These days, it is almost impossible to find an enterprise that is not relying on any software or application in their business operation. With the exceptions of off-the-shelf software such as Microsoft Office and Notion subscription, many of the enterprise software solutions out there would require the licensees to enter into a negotiated software licence agreement, which will set out the licensing terms of the software.
In a simple software deployment, the software licence agreement could be rather straightforward, and end users may even be able to adopt the software principals’ standard form software licence agreement with minimal amendments. Where a software deployment involves software integration, data migration, or some form of customisation, however, that is when the negotiation of the software licence agreement can get a little trickier and potentially get out of hand.
Here are 8 points that the procurement team or legal team should consider when negotiating a software licence agreement.
1. End Users’ Requirement
More often than not in a software procurement exercise, the procurement team and the legal team will not be the end users of the software to be licensed. In finalising the software licence agreement, it will be crucial for the team that is driving the discussion on the software licence agreement to have a good understanding of the requirements of the end users, whether the requirements relate to functionality, usability or user interface of the software. Ideally, these user requirements should make their way into the Scope of Work or Statement of Work schedule of the software licence agreement.
2. Testing and Acceptance Mechanism
A software licence agreement should provide for adequate acceptance testing mechanism, which is primarily to ensure that the software that is ultimately being delivered to the end users is functional, complies with the agreed specifications, and meets the user requirements. In formulating an acceptance test mechanism, it would be crucial to ensure that the user acceptance test is structured as the final phase of the testing before the company can decide whether or not the software meets the exit criteria of the acceptance test. The software licence agreement should adequately address the event where a software is being rejected by the company for failing the acceptance test, and circumstances in which the company can terminate the software licence agreement altogether due to acceptance test failure.
3. Service Levels
Where a vendor or software principal is supposed to maintain the software or provide continuous operational support to the use of the software, a service levels mechanism built into the software licence agreement would be key as a measurable yardstick to the services being performed by the vendor or software principal. When it comes to service levels, companies should avoid the pitfall of adopting the standard service levels offered by the software principals or vendors. Instead, the service levels should reflect the performance standards that the companies would require the vendors or software principals to meet. Otherwise, there may be a mismatch in terms of service expectations. A service credit scheme should also be included as part of the service levels mechanism to better manage the service delivery of the software principals or vendors.
4. Scope of the Licence
When it comes to software licensing, another thing to consider is the scope of the licence. While the key is to secure a right to use the software, companies should also assess whether there is a need to sub-licence the software to any of the subsidiaries within the group, whether the licence would allow the making of back-up copies of the software especially for disaster recovery purposes, and whether the usage of the software is subject to any limitations or restrictions.
5. Compliance Requirements
It would also be important for companies to consider the legal consideration requirements that they are bound to comply with when negotiating software licence agreements. This is especially so for financial institutions who are subject to the stringent requirements of Bank Negara Malaysia’s Risk Management in Technology (“RMiT”) policy document and Policy Document on Outsourcing. In finalising the software licence agreement, companies should ensure that its terms and conditions fulfil the requirements of the RMiT, wherever applicable. Separately, for companies who are bound by the Cyber Security Act 2024 and the recently amended Personal Data Protection Act 2010, considerations should also be made on whether there is a need to impose an obligation on the part of the vendors or software principals to notify the companies upon the discovery of a cyber security incident or personal data breach.
6. Intellectual Property Infringement
In a software licence agreement, the vendors or software principals are essentially granting the end users a right to use their intellectual property. In this case, companies should secure some form of remedies from the vendors or software principals, catering for the event where there is a third party alleging that their intellectual property is being infringed by the licensed software. At the minimum, companies should obtain a commitment from the vendors or software principals that they will be modifying the software to remove the infringing portions or secure a non-infringing replacement with equivalent functionalities. Where remedies are not viable, there should be a refund of fees paid in advance by the companies.
7. Payment Requirement
The licence fees payable for some software may be subject to certain use limitations. For example, a software may come with a limit on the amount of data that it can process in a year, or the number of customer profiles that it can store. Depending on the manner in which the software is being commercialised, exceeding the use limitation may not result in an inability to continue using the software, but rather the licensee may still be able to use the software albeit with additional charges. In negotiating software licence agreements, companies should be mindful of such arrangement to avoid incurring hidden costs.
8. Need for Source Code Escrow
For mission-critical software or applications, companies should consider the necessity of a source code escrow arrangement. Source code escrow is crucial to ensure that the companies can have direct access to the source code (and documentations) of the software in order to carry out maintenance in the event the software is subject to obsolescence or where the vendors or software principals ceases to provide support to the software or where the vendors or software principals are wound up for whatever reason.
Manoeuvring a software procurement exercise can either be a walk in the park or a logistical nightmare depending on the scale and complexity of the procurement exercise. Having a well-negotiated software licence agreement can help to mitigate risks greatly. In order to do that, the team that is driving the agreement negotiation will have to be well-familiar with technology and agreement structuring. With this article of ours, we hope that it can provide some helpful tips to those who are about to embark on a software procurement exercise.
◦
The Technology Practice Group at Halim Hong & Quek frequently represent our clients on various technology and software outsourcing or licensing exercises. If your organisation is planning for a software procurement exercise and would need external legal support, or if you simply would like to know more about how we can help in a software procurement exercise, please feel free to reach out to the partners of the Technology Practice Group.
About the authors
Lo Khai Yi Partner Co-Head of Technology Practice Group Technology, Media & Telecommunications (“TMT”), Technology Acquisition and Outsourcing, Telecommunication Licensing and Acquisition, Cybersecurity [email protected].
