parties, maximising your revenue potential.

5. Data Privacy

As data privacy and UK GDPR compliance continue to dominate discussions in the tech world, ensuring robust data security stands out as a critical priority for every business. To address these concerns, software licensing agreements should include a clause that clarifies the ownership of customer data and whether it will be stored on or outside their own devices.

Additionally, if personal data processing occurs between parties, a separate data protection agreement should be implemented to ensure comprehensive coverage and compliance.

By addressing data privacy and security in the licensing agreement, businesses can build trust with their customers and safeguard sensitive information appropriately.

6. Confidentiality

A well-drafted confidentiality clause in software licensing agreements is vital to protect sensitive information shared during the business relationship.

It places obligations on one or both of the parties to maintain strict confidentiality of proprietary or sensitive information. It is a key clause for safeguarding trade secrets, algorithms and valuable data.

This clause acts as a legal deterrent against unauthorised access or misuse of confidential data. It provides a clear framework for handling and protecting sensitive information, which in turn can build trust between the parties to the software licensing agreement.

7. Limitations of liability

This clause is crucial for software providers in software licensing agreements as it reduces their exposure to potential liabilities. It specifies certain scenarios where the supplier will not be held responsible for costs or damages related to the contract.

Additionally, in most commercial contracts, the limitation of liability clause often sets a cap on the amount of damages that a service provider may be responsible for if certain things go wrong. Damages, in plain English, refer to the monetary compensation that someone receives as a result of harm or loss caused by another person or entity's actions.

Including a limitation of liability clause allows suppliers to manage risk and understand potential worst-case scenarios in case of a breach. For suppliers, it is crucial to include suitable limitation of liability clauses in their terms of business to safeguard their interests and quantify the risk associated with their software licensing agreements.

However, when contracting directly with consumers, suppliers must be aware that certain consumer laws may restrict their ability to limit liability. In B2C contacts, it's crucial to ensure that limitation of liability clauses are fair, clearly written and do not put the consumer at a disadvantage.

For limitation of liability clauses to be enforceable, they must be fair, reasonable and properly drafted, taking into account applicable laws and regulations (such as the Consumer Rights Act 2015 for B2C or laws such as the Unfair Contract Terms Act 1977 for B2C).

By carefully structuring limitation of liability clauses, suppliers can protect their business while adhering to legal requirements.

Final thoughts

In conclusion, software licensing agreements are crucial for governing the relationship between software providers and their customers. By clearly defining the terms and conditions of software access, usage, and distribution, these agreements ensure both parties are aligned on their rights, restrictions, and responsibilities. With the inclusion of these vital contractual elements, customers are equipped to responsibly manage their software usage, while software providers gain the ability to protect their software and business interests. As a result, well-drafted software licensing agreements can cultivate thriving commercial relationships. By grasping these must-have clauses, both parties can navigate the complex software landscape with clarity and confidence.

To draft your own software licensing agreements, sign up with Docue today and check out our software licence agreement template.

Safeguard your software and create a legal framework that is tailored to your business; all with just a few simple clicks!