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Essential Clauses to Strengthen Your Software Licensing Agreement

Author: Gaurav Shanker, Managing Partner And Yamini Mishra, Associate |

Article by Business Law Chamber

In today’s digital-driven world, software is more than just a tool; it is a critical business asset that powers operations and growth. To safeguard this asset, companies enter into a Software Licensing Agreement (SLA), which defines how third parties may use their software. The software owner (Licensor) grants specific rights to the end-user (Licensee) under controlled terms, ensuring that while the Licensee benefits from access to the software, the Licensor’s intellectual property (IP) remains protected. A well-drafted SLA prevents misuse, builds clarity, and fosters long-term business relationships. The following clauses are essential to strengthen your SLA:

Scope of Software Licence

Defining the scope is vital in establishing boundaries on how the Licensee can use the software. A well-drafted scope clause should clearly articulate:

  • Access rights – how the Licensee is allowed to access or install the software (e.g., onpremises, on designated devices, or via remote servers).
  • Permitted purpose – the specific business or functional use for which the software may be deployed.
  • User limitations – the number of authorised users or devices that can make use of the software under the licence.
  • Territorial restrictions – whether the software can only be used in a defined geographic region.

By clearly defining these parameters, the SLA ensures both parties understand their rights and responsibilities. This clarity helps prevent unauthorized use and reduces the risk of disputes caused by vague or broad language.

Intellectual Property of Software

Software embodies valuable IP, including source code, object code, and proprietary algorithms. The SLA must affirm that the Licensor retains all IP rights, while the Licensee only receives a limited, non-transferable right to use the software. This prevents unauthorized sublicensing, modification, or misappropriation. A clear IP clause protects the Licensor’s ownership and provides the Licensee with transparency on permissible use.

Term

The term clause specifies the duration for which the Licensee may use the software. Establishing a clear term is crucial as it determines when rights begin and end, helping both parties plan for renewals, payments, and obligations. If multiple software products are licensed under one SLA, it is essential for the term clause to explicitly address the scenario where the license for one of the products expires or is terminated. The term clause should clarify that the conclusion of a licence for a specific product does not automatically lead to termination of the entire agreement or the usage rights relating to other products licensed within the same SLA.

Payment Terms and Models

SLAs operate under different payment structures depending on business needs:

  • Subscription basis – periodic fees (monthly, yearly) including updates and support.
  • Fixed periodic payments – predetermined billing cycles, payable in advance, arrears, or under a deferred payment plan as agreed between the parties.
  • One-time licence fee – granting usage rights without recurring charges, with separate maintenance or upgrade fees.

The payment clause should clearly define the payment schedule, invoicing, late payment procedure, and renewal or cancellation terms to ensure transparency and smooth financial management. As a best practice, detailed payment mechanisms and fee structures may be set out in an annexure to the SLA, rather than within the main body of the agreement, allowing flexibility for future updates without amending the entire agreement.

Updates and Downtime

Regular updates ensure the software remains secure, efficient, and compliant. The SLA should outline the Licensor’s responsibility to provide patches, bug fixes, and enhancements. It must also address scheduled maintenance or unforeseen downtime, specifying notice periods to set clear expectations for the Licensee regarding service availability and communication. Defining these aspects promotes transparency, limits disruption, and strengthens trust between Licensor and Licensee.

Termination

The termination clause defines how and when either party can end the contract. Common grounds include material breaches like non-payment or unauthorized use. The SLA usually requires written notice and a cure period before termination takes effect. For SLAs involving subscription-based licences, it is important to note that the expiration or cancellation of a subscription does not necessarily terminate the entire agreement. The agreement may continue to govern other licences or obligations that remain active beyond the specified subscription period. This provides flexibility and clarity for both parties in managing ongoing relationships or multiple product licences.

Limitations of Liability

This clause caps the Licensor’s financial exposure and excludes liability for indirect, consequential, or incidental damages (such as lost profits). It often limits total liability to the fees paid under the agreement, creating predictable boundaries for risk. When dealing with Licensees, the clause must comply with applicable consumer protection laws to ensure that consumers or end users are not unfairly disadvantaged. A well-drafted limitation of liability clause safeguards both parties and promotes commercial balance.

Conclusion

A comprehensive SLA protects the Licensor’s IP, ensures predictable operations for the Licensee, and clearly allocates rights, responsibilities, and risks. By incorporating these key clauses thoughtfully, businesses can prevent disputes and foster long-term, trust-based software relationships.

Disclaimer: The views in this article are author's point of view. This article is not intended to substitute legal advice. In no event the author shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information. For any further queries or follow up, please contact us at communication@businesslawchamber.com.