Navigating Software Contractual Terms

A Software License Agreement is a contract between a vendor and a customer that outlines how software can and cannot be used. Below are some examples.

A Software License Agreement is a contract between a vendor and a customer that outlines how software can and cannot be used. The agreement can vary from a standard, boilerplate document to a unique, tailored contract that meets specific needs. Carefully review and question your contract and know that all terms and conditions are negotiable before you commit to anything. Below are some examples of legal terms customers should be aware of before signing an agreement.

User or Authorized User

The user or authorized user should include employees, consultants, clients, external users, contractors, and agents. Pay close attention to this clause in your contract to ensure that all these instances are covered without any additional fees. Some publishers may charge for any users that are not employed on your premises but still use the software.

Usage and Restrictions

These terms define how the software can be used and any restrictions imposed.


Is the publisher granting the customer unlimited – on-premises or cloud-based – usage for all employees, agents, contractors, bots, and/or third-party entities? If not, specifications should be implemented stating who can use the software provided. Ask questions such as on what platform can the software be installed – desktop only or can it be installed on a server? If you have multiple locations, can the software be used in all locations?


Is the customer prohibited from sublicensing, selling, transferring, leasing, distributing, or making the software available to any third parties? Is the customer prohibited from installing the software in a virtual environment or on a server?

License Type

There are many types of software licenses and they all come with their own set of nuances. Are you agreeing to a subscription-based license, a perpetual license, end user only (no bots allowed), a concurrent license, metered (consumer-based) license, device license (ex. a call center), or a multi-user license (ex. a training lab where end users change daily)? Have a very clear understanding of how the software is licensed as this could cause compliance issues if the software is outside of the scope defined by your contract.

Annual True-Up Clause

This clause will cover any changes in the estimated versus actual license count that have occurred before the renewal of the contract. One example: if your company wants to avoid multiple, daily purchase orders they chose to issue a license to an end user (over and above the original licenses purchased) and pay a set fee at renewal for any overages. True-up fees should be negotiated to ensure the publisher does not charge you more per license than the original price agreed upon.

Audit Clause

This defines how and when a publisher can audit a client. Ensure the publisher gives you ample time – at least 60 days advanced notice – and that you are informed in writing that the publisher intends to audit your company. Allowing the publisher to remote into your environment to monitor usage should be prohibited. A major red flag to look for and avoid is the hidden audit clause, which may not be defined as an audit clause, but included in the language that outlines and defines what you must provide to your vendor during the renewal process. Vendors are requiring the customer to provide a Baseline (Renewal) Report showing active usage. Following submission, the vendor will review the report and, as outlined in the contract, can ask questions and address any concerns. This is an open door for an audit. The language further states that, if concerns are raised, the customer will pay “adjusted” renewal rates. These hidden clauses can result in very hefty renewal rates and make the renewal process long and exhaustive.

Organizational or Infrastructural Terms

This defines your company, i.e. the enterprise. Do you have multiple business units that will be using the software? If these are not clearly defined in your contract, you would be required to purchase additional licenses to cover those business units not outlined in your contract.

Termination Clause

This will outline what occurs when the contract ends. Does either party have the right to end the contract earlier than agreed upon? Is it a Termination at Will or a Termination for Cause? If the publisher breaches the contract, are you still responsible for making payments? Clearly state that a breach of contract would immediately halt payments.

It is important, and your right, to fully review and question all terms and conditions in an Agreement before signing. The purpose of the Agreement is to define expectations and protect all involved parties.