24 February 2024

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Software Contract

Guide To Software Contracts: All you need to know

Introduction

A “contract” is a document in which two or more parties agree on written clauses. A contract is valid for a set amount of time; after the task is completed, the contract is terminated. A “software contract” is a contract between two parties in which one party is the “software provider” and the other party, the “software user,” spells out all of the requirements expected of the other party. 

The software provider is the software company that grants the software user access to the software for a set length of time based on the terms of the contract, and the user has access to the program until the contract is terminated or ends. This page examines software contracts and all associated topics. 

What is a software contract?

A software contract means that an owner grants the authority to use software contract programs to create, read, and edit the contract’s record. To build a software contract, the software provider will deliver an order form or any other document outlining the business terms and conditions, such as how frequently you will be paying, how much you will be spending, and other commercial data. 

Before signing any document, it should be properly read and the signer should understand what they are signing. The software user and provider are free to add terms that meet their needs, but both parties are free to accept or reject clauses that do not meet their needs.

Ownership 

The software company will be the sole owner. Only access will be allowed to the buyer, and only for the time period specified in the contract.

Associated license

The license can be associated with three line items, each of which can be chosen.

Associate by Software Product

Click on “associate by software product ” to select from the list that are associated with the software product. 

Associate by Vendor

Click on ” associate by vendor” to select from the list that are associated with lists of vendors.

Associated License 

Click on “associated License ” to select the list of available licenses.

Features of software contracts 

Software contracts consist of five elements. They are as follows: 

Usage and Restrictions: This specifies the user what are his rights and restrictions. The customer cannot license, sell or rent his non-transferable rights or license to another person.

Ownership: It indicates that the software is owned by the software business. The software company grants the buyer usage and permissions. The buyer receives no ownership rights from the company.

Term and Termination: This specifies the contract’s validity. It will specify what happens when the contract is terminated or ends, as well as what happens if either of the parties terminates the contract before it is completed. It includes “terms” which are guidelines for contract termination.

Fees and payment: This shows the payment method. It specifies the currency (INR or USD) and the deadline for payment. It also includes provisions for late fees, installments, and payment after the work is completed.

Indemnification: The phrase “Indemnity” signifies that if one party suffers a loss or injury, the other party will compensate them. For example, an insurance firm guarantees the insured that if they incur a loss, the insurance company will compensate them. The software contract includes sections that allow the client or buyer to sue the software firm if they suffer a loss due to hacking, data leakage, or breach of contract.

Legal viewpoint on software contracts

  • Infotech dealer vs Union of India (2010)

In this case, it was held that the case relates to an “End User License Agreement (EULA)” and the court dismissed the writ petitions holding that the software is goods and whether the transaction amounts to sale or service would depend on the individual transaction and, as a result of that challenge, the amended provision cannot be held to be unconstitutional so long as the Parliament has the legislative competency to enact law in respect of tax on service in exercise of powers under Entry 97 of List I of Schedule VII.

  • The Commissioner of Income-tax vs Zte Corporation (2021)

It was decided in this case that the buyer is granted a limited, non-transferable, perpetual, non-exclusive license to use the software and documentation provided under the contract. The buyer has no title or ownership rights under the contract between the assessee and the customers.

  • KILITCH Drugs Ltd vs M/S Base Information Management (2011)

In this case, it was stated that the contract under which the user acquired the aforementioned software as a license requested the opponent to cancel the license and refund the amount made by them against the contract under which the complaint was made was found to be incorrect. 

These stories demonstrate the need to thoroughly read a contract’s terms and conditions before signing it. To avoid any mistakes or misunderstandings, a provision of witnesses can be added so that if something is overlooked by the contractual party, the witness can catch the defaults and prevent any damage or loss to the user or the contractual party.

As a result, the five aspects must be carefully examined, and if there is any uncertainty, the user can seek a legal adviser to guide them through the benefits and losses associated with each provision. If the user is not satisfied with any clause, the clause can be omitted or excluded from the contract with the agreement of both parties, with the help of the legal expert.

Note: These are the 5 elements that need to be read before signing the software contract. 

If the user does not thoroughly read the clauses before signing, he cannot sue the providers for compensation or breach of trust because he will be held guilty for his own fault. The software user can negotiate before the delivery date, but there can be no negotiation after the delivery since the negotiation can be done before the work is completed according to the contract. If necessary, the user can cancel the contract by negotiating a clause that states “termination for convenience.”

Summary

A software contract is a contract between a software provider and a software user firm. It is a sort of contract that must adhere to Section 10 of the Indian Contract Act of 1872. Before signing the contract, all of the terms and conditions must be read. After signing the contract, the parties have the option to end it by mutual agreement. As a result, the software contracts deal with three key words: signed, sealed, and delivered. The Information Technology Act of 2000 specifies the consequences of breach of contract, misrepresentation, or fraud in relation to software or contracts.