Software Licensing and Maintenance Contracts: Legal Issues

Software licensing and maintenance contracts are the key legal foundation when supplying software. The biggest change seen in software licensing has been the transition from suppliers installing software at their customers’ premises and so on the customer’s server, to offering software-as-a-service (SaaS) via cloud computing. This allows suppliers of software, when using the SaaS model, to keep software on their own server and hence gain stronger control over its access and use. However, you would be mistaken to believe that the days of bespoke software designed and installed for a specific customer are gone. See the case from last year, CIS General Insurance v IBM [2021] EWHC 347, where IBM were contracted to implement a new IT solution for Co-op’s insurance business, failed to meet acceptance standards, and were eventually ordered to pay £15.8 million in damages. A lack of understanding of IBM’s contractual arrangements played into the extent of the damages award.

What is software?

Software can be broadly split into three groups:

• Operating system – this is the software which runs the basic function of a computer and enables it to support the other layers of software. It is, in a sense, the bridge between a computer’s hardware and the applications then visible to a user.
• Utility software – is software designed to help analyse, configure, optimize or maintain a computer. It is used to support the computer infrastructure – in contrast to application software, which is aimed at directly performing tasks that benefit ordinary users. Examples include network management software and virus protection software.
• Applications – this software serves the direct needs of users. It allows users to undertake word processing, emailing, browsing the web etc. This is the final layer of software which, as far as most users are concerned, is the only software viewed.

When entering into software licensing and maintenance contracts it is important to be clear about which kind of software is being supplied, as the legal obligations will differ. In general, operating systems are offered by suppliers of computers on their standard terms. This is usually the case for utility software as well (although it can sometimes be bespoke). The rest of this blog will deal with application software which is more often bespoke and therefore the terms of its supply are more often negotiated by the parties.

Software Licensing and Maintenance – permitted use

Suppliers will usually only supply software on a non-exclusive basis. This is so they can market and supply their software product to other customers. A supplier will often also restrict the use of software in certain ways, for example, by reference to:

• The identity of the customer or a group of users associated with the customer.
• The identity and number of machines or operating system environments on which the software is loaded.
• The purpose for which the software is used.
• The number of concurrent users of the software.
• The volume of the processing handled by the software.

Permitted use – case law

The importance of wording around permitted use of software in software licensing and maintenance contracts was explored in the case SAP UK Ltd v Diageo Great Britain Ltd [2017] EWHC 189. Here are the facts:

• From May 2004, Diageo was licenced to use various SAP products, including mySAP ERP and SAP Process Integration. The licence to access and use this software was on a named user basis. Fees for SAP ERP were calculated by reference to various fees for categories of named uses. Fees for SAP PI were calculated on the volume of messages processed by SAP PI.
• From 2011/2012 Diageo used a system called ‘Connect’ and a platform provided by Salesforce called ‘Gen2’ which passed messages back and forth with SAP ERP and SAP PI. SAP claimed that these new systems “used” or “accessed” the SAP systems, that they were not permitted “users” of the software and that Diageo therefore owed additional licencing and maintenance fees totalling £54 million.

The High Court ruled in favour of SAP and so Diageo was liable to pay additional licencing fees. On the “plain and obvious meaning of the words in the licence”, only “named users” were authorised to access the SAP software. No “Named User” category in the schedule to the software licencing and maintenance contract applied to the type of access created by ‘Connect’ and ‘Gen2’ and therefore Diageo was liable for that usage.

This case highlights the importance of acknowledging the change in circumstances when engaged in long term software licensing and maintenance contracts. This is heightened by the fast pace of technological development and therefore potential changes outside of the control of a party.

Software licensing and maintenance – open-source software

The majority of software developed in more recent times incorporates open-source software (OSS). OSS is software with source code that anyone can inspect, modify and enhance. Source code is the part of software that most computer users don’t see; it’s the code software developers can manipulate to change how a piece of software, such as an application, works. The authors of OSS allow others to do a variety of things such as view the source code, copy it, learn from it, alter it or share it. Users of OSS must accept the terms of the OSS licence for each particular bit of OSS they use. Due to the fact that OSS is often used by developers to create new pieces of software which become subject to software licensing and maintenance contracts it is important to understand the scope and nature of each OSS licence when entering into such contracts. OSS licences generally fall into two categories: permissive OSS licences and restrictive OSS licences:

• Permissive OSS licences usually only require that the distribution of the original OSS be on the same terms as those on which it was provided to the developer. Permissive OSS licences are generally compatible with commercial software licencing and maintenance contracts.
• Restrictive OSS licences, by contrast, impose restrictions on the ways in which the OSS and any amendments to it can be distributed. Therefore developers may find it difficult to licence software incorporating restrictive OSS licences because the OSS may not be permitted to be used for the commercial purposes intended.

Both the supplier and customer need to have a good understanding of all the OSS incorporated into any software they wish to use commercially. For the supplier this will stop them wasting time developing software which includes licences incompatible with their desires and for customers it will ensure they can continue to use the software without interruption from OSS authors.

Acceptance tests

The customer may require the supplier to carry out formal acceptance tests before accepting delivery of the software. For the customer, successful completion of these tests could be a condition of payment of a retained proportion of the licence fee to incentivise successful completion. The supplier, however, will often argue that no retention of a proportion of the licence fee in the software licence and maintenance contract should exist, and that the customer should rely upon a warranty ensuring the supplier fixes any faulty parts of the software once delivered (if such warranty exists).

Software licensing and maintenance – support and maintenance

Customers will often want to ensure that software they licence has support and maintenance provisions contained within the contract licensing its use. This means that once the piece of software has been handed over for use by the customer, if its functionality is faulty, the supplier or a third party will step in to fix the problem. This could be because the customer simply does not have the technical know-how to fix such problems or, in more complex situations, it could be because the original developers input would be very valuable given the nature of the software.

Support and maintenance provisions often come in the form of Service Level Agreements (often referred to as SLAs) and are usually added as a schedule to software licensing and maintenance contracts. A service level agreement usually details the response time required for a fault categorised by severity. You can read more amount support and maintenance in our blog: Software Support and Maintenance Agreements – Our Guide.

Here to help

This blog covers a few legal issues involved in software licensing and maintenance contracts. There are many more. The case law cited above (SAP UK v Diageo) highlights the importance of ensuring any software licensing and maintenance contract is specifically tailored to the commercial reality of the software being licensed. Given the fast moving world of technology, the circumstances in which companies market such products can change rapidly and so having a strong idea of the legal underpinning from the outset can ensure effective reviews of that position further down the line.

Another issue to consider is data protection. The move to cloud computing and the SaaS model of supplying software has meant that software suppliers are usually storing large quantities of customer data on their own servers. Read our blog: SaaS Providers: Data Protection for more information.

EM Law specialises in technology law. Get in touch if you need advice on software support and maintenance agreements or other technology law matters.