Software | Hardware Licensing: Key Contract Terms

As an IT manager, one of the activities you are most likely involved in is procuring software or hardware and maintaining the purchased hardware or software. A very important part of the procurement process is constructing, modifying, and negotiating the initial contract. The initial contract is vitally important as it defines the relationship between you and the vendor. It is also a major tool in remedying performance issues by the vendor and establishing when and where you can use their product. While it is sometimes easier just to accept and sign the contract provided by a vendor, it is a wiser decision for the long haul to understand contract terms and make sure they are favorable or at least fair to your organization. Assuming that the vendor’s standard contract is fair to you would be a mistake. You need to fully understand what you are committing to in the contract before signing. Following is a list of terms that you will probably come across in software and hardware contracts. Note: I am not a lawyer, so please work with your in-house legal or procurement team to finalize and analyze specific contracts. Perpetual: A perpetual license is one that the purchasing company can use forever. A non-perpetual contract states a time frame in which the purchasing company can use the product. Exclusivity: Determines whether the product you are buying can only be sold to you or is sold to many customers. A non-exclusive software licenses means the vendor can sell the product to many customers. An exclusive contract dictates that the vendor will not sell the product to anyone but your company. Off the shelf software products are non-exclusive. Transferable and assignable: Determines if you can transfer the purchased asset to another entity. Keep in mind another entity could be a subsidiary of your company or another company you have partnered with. Most vendors make contracts non-transferable. One reason for this is to ensure you do not sell the rights to the product to someone else. Termination: This is a very important clause as it states under what conditions you or the vendor can terminate the contract. Force Majeure: A clause intended to free your company or vendor from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of God (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. Confidentiality / Publicity: Determines whether your company and the vendor can make public statements about the product, relationship, agreement, upcoming plans, product enhancements, or any information about the other party that is not approved. Location: States where a purchasing company can use the product. The company can only use the product in the specified location – i.e. United States, China, or worldwide. Licensing Term: Related to non-perpetual licenses. Specifies the term (timeframe) in which the software can be used. Payment: Dictates the payment terms of the purchase or ongoing maintenance. This details the payment schedule. An example would be 25% upfront, 75% upon completion. It can also contain timeframes for payments after you receive an invoice – net 45 days, etc. Limitation of Liability: Limits the financial responsibility of the vendor and purchasing company if damages result from use of the product. An example would be a company trying to receive money from a software vendor if the software product is hacked and company information is obtained. Indemnity: Indemnity is a clause used to protect a party from financial loss. For example, a typical license would protect the purchasing company from patent disputes associated with the patent licensed by the vendor and protect the purchaser from product liability incurred as a result of the vendor’s use of the patent. Service Levels: Defines the service level that you have negotiated with the vendor. This includes the level of support or ongoing maintenance that the vendor will provide. Response Times: Determines the response time of the vendor for various situations. This is usually used to define responses for critical and non-critical product errors, and enhancement requests. Remedies: Remedies are used to provide financial (or other) compensation for a party not living up to the terms in the contract. Disclaimers Warranties: A vendor’s guarantee given to the purchaser usually specifying that the vendor will make any repairs or replace defective items free of charge for a stated period of time. Warranties also include other promises made by the vendor. Governing Law: The exact governing body in which determines the lawfulness of the contract. The governing law is usually assigned to a particular state as laws differ from state to state. Hopefully you have found this information useful. For more information on how to use these terms and clauses in contracts to protect your company and provide flexibility for unknown situations please read CYA: Using Contracts to Protect Your Company. Related Articles: CYA: Using Contracts to Protect Your Company