The warranty side of software license and service agreements – Part I

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The warranty side of software license and service agreements - Part I

Huzefa Tavawalla and Vivek Kathpalia

With rapid growth in the technology sector, there has been a corresponding growth in more complex software contracts. Warranties form an essential part of any Indian software contract, and they vary across deal structures. The differences arise not only due to various business models, but also from the negotiating leverage of each contracting party.

Broadly, software agreements in India consist of services and licenses. In common parlance, the agreements are generally known as "service agreements" and "license agreements."

As a customer, when your organization accepts a software solution or when the vendor provides the necessary services during the term of a license or service agreement, you usually demand a warranty period. During this period, the vendor has an obligation to rectify defects that may arise in the software, or remedy any flaws that may arise during the performance of services.

Subject to applicable laws and regulations in India, the parties are free to negotiate and agree on the nature of warranties amongst themselves. However, all customers want a far more extensive warranty that goes beyond the agreement, which may extend beyond the term of the agreement rather than a plain vanilla warranty clause. On the other hand, a vendor will always want a close-ended warranty clause, thereby ensuring that there are no warranties other than those expressly agreed to in the license or service agreement.

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Industry practices

Some of the typical warranties are as follows:

• Right to enter into and perform all obligations under the agreement.
• No agreement that restricts or conflicts with the performance of both parties' rights and obligation under the agreement.
• Accuracy and completeness of technical information exchanged between the parties.
• The software, deliverables or the services performed are free from any third-party intellectual property infringement claims.

The above warranties are only illustrative, and may also be one-sided at times. Software contracts may also have express clauses in order to reflect that the services or the licensed product will comply with the specifications as mutually agreed between the vendor and the customer. Depending upon the deal size, warranties are also provided against viruses when the products (or deliverables) are developed in the vendor's environment or premises.

In case there is a breach in warranty for the licensed products or the services performed, then the recourse, which is generally agreed to is as follows:

• Rectification of the product or re-performance of the services to cure such breaches.
• If rectification is not possible, then replacement of the product.
• If none of the above remedies are available, then the vendor may refund the fees only for that particular product. If the breach is for services, then the refund will be determined on a pro-rata basis, which depends on the period that led to the deficiency in service.

Incidental clauses to warranty

Limitation of liability: Most software licenses and service agreements cap the monetary liability that may potentially arise from the breach of the above warranties. Such an amount is generally:
• The total license or service fees paid for the past six to 12 months from the date of breach; or
• A particular amount that is mutually agreed by the parties; or
• The aggregate fees paid during the entire term of the agreement.

It is now increasingly common to see that certain claims are usually carved out as exclusions to the limitation of liability clause. Thus if any situation falls under such exclusions, then the parties may claim any sums beyond the agreed limitation of liability cap.

As a trade practice, software agreements also include clauses that disclaim certain liabilities. The outcome of such clauses is that if any such liability arises or accrues, they are disclaimed.
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Some examples of such claims are given below:

• Claims that result from known viruses or other contaminants, which are possibly identified at the time of software delivery.
• Third party claims for the breach of intellectual property rights.
• Claims that result from breach of confidentiality obligations.
• Claims result from acts of fraud, willful default, and gross negligence.

Warranty disclaimer: As a trade practice, software agreements also include clauses that disclaim certain liabilities. The outcome of such clauses is that if any such liability arises or accrues, they are disclaimed. Thus the parties that disclaim such warranties have no liability to the other party, irrespective of any limitation of liability clause.

A few examples of such disclaimers are:

• Disclaimer for claims or defects that arise from combination of the licensed software with any third party software without the vendor's consent.
• Disclaimer for claims that result from modification of licensed software by the customer on his own accord without the vendor's consent.
• Disclaimer of any warranties regarding end results from use of the license software.
• Disclaimer of any claims that arise from the software's use in a manner not permitted by the license.

To learn more from this two part series read: Regulatory framework's role in warranty of software license and service agreements – Part II



About the authors
Vivek Kathpalia is a partner and heads the Singapore office of the international law firm, Nishith Desai Associates and is a registered foreign attorney. He is a senior member of the information technology, media and telecom practice group and represents clients in litigations and arbitrations in sectors ranging from technology, intellectual property, telecom, real estate and education.

Huzefa Tavawalla is an associate at Nishith Desai Associates and focuses on intellectual property, information technology, telecommunication and media and entertainment. He earned a bachelor's degree in law from the India Law Society's Law College, Pune and is a member of the Bombay Bar Association and the Bar Council of Maharashtra & Goa.

Nishith Desai Associates is a Mumbai-based international tax and legal counseling firm.

This was first published in September 2009

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