Best Practices in Drafting Software Contracts

On May 19, the American Law Institute approved the Proposed Final Draft of the Principles of the Law of Software Contracts. The 305-page document presents best practices that should be taken into account when drafting software contracts.

Implications of the Principles for Drafting Software Contracts

Here are some implications of the Principles that I find most interesting:

• Section 2.03(d) says, in part, that “in the case of standard-form transfer of generally available software, mere notice of a material modification sent by one party is insufficient to prove agreement by the other party, even if the original contract authorizes this manner of modifying the contract.” Implication: If a website’s terms governing use of software include a provision stating that the licensor (website owner) may change the terms of use merely by notifying the licensee (user) of the change, that provision would not be enforceable under the Principles.
• Section 3.02(b) says, in part, that “the transferor creates an express warranty to the transferee [by a]n affirmation of fact or promise made by the transferor to the transferee, including by advertising [or a]ny description of the software made by the transferor to the transferee [or a]ny demonstration of software shown by the transferor to the transferee on which a reasonable transferee could rely….” Implication: Software licensors should review the accuracy of their advertisements, product collateral, packaging and demonstrations to minimize the likelihood that any inappropriate express warranty will be created.
• Section 3.05(b) says, in part, “A transferor that receives money or a right to payment of a monetary obligation in exchange for the software warrants to any party in the normal chain of distribution that the software contains no material hidden defects of which the transferor was aware at the time of the transfer. This warranty may not be excluded.” Implication: While no one can reasonably expect software to be perfect, licensors should not conceal known defects that would result in the licensee not receiving substantially what it bargained for.
• Section 3.11(e) says “The cumulative effect of nonmaterial breaches may be material.” Implication: Many small software defects, together, can entitle the licensee to remedies for material breach.

Not Binding Law

The Principles are not binding law, like statutes or court decisions. Nevertheless, many courts find ALI publications highly persuasive. Accordingly, software licensors, and anyone else who is drafting software contracts, should review their existing agreements and seriously consider modifying any provisions that conflict with the Principles.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.