◦
Ong Johnson Partner Head of Technology Practice Group Technology, Media & Telecommunications (“TMT”), Fintech, TMT Disputes, TMT Competition, Regulatory and Compliance [email protected]
Software Licensing – Key Considerations In Negotiating Software Licences
These days, it is almost impossible to find an enterprise that is not relying on any software or application in their business operation. With the exceptions of off-the-shelf software such as Microsoft Office and Notion subscription, many of the enterprise software solutions out there would require the licensees to enter into a negotiated software licence agreement, which will set out the licensing terms of the software.
In a simple software deployment, the software licence agreement could be rather straightforward, and end users may even be able to adopt the software principals’ standard form software licence agreement with minimal amendments. Where a software deployment involves software integration, data migration, or some form of customisation, however, that is when the negotiation of the software licence agreement can get a little trickier and potentially get out of hand.
Here are 8 points that the procurement team or legal team should consider when negotiating a software licence agreement.
1. End Users’ Requirement
More often than not in a software procurement exercise, the procurement team and the legal team will not be the end users of the software to be licensed. In finalising the software licence agreement, it will be crucial for the team that is driving the discussion on the software licence agreement to have a good understanding of the requirements of the end users, whether the requirements relate to functionality, usability or user interface of the software. Ideally, these user requirements should make their way into the Scope of Work or Statement of Work schedule of the software licence agreement.
2. Testing and Acceptance Mechanism
A software licence agreement should provide for adequate acceptance testing mechanism, which is primarily to ensure that the software that is ultimately being delivered to the end users is functional, complies with the agreed specifications, and meets the user requirements. In formulating an acceptance test mechanism, it would be crucial to ensure that the user acceptance test is structured as the final phase of the testing before the company can decide whether or not the software meets the exit criteria of the acceptance test. The software licence agreement should adequately address the event where a software is being rejected by the company for failing the acceptance test, and circumstances in which the company can terminate the software licence agreement altogether due to acceptance test failure.
3. Service Levels
Where a vendor or software principal is supposed to maintain the software or provide continuous operational support to the use of the software, a service levels mechanism built into the software licence agreement would be key as a measurable yardstick to the services being performed by the vendor or software principal. When it comes to service levels, companies should avoid the pitfall of adopting the standard service levels offered by the software principals or vendors. Instead, the service levels should reflect the performance standards that the companies would require the vendors or software principals to meet. Otherwise, there may be a mismatch in terms of service expectations. A service credit scheme should also be included as part of the service levels mechanism to better manage the service delivery of the software principals or vendors.
4. Scope of the Licence
When it comes to software licensing, another thing to consider is the scope of the licence. While the key is to secure a right to use the software, companies should also assess whether there is a need to sub-licence the software to any of the subsidiaries within the group, whether the licence would allow the making of back-up copies of the software especially for disaster recovery purposes, and whether the usage of the software is subject to any limitations or restrictions.
5. Compliance Requirements
It would also be important for companies to consider the legal consideration requirements that they are bound to comply with when negotiating software licence agreements. This is especially so for financial institutions who are subject to the stringent requirements of Bank Negara Malaysia’s Risk Management in Technology (“RMiT”) policy document and Policy Document on Outsourcing. In finalising the software licence agreement, companies should ensure that its terms and conditions fulfil the requirements of the RMiT, wherever applicable. Separately, for companies who are bound by the Cyber Security Act 2024 and the recently amended Personal Data Protection Act 2010, considerations should also be made on whether there is a need to impose an obligation on the part of the vendors or software principals to notify the companies upon the discovery of a cyber security incident or personal data breach.
6. Intellectual Property Infringement
In a software licence agreement, the vendors or software principals are essentially granting the end users a right to use their intellectual property. In this case, companies should secure some form of remedies from the vendors or software principals, catering for the event where there is a third party alleging that their intellectual property is being infringed by the licensed software. At the minimum, companies should obtain a commitment from the vendors or software principals that they will be modifying the software to remove the infringing portions or secure a non-infringing replacement with equivalent functionalities. Where remedies are not viable, there should be a refund of fees paid in advance by the companies.
7. Payment Requirement
The licence fees payable for some software may be subject to certain use limitations. For example, a software may come with a limit on the amount of data that it can process in a year, or the number of customer profiles that it can store. Depending on the manner in which the software is being commercialised, exceeding the use limitation may not result in an inability to continue using the software, but rather the licensee may still be able to use the software albeit with additional charges. In negotiating software licence agreements, companies should be mindful of such arrangement to avoid incurring hidden costs.
8. Need for Source Code Escrow
For mission-critical software or applications, companies should consider the necessity of a source code escrow arrangement. Source code escrow is crucial to ensure that the companies can have direct access to the source code (and documentations) of the software in order to carry out maintenance in the event the software is subject to obsolescence or where the vendors or software principals ceases to provide support to the software or where the vendors or software principals are wound up for whatever reason.
Manoeuvring a software procurement exercise can either be a walk in the park or a logistical nightmare depending on the scale and complexity of the procurement exercise. Having a well-negotiated software licence agreement can help to mitigate risks greatly. In order to do that, the team that is driving the agreement negotiation will have to be well-familiar with technology and agreement structuring. With this article of ours, we hope that it can provide some helpful tips to those who are about to embark on a software procurement exercise.
◦
The Technology Practice Group at Halim Hong & Quek frequently represent our clients on various technology and software outsourcing or licensing exercises. If your organisation is planning for a software procurement exercise and would need external legal support, or if you simply would like to know more about how we can help in a software procurement exercise, please feel free to reach out to the partners of the Technology Practice Group.
About the authors
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”), Technology
Acquisition and Outsourcing, Telecommunication Licensing and
Acquisition, Cybersecurity
[email protected].
◦
Ong Johnson
Partner
Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”),
Fintech, TMT Disputes, TMT Competition, Regulatory
and Compliance
[email protected]
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