Print Friendly, PDF & Email

Practical Tips in Negotiating and Preparing an IT Licensing Agreement

Information Technology (“IT”) is currently a pervasive element in most of the business entities to ensure the efficiency of their business operations. Due to this reason, IT licensing becomes a common arrangement between the owner of a system or software (known as “the licensor”) and the business entity who is desirous to obtain the license to use the licensor’s system or software (known as “the licensee”).

The following may be taken into consideration by the licensee in negotiating and preparing an IT Licensing Agreement:

 

IT Licensing Agreement should comprise of both legal provisions as well as the technical documents

It is important to ensure that an IT Licensing Agreement incorporates these two (2) components. Normally, the body of the IT Licensing Agreement will comprise of the legal provisions while the technical documents will be annexed in the schedules of the IT Licensing Agreement. The technical documents to be annexed to the IT Licensing Agreement should include but not limited to the detailed specifications of the system or software being licensed, functional requirements (i.e. what the system is capable of performing), the user acceptance test to be conducted as well as the acceptance criteria to be achieved pursuant to the user acceptance test. By having the technical documents forming part of the IT Licensing Agreement, it may prevent any subsequent dispute between the parties particularly with regard to the execution of the parties’ obligations under the IT Licensing Agreement.

 

Parties involved in respect of the deliverables under an IT Licensing Agreement

It is important to ascertain whether the deliverables to be delivered by the licensor under the IT Licensing Agreement are to be delivered solely by the licensor (particularly when the subject matter being licensed is solely owned by the licensor) or whether the licensor will also depend on the third party to successfully deliver the deliverables and perform its obligations under the IT Licensing Agreement (as in some cases, the licensor is merely a local representative office in which most of the deliverables will be undertaken by its main office, normally located in overseas). It is always advisable that the licensee to execute the IT Licensing Agreement directly with the owner of the system or software to be licensed. However, in case of the later, it is strongly advised that the terms and conditions in the IT Licensing Agreement to be carefully drafted in such a way to capture such arrangement and the agreement of the licensor to procure the agreement of its main office to ensure the licensor is capable to perform its obligations under the IT Licensing Agreement. Similarly, the IT Licensing Agreement must clearly stipulate that despite the said arrangement, it will not release the licensor from performing any of its obligations as detailed out in the IT Licensing Agreement. The IT Licensing Agreement also should prohibit the licensor from assigning its rights or obligations under the IT Licensing Agreement without the prior written consent from the licensee.

 

User acceptance test

It is crucial for user acceptance test to be conducted as part of the licensor’s obligations under the IT Licensing Agreement. This is to test whether the system or software being licensed operates according to the functional requirements and successfully achieve the acceptance criteria set out by the licensee. The IT Licensing Agreement should clearly stipulate all the relevant terms and conditions relating to user acceptance test such as the preparation of the test data/test script, test scenario, the procedures to be adhered to in conducting the user acceptance test as well as the proper environment needed in performing the same. It is pertinent to stipulate in the IT Licensing Agreement that the system or software being licensed will only be accepted by the licensee once such system or software successfully achieved the acceptance criteria pursuant to the conduct of the user acceptance test and the licensee has signed the certificate of acceptance to signify its acceptance of the system or software being licensed. In some cases, where possible, it is strongly advisable that the payment should only be made to the licensor once the licensee has signed the certificate of acceptance.

 

Performance timelines, milestone, payment schedule, warranty period and performance bonds

It is important to ensure that the IT Licensing Agreement incorporates the detailed timelines for the performance of the licensor’s obligations under the IT Licensing Agreement as well as the milestone to be met by the licensor. This is to measure the performance of the licensor and to ensure that a particular project which involves the IT licensing to run on schedule without any delay.

To protect the interest of the licensee, it is strongly advised that the payment to be made to the licensor to be tied to the milestone achieved by the licensor, so as to minimize the licensee’s risks as well as to encourage the licensor to perform its obligations and to achieve the agreed milestones in accordance with the agreed timelines.

Despite the signing of the certificate of acceptance by the licensee, the IT Licensing Agreement should provide for warranty period of the licensed system or software.

This is because, there is no bug-free software and the licensor should do whatever necessary (including undertaking enhancement or update) during the warranty period to ensure that the licensed system or software will perform at its optimum level.

The licensee also should require the licensor to provide in favour of the licensee a performance bond to ensure the licensor will at all times perform its obligations under the IT Licensing Agreement.

 

Maintenance services

It is important for the IT Licensing Agreement to provide for the provisions on the maintenance services to be provided by the licensor to the licensee.

The scope of the maintenance services (which normally involves preventive and corrective maintenance) and the manner how the maintenance services are to be provided (i.e. helpdesk or on-site) must be clearly spelt out to avoid any subsequent dispute between the parties as well as to avoid the licensee from paying an extra amount for maintenance services not covered under the agreed maintenance services. There must be a service level agreement imposed on the licensor in discharging its obligations relating to the maintenance services. Further, it is strongly advisable to impose a penalty on the licensor (the amount of which to be clearly stipulated in the agreement) in the event it had failed to meet the agreed service level agreement in providing the maintenance services. This is to ensure that the licensor meets its service level agreement as the same is crucial to ensure the smooth business operation of the licensee.

 

Execution of the Source Code Escrow Agreement

It is interesting to note that in most cases, a licensee will in its day-today operation, rely heavily on the system or software licensed by the licensor. The problem will arise when the licensors involve in legal matters which prevent them from effectively perform its obligations pursuant to the licensing of the system or software such as providing the maintenance services on the licensed system or software.

A clear example of this circumstance is when the licensor is in the process of being wound-up for any reason.

To ensure that the licensee is able to continue the effective use of the licensed system or software, it is strongly advisable for a licensee to execute a source code escrow agreement with the licensor and an escrow agent (whose appointment is to be agreed by both licensee and the licensor) in addition to the execution of the IT Licensing Agreement to capture the agreement of the licensor to deposit with the appointed escrow agent, the source code of the licensed system or software as well as the licensor’s agreement for the release of such source code to the licensee in the specific circumstances as defined in the source code escrow agreement for the licensee’s limited use to continue its operation.

It is strongly advisable for the licensee to raise the above issues in negotiating the IT Licensing Agreement with the licensor as well as to address all the issues mentioned above in the IT Licensing Agreement to ensure that the rights of the licensee will be protected.

 

Written by:

Khairul Fazli Abd Kadir (Partner) khairul.fazli@azmilaw.com

Azarith Sofia Aziz (Partner) azarith.sofia@azmilaw.com