Overview
The procurement of software by multinational businesses raises particular issues, both contractual and practical. First and foremost, each customer entity that will use the software must be licensed. In this QuickCounsel, we look at some options for structuring multinational software licences and consider key issues that vendors and customers need to address in the licence agreement.
Defining the Customers "Group"
Whatever licensing structure is used (see "Choosing the right licensing structure" below) each company within the customers group that will use the software must be licensed to do so. This can be addressed by:
- Naming specific customer entities. The customer should secure a right to extend the licence to future group companies through an agreed "change control" process; Defining the "customer group". The customer should check that this definition and related terms such as "subsidiaries" and "holding companies" cover all of the intended licensees and future scenarios. (For example, in a 2011 UK Supreme Court case, the Court ruled that a company ceased to be a "subsidiary" as defined in the contract, where the shares held by its holding company were pledged to a bank and the banks nominee became the registered holder.)
Choosing the Right Licensing Structure
It is important to select the right licensing structure for your organisation. This should be decided early in the engagement, as it will impact the rest of the contractual terms.
The "right" structure will depend on a number of factors, including:
- Are existing intra-group arrangements are in place to accommodate group-wide multinational licensing (for example, accounting policies, contracting policies, claims handling and liability issues)? Is local legal support - in-house or external - available in-country to support contract localisation to reflect local laws, if required? Does the business have a centralised approach or do local country affiliates have a degree of autonomy?
Options for structuring the licence include:
A global group-wide licence
Structure: Here, the vendor and customer contract at group level so that licence allows the customer and its group companies to use the software (see "Defining the customers group" above.) The customers local affiliates have the benefit of the licence but without having a direct contractual relationship with the licensor. This structure benefits from simplicity of documentation - there are no "in-country" schedules or special conditions to worry about - but the licence agreement will need to address issues around responsibility/liability for local affiliate breaches, the treatment and recovery of losses suffered by local affiliates, particularly in common law jurisdictions where "privity of contract" rules may prevent a person who is not a contracting party from enforcing the agreement, and the handling of claims. Tax and accounting issues are beyond the scope of this QuickCounsel, but the customer should also consider the intra-group accounting treatment of the licence fees and any support fees if customer affiliates will receive or benefit from support and maintenance services.
Enforcement by the vendor: The vendor may require the contracting customer entity to assume responsibility for local affiliates compliance with the licence terms and to be liable for any breaches. The customer, in turn, will need to consider whether its own intra-group arrangements permit it to assume liability for its group companies in this way.
Local affiliate losses: The customer should ensure that there is a mechanism, either within the contract or under the governing law of the licence agreement, for both the customer and its affiliates to recover their losses in the event of vendor breach or if the customer invokes an indemnity.
Enforcement by the customer and/or local affiliates: Both parties should consider whether the customers local affiliates will have the right to enforce the licence agreement against the vendor. (In some common law jurisdictions, the rules of privity of contract have been displaced either by legislation that allows outsiders to sue on the contract, or by case law. See for example, the Contracts (Rights of Third Parties) Act 1999, which applies to England, Wales and Northern Ireland; similar legislation is currently under consultation in Hong Kong.) (See also "Handling claims" below.
"Framework" licence
Structure: An alternative structure is the framework licence. The vendor and customer agree (at global level) the licence terms that will govern local affiliates use of the software and a process for local affiliates to "call-off" licences as needed. Each "call-off" constitutes a separate agreement between the relevant local affiliate and the vendor (or the vendors local affiliate); and each call-off incorporates the framework licence terms. Depending on the preferred approach (centralised or devolved) the framework terms can be amended to reflect local practical and legal requirements. This can be useful if the vendor offers different software solutions for different jurisdictions, or to reflect local support requirements such as language and support hours. Frameworks can be efficient from a procurement perspective, as they require one-time negotiation between the customer and the vendor, leaving in-country engagement on local legal requirements only. However, they do require local legal support (see "Localising licence terms for in-country-use")
Localising licence terms for in-country use: Both parties will need to consider whether local affiliates may agree changes to the framework licence terms for their local use. It may be that there are mandatory local laws that cannot be avoided by contract, in which case, allowing local changes is a sensible approach. Common issues when localising technology supply and licensing contracts in any jurisdiction include:
- Limitations and exclusions of liability: Local laws may restrict the parties ability to limit and/or exclude liability for certain types of losses; Warranties: In some countries, warranties may be implied in respect of ownership, fitness for purpose and quality; Permitted acts: In Europe, licensees of software have certain rights that cannot be exclude by contract, for example, the right to make a back-up copy of a programme, the right to decompile a program to achieve interoperability with another program (subject to stringent conditions) and the right to observe, study or test of the functioning of a program. Prohibitions on assignment: In Europe, a clause in a perpetual software licence that purports to prohibit transfer/assignment of the software to a third party may not be effective if the licence is granted for a one-off fee. This is a consequence of a 2012 decision from the European Court of Justice on the application of the "exhaustion principle" to software licences. The position in Europe therefore differs from the United States. See for example, the US Court of Appeals (9th Circuit) decision in Vernor v Autodesk, and more recently, in the context of digital downloads, the decision in Capitol Records LLC v ReDigi Inc. Governing law: Careful thought should be given to the governing law of local "call-off" licences. If the call-off licence is to be heavily amended to reflect local law requirements, then it may make sense to apply local law, although the parties should be mindful that this may lead to unexpected results under local rules of contract interpretation. Either way, the safest course is for local counsel to review the call-off licence from a local law perspective.
Liability: Both the customer and the vendor should ensure their liability and the liability of their local affiliates is appropriate excluded and limited both at the local "call-off" level and at the framework level. It is easy to overlook that the framework licence agreement may create obligations and liabilities between the "global" customer and vendor, independent of the local call-offs. Also, if the same vendor and/or customer entity is party to both the framework licence agreement and to a call-off, then there is a risk that the same act/omission could give rise to liability under both contracts. This could be addressed by stating that in these circumstances, liability will be treated as having arisen under one or other of the agreements, and the limits/exclusions in that agreement will apply.
Other Issues
Handling claims
Vendors may balk at the prospect of multiple claims from local affiliates all related to the same issue. One option is to include a claims handling process that requires all disputes/claims to be channelled through the principal customer and principal vendor. This would need to be reflected in the parties own intra-group governance arrangements.
Testing and acceptance
If the customer intends to have a phased implementation of software across multiple territories, then the parties will need to consider whether the software will be subject to acceptance testing on first installation only or following installation in each territory. If the latter, then the licence agreement should address the consequences of the software failing acceptance testing in one territory (even if it has "passed" acceptance testing in another), including for example, a right for the customer/local affiliates to terminate their licences in other territories.
Escrow
A key question is whether all of the customer entities licensed to use the software should also be entitled to access and use the source code if it is released under any corresponding agreement(s). The customer will be in a stronger position to argue for group-wide use of the source code if the vendor is providing consolidated support and maintenance services across the customers group; less so if support is delivered under separate local support agreements between customer and vendor local affiliates.
Conclusion
When drafting or negotiating multinational software licences, its important to assess all aspects of the licensing arrangement in the context of:
- Multiple licensees Who might (or might not) have a direct contractual relationship with the licensor In different territories, possibly with different laws.
We hope that this QuickCounsel shows that the chosen licence structure impacts not only the contractual terms of the licence agreement but also the customers intra-group arrangements.
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