ContractsInternational Scenario and Judicial Precedents for Software Agreements – II

In this part, we shall take a look at the international scenario currently relevant to Software Agreements and landmark judgments pertaining to Software Agreements.

INTERNATIONAL SCENARIO

The contents of international software agreements are usually similar to the national software development or licensing agreements. The international software agreement generally includes the details and description of the products, the term, the manuals and instructions, the warranties, rights and liabilities, and other requirements of the software.

There are two types of international software agreements which are used-

1. International Software License Agreement

International software license agreement is a legal instrument by which the owner of the software i.e., the Licensor authorizes the other party or the client i.e.,  the Licensee, who is located in another country, to use the software adhering to the terms and conditions mentioned in the agreement. This process is done in exchange for remuneration.

This agreement is usually drafted keeping in mind the licensor’s requirements and includes general provisions and clauses which the licensee needs to accept compulsorily. However, there is room for minimum changes and negotiations, if required, especially when the software is being custom-made, based on the client’s requirements.

2. International Software Distribution Agreement

In this agreement, the Licensor exclusively allots the rights of exploitation to a third party, i.e., the Distributor, in a specific region or country, who then sells them to Licensees within that region or country. The Licensor receives a certain amount and royalties after the software is sold by the Distributor in the respective region.

The important clauses of international software   agreements   are   explained   below, which also depicts the differences between a software license agreement and a software distribution agreement:

• Parties

Personal information of the parties that sign the contract should be necessarily included in the heading of the agreement itself. The Licensor should make sure that if any person is signing on behalf of the company; he/she should prove his/her legal representation and has sufficient powers to do so.

In a software license agreement, the purchaser or licensee can be a company or a natural person, but in the case of a software development agreement, it is generally a company.

• Definitions

This is one of the most important parts of the agreement as it plays a vital role to avoid conceptual differences or confusion.  This  section  includes  definitions  and  explanations  of the technical aspects involved in the software. Some commonly defined terms  are- “Software Materials, Source Materials, Product Code, Intellectual Property Rights, etc.”

• Object of the Agreement

The purpose of the agreement, i.e.,  the authorization for exploitation by the owner to a client, should be mentioned in the agreement. In the case of a distribution agreement, the object of the agreement is the assignment of the rights  to  a  Distributor,  who  then transfers them to end-users in a designated country.

• Term

 If the parties intend to establish a specified term or duration in the agreement, a possibility of renewal should be considered. The term is usually 5 years, both in the case of license and distribution agreements.

• Exclusivity

It should be explicitly mentioned in the agreement whether the Licensee will have any right or possibility to transfer the license to a third party.

Normally, in the license agreement, there is no possibility of further reselling or transfer of the license subsequently by the Licensor whereas, in a distribution agreement, the Distributor is given the option to sell the license in the market, to the third parties,  in a limited geographical region. Therefore, the Distributor can exploit the license in that designated zone or country only.

• Remuneration and Currency

“Remuneration is the price paid by the licensee for the use of the software.” Typically, the remuneration is unique and paid according to the software and is variable in  nature. Usually, in a license agreement, the price is decided in the contract and is non-negotiable. On the other hand, in a distribution agreement, the Licensor receives the initial amount and royalties as and when it is sold by the Distributor.

As the process happens globally and across countries, one important aspect to be decided is the currency of the remuneration. To avoid future risks and disagreements, it is recommended that such factors be discussed with all parties involved and then explicitly included in the agreement itself.

• Warranty

The Licensor is advised to include this section in the agreement which will provide details of the responsibilities arising out of possible software damages if any. Generally, the Licensor tries to limit the responsibilities arising out of such situations.  If the third party or the client tries to modify the software, no warranty or guarantee shall be provided.

• Responsibility

These clauses play a vital role as they can be accepted in Courts of Justice if required. It is very important to limit the liabilities and responsibilities of the Licensor; however,  it can never be non-existent.

• Intellectual Property Rights

It shall determine the ownership of the software program. Usually, all the IPRs and ownership lay with the Licensor and cannot be transmitted to the Licensee, third party,  or the Distributor in a software distribution agreement.

However, regarding trademarks, it should be necessarily specified in the software distribution agreement that the Distributor shall not use the trademark in any country until and unless it has been registered by the Licensor. Also, it is advised to mention in the agreement that under no circumstances can the trademark be combined with any other trademark, trade name,  or designation of the Distributor unless the Licensor expressly states so, in writing.

• Notices

This clause specifies and lays down the different modes or ways of communication and their effects on all the parties involved.

