This article, the first in a series, aims to make clear key elements of software contract negotiations for professionals in software companies who may not have a legal background.
Here, we focus on “Scope Terms” within such a contract. Basically, when you as a Vendor (one who owns the software) grant rights to your software, you must define (or restrict) those rights. As a Customer (one who gets the rights to use the software), understanding the scope is crucial so you can ensure your business can rely on the software, you are not caught off-guard by a hidden cost, or a legal dispute.
Remember that a Vendor would want a narrow scope to maximise their income and the Customer would want to have the scope broad enough to cover all anticipated use so they do not have unforeseen costs.
Here are two sample clauses and the fundamental principles that you as readers should understand. Note that Sample Clause 1 may be used for a software that you install on your device and Sample Clause 2 may be used for a software that you may access over the internet (SaaS) for a recurring subscription fee. For clarity, consider Sample Clause 1 is for Microsoft Office that you have on your computer locally, and Sample Clause 2 is for Microsoft 365.
Sample Clause 1:
Provided Customer complies with the license restrictions set forth in this Clause ______, Vendor hereby grants Customer a perpetual, revocable, nontransferable, nonexclusive, fully paid, royalty-free, license to use the Software for internal business purposes of the Customer.
Sample Clause 2:
Provided Customer complies with the license restrictions set forth in this Clause ______, Vendor hereby grants Customer, for the Subscription Term, a revocable, nontransferable, nonexclusive license to use the Software for internal business purposes of the Customer.
Key Concepts Explained:
- Duration: The license granted under Sample Clause 1 is perpetual unless the terms of the license are breached. The license granted under Sample Clause 2 is valid for the “Subscription Term” which is generally a date some months or 1 year from the date that the subscription starts.
- Revocability: This means that the Vendor can take away the license when you breach a condition of the license such as for improper and unauthorised use and non-payment. This in turn means your rights to the software copy (when installed) or your rights to the software available on the cloud (in SaaS model) are not unrestricted and can suffer a suspension or termination.
- Transferability: Non-transferability means you cannot give the rights you have under the license to anyone else. They are only meant to be exercised by you. This is different from sub-licensing where you get to keep your rights and allow another party to also exercise some or all those rights.
- Exclusivity: The nonexclusive nature of the license means that the Vendor may grant the same rights to someone else or exercise those rights itself. In both cases covered by the sample clauses above, it makes sense to give nonexclusive rights to the Customer so these rights can also be given to other customers of the Vendor and increase Vendor’s revenue.
- Payment: You may notice that the license is “fully-paid” and “royalty-free” as in Sample Clause 1. This means that there are no ongoing payments beyond a (generally) lump sum payment made to acquire the rights to the Software. Since SaaS contracts generally renew after each Subscription Term, and the payment in each Subscription Term may change, we should avoid using words like “fully-paid”.
- Internal business purposes: The rights to the Software are given so that the Customer can exploit the Software for the intended purpose for its business, say to maintain attendance of employees electronically. Customer cannot resell or repackage the Software in a way that competes with the business of the Vendor so that other possible customers of the Vendor go to the Customer for similar intended purposes.
What also helps in defining the scope of the license more clearly are the restrictions (notice each clause starts with “Provided Customer complies with the license restrictions set forth in this Clause ______”). You should also define what “Software” means so disputes are avoided regarding what tools, functionalities, and documentation are licensed under the ambit of Software. The other articles in the series will touch upon these topics.
You can also set out several other parameters to limit the scope, such as number of users that can use the Software, the territorial extent, and be as creative as possible. Do consult a legal expert when you plan to do so!
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