Software licenses and associated services are usually time-limited and subject to early termination. Customers should understand the term of each software license and associated services and take reasonable precautions to properly exercise renewal rights and avoid early termination.
Term
A software license agreement usually specifies the duration of the software license and of the vendor’s associated services (e.g., maintenance and technical support). A software license can be time-limited or perpetual, and associated services can be available during the entire term of the software license or for a limited period.
Where the term of a software license or an associated service is time-limited, the software license agreement may provide for the renewal or extension of the term. A renewal or extension may be automatic (unless a party opts out), at a party’s sole option, or require the agreement of both parties. Automatic or optional renewals and extensions are usually subject to limitations or pre-conditions, such as timely renewal notice and prompt payment of fees, which a party may invoke to prevent an undesired renewal. A renewal that requires the agreement of both vendor and customer provides flexibility but no certainty.
Fees payable for a software license and associated services invariably reflect the term of the software license and associated services and the customer’s ability to renew or extend the term. Fees payable for automatic or optional license term renewals or extensions are usually either pre-determined or based upon a formula (e.g., a cost-ofliving increase to the initial term fees or a discount from the vendor’s then-current standard fees).
Termination
The rights and obligations (including the software license) set forth in a software license agreement may be subject to early termination by a vendor or a customer in accordance with express or implied termination rights. Even software licenses described as “perpetual” can usually be terminated in specified circumstances (e.g., by the vendor if the customer fails to pay the license fee, or by the customer if the licensed software does not meet certain requirements).
Two kinds of termination rights are commonly found in software license agreements: termination for convenience (which allows a party to terminate for the party’s sole convenience) and termination for cause (which allows a party to terminate only if the other party breaches the agreement). Termination rights can be subject to limitations or pre-conditions, such as notice to the breaching party and a reasonable opportunity to remedy the breach. Termination rights may apply to the software license agreement as a whole or only to specific rights and obligations (e.g., maintenance and support services may be terminated separately from the software license).
A vendor or a customer may also have implied termination rights under generally applicable law. The nature and extent of implied termination rights will depend upon the particular circumstances and the express provisions of the software license agreement.
Recommendations
When negotiating a software license agreement, customers should understand the term of each software license and associated services and the circumstances in which the license and services may be terminated by the vendor or the customer. Customers should take reasonable precautions to ensure that they properly exercise renewal or extension rights and avoid circumstances that present a risk of early termination, particularly if the licensed software is mission-critical to the customer’s business operations.