Negotiating the Risks of Software Contracts – The Three Risky Provisions

Software and service contracts come with many potential risks, and companies should be careful when initiating a new contract or renewal. It is considered a best business practice to negotiate the terms of a software or service contract before agreeing to the initial terms provided by a vendor in the contract. There are many contractual provisions that can be negotiated, but the main risk provisions found in most contracts are: (1) Limitation of Liability, (2) Indemnification and (3) Guarantee. These contractual arrangements must be considered in conjunction with each other as they cannot be negotiated effectively without determining how they influence each other.

Limitation of liability is one of the main contractual provisions negotiated in a software contract. The limitation of liability limits the liability of each party for breach of contract or list of damages for all kinds of damages. The liability of a software publisher is generally limited to the amount of fees paid to the seller or a fraction thereof. The risk of not negotiating these conditions is that the licensee will be capped on the amount of damages. This ceiling may not correspond to the actual amount of damage. The best way to negotiate these contractual provisions is to draft the provision so as to: (1) increase the damage limit, (2) negotiate insurance coverage, or (3) negotiate a waiver of the limitation that excludes certain types of damage. limitation of liability claims.

An indemnity clause obliges one party to bear the pecuniary and defense costs, either directly or by reimbursement, for losses suffered by a second party. It shifts the potential costs from one party to another. A potential claim is an intellectual property (“IP”) infringement claim. Licensee may seek reimbursement of costs incurred in defending a third party claim that the licensed software infringes the intellectual property rights of the third party. For this reason, licensees should be careful to negotiate appropriate protections for third party claims.

The best way to negotiate this provision of the contract is to include indemnification provisions that the software or the service provider will be liable if the licensed software infringes the intellectual property of a third party by requiring that the software or the vendor service provider does the following: (1) license the infringing code so that it can legitimately provide it to you; (2) modify the counterfeit code so that it no longer infringes the intellectual property rights of the third party; (3) replace infringing code with code that does not infringe the intellectual property of the third party; or, if none of the above solutions is possible, (4) the software publisher will reimburse the license fees (but beware, the license fees will rarely be sufficient to compensate for the losses suffered if the software publisher has infringed intellectual property of a third party). There are also indemnification provisions that can be negotiated for damages suffered by a service provider who provides services on commercial property, such as personal injury, death or damage to personal, real or bodily property resulting from negligent or intentional acts or omissions. . These should also be carefully negotiated to avoid any potential risk.

A warranty in software or a service contract is (1) a formal promise from a supplier that the product is free from defects or that the service will be performed in a professional manner, and that if it does not, (2 ) how the seller will deal with rectifying defects in the product or service. The best way to negotiate this provision of the contract is to include guarantees that promise to protect the licensee against warranty failures. The warranty section must include some of the following warranties: (1) the software or service provider has the necessary equipment and qualified personnel to perform the services in accordance with industry standards, (2) the services will be performed in a professional manner (3) the software or service provider will comply with all applicable laws (4) the software or service provider ensures that it maintains an information security process with physical safeguards appropriate for the sensitivity of the information customer (5) warrants that the software will perform its functions and (6) warrants that the software is free from material or hidden defects.

Remember, it is always important to seek advice from experienced advisers so that you understand all the risks involved in negotiating software and service contracts.


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