• Applicable Law and Competent Jurisdiction

The law applicable to the agreement shall be established and mentioned. The competent jurisdiction shall govern that which Court can hear the disputes arising from the agreement in the future or if there are any violations of the terms of the agreement or any such issues. It should be also mentioned whether any alternative dispute resolution methods can be opted for. Every detail about the mechanism and process of alternative dispute resolution shall be mentioned in the agreement.

“In the Software License Agreements, when the user (Licensee) is a consumer, the competent jurisdiction will be one of his or her domiciles; on the contrary, if it is a company for which custom software has been made, it will normally be the jurisdiction of the Licensor. In the Software Distribution Agreement, the jurisdiction that best suits the Licensor is usually agreed upon, which is usually Licensor´s country.”

• Expenses and Taxes

This clause is generally included in software distribution agreements and not in software license agreements. It is advised to put it down in writing as to who shall be paying the expenses and taxes derived from the reselling of the software to the end-users. It is usually paid by the party or client.

• Termination of Contract 

Both the parties should agree and establish the grounds on which the contract can be terminated, for example- breach of obligations, time-lapse, etc. The parties can establish as many grounds as needed. This  shall  limit  the  scope  of miscommunication if any such situation arises.

PRECEDENTS PERTAINING TO SOFTWARE AGREEMENTS

In the leading case law of Tata Consultancy Services vs. State of Andhra Pradesh [Appeal (Civil) 2582 of 1998], The Supreme Court laid down that computer  software  are  considered  as  ‘goods’ and thereby whether they come with computer or independently,  canned  or  un- canned, tangible or intangible, the software is capable  of  being  transferred, transmitted, stored and processed therefore they will be liable to be taxed. Also, the provisions of the Sales Of Goods Act, 1930 will apply to computer software.

In Liberty Bay Credit Union v Open Solutions, Inc (Civil Action No. 11-10189-RGS), the agreement was for the development of loan origination software but for four years the project was not delivered, also the software suffered from defects. The vendor during these periods requested more time and the client allowed but the software was not delivered within the time. The client subsequently terminated the contract and demanded a refund and damages for the loss incurred due to the delay. Meanwhile, the vendor sued the client for the recovery of the balance amount under the agreement.

The method of payment for the project was explicitly stated in the agreement, and the vendor stated that he would not continue until the client made the scheduled payments. Due to the client’s refusal to pay, this lawsuit for damages was filed. Massachusetts U.S District Court laid down three observations that are relevant to understand the scope and extent of the developer’s liability in case of defect and delay.

Ruling of the Court

1. The Court observed that the license agreement provided performance time i.e., the time within which the project should be completed. This clause was waived by the client by allowing extension of time, but the extension should be read as “extension for a reasonable period” and not for an “indefinite period”. Now, in the instant case, one year expired but the project was not delivered and therefore, it is the vendor who will still be liable for breach of contract.
2. The developer had argued that the client cannot seek damages since the client waived its right by giving two chances to the developer. The Court rejected this argument and held that this cannot be considered as a waiver. The client can still claim damages for subsequent breaches.
3. The contract was based on a scheduled milestone payment system and it was contended by the vendor that the client had breached its payment obligations but The Court ruled that when the client offered an extension, the vendor approved it and continued working despite not being in accordance with the contract terms. As a result, the vendor cannot use this as a defense against its liability to the client.
4. The license agreement had a “limitation to liability” clause which prohibited the client from claiming consequential damages and could claim damages only to the extent of monies paid. As a result, the client is limited to claiming damages against the payment made under the agreement and is barred from claiming lost profits.

The Court upheld the clause and barred the client from claiming profits lost as a result of defects or loss as a result of defects.

AMLEGALS REMARKS

Drafting legal documents per the need of the case is one of the prime tasks which needs to be done diligently. The negotiation phase is the most important step in drafting any software agreement because it is during this time that all requirements and details relating to the product likely to be offered by the developer/licensor are discussed, so this should be executed with maximum clarity and all-important clauses should be agreed upon and included in the contract.

Even common terms can have different meanings in different contexts, so the definition clause should be carefully drafted to leave no room for ambiguous interpretation by either of the parties.

Software agreements contain minute details which need to be dealt with keeping in mind the nature of the agreement. Even though software agreements are to be drafted following the common standards of drafting any agreement, however the nature of such software agreements have underlying differences.

Certain clauses such as the IPR clause, the definition clauses defining the technical terms, the exclusivity clause, etc., are of prime importance in software agreements. Hence, such agreements should be crafted uniquely per the legal needs of the case.

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For any query or feedback, please feel free to connect with arushi.vyas@amlegals.com or malvika.kapur@amlegals.com.