If you are a software development company wanting to license your software, this article is for you. First, we discuss the basics of software licence agreements and some of the most important provisions that software companies and developers must consider.

It is critical to get your licence agreement right from the beginning. Failing to do so can affect your rights to your software and potentially damage your brand.

Remember: This article covers the basics of software licence agreements, and you should seek proper legal advice from a legal practitioner regarding any contract you intend to enter.

Software Licence Agreement Basics

A licence is a set of legal rights that the licensor provides to the person that licenses the software (licensee). There are many types of licences, and combinations of licences available. Let’s take a look at several common software licence types below.

The Different Types of Software Licences

Proprietary Licence

A commercial licence gives the licensee the right to access and use the software. For example, a software developer may sell a yearly licence to a company to use their customer relationship manager (CRM). The master licence may allow the company to add their employees as end-users.

Open-Source Licence

This licence type allows users to access and modify the software’s source code. Several open-source licences exist, including the GNU General Public Licence (GPL) and the Apache License.

Freeware Licence

This licence type allows users to use the software for free, but the software remains the developer’s property. Users cannot modify the software or distribute it without permission.

Shareware Licence

This type allows users to try the software before purchasing a licence. Users can typically use the software for a limited time or with limited features.

What is a Software Licence Agreement?

A software licence agreement is a contract between the software owners and the licensee that sets out the rights and obligations of the parties under the licence.

Types of Licence Agreements?

There are numerous possibilities when it comes to licences. Therefore, it is crucial to understand what the software development company wants to achieve – or what they are willing to negotiate.

Why You Need a Software Licence Agreement

A software licence agreement is required when providing access to your software to a third party, as it sets out the terms and conditions upon which the licensee (and potentially the end users) can use or sell the software, as the case may be.

Ownership vs Licence

Ownership, in terms of software – or source code, refers to the intellectual property rights under the Copyright Act 1968 (Cth) (Copyright Act).  

Specifically, section 47(AB) of the Copyright Act provides that a computer program is a literary work.

Literary works, like other forms of material protected by the Copyright Act, such as dramatic and musical works, are protected by the Copyright Act upon the works’ creation – unlike trade marks, designs and patents, copyrighted material does not require any form of registration.

Many people ask whether it is possible for the licensee to ‘own’ the software inadvertently if it is licensed. Generally speaking, ownership of source code will only transfer to the licensee with a written agreement that transfers those rights.

Section 196(3) of the Copyright Act provides:

An assignment of copyright (whether total or partial) does not have effect unless it is in writing and signed by or on behalf of the assignor.

Therefore, ensuring that the software licence agreement does not have a clause that transfers ownership in any part of the software is essential. 

Important Terms and Conditions of a Software Licence Agreement

Breach of Contract and Termination Rights

Software developers must set out the terms and conditions and the consequences if the licensee breaches the software licence. The parties must have an understanding of what constitutes a breach. The parties must specify, where possible, the following types of contractual breaches in the contract.

  1. Breach of warranties,
  2. Breach of an intermediate term,
  3. Breach of an essential term.

Each type of breach will give rise to a right regarding termination. For example, a breach of a warranty, such as a minor bug, may require the software developer to rectify a bug within 30 days.

If the client fails to pay the development fees according to the payment schedule, they will likely breach an essential term, allowing the software developer to terminate the contract and require the client to pay for the development up to the termination date.

Related article: Breach of the software development contract.

Australian Consumer Law

This Australian consumer law section will be updated by 30 April 2023, where I will go into detail regarding Unfair Contract Terms, Statutory Warranties, and Consumer Guarantees.

Intellectual Property

This intellectual property section will be updated by 30 April 2023.

Copyright in software, as a literary work.

Dispute Resolution

Adding alternative dispute resolution (ADR) provisions to software licence agreements is a great way to keep disputes out of Court, saving a lot of money on lawyers, court costs and damages.  Litigation is a massive distraction that your business doesn’t need.

Related: Alternative dispute resolution in QLD

Licensee Fees

Being paid licence fees is quite apparent. However, it is vital to consider the payment methods and any discount pricing for volume users. Additionally, software developers should consider applying yearly pricing models. There may also be set-up and customisation costs when drafting software licence agreements.

If the licensee has the rights to sublicense the software, royalties may be paid per sublicence or end user.

Rights to the Software

Think about what rights you want the licensee to have. For example, what is the extent that they can use the software? For example, the software owners may license certain users to use, resell, or sublicense the software.

The licensor must clearly state the rights it wishes to license in the agreement. I usually like to establish the intentions of the parties at the contract’s start clearly in the recitals.

It would help if you also contemplated whether the agreement allows the licensee to transfer its rights to a third party. 

Updates & Support

Licensees will usually push to have improvements and bug fixes in the software – which is only fair. In addition, they will usually require a level of support from the software company. Unfortunately, these aspects of software licence agreements are often overlooked and can lead to frustration.

Developers are usually happy to provide updates to their software, as it helps maintain security and add some fixes or improvements that the licensee requests. However, your software licence agreement must not leave any ambiguity for the licensee to interpret “software updates” to mean “complete re-engineering of the platform”.

Also, you must accurately describe the support terms. For example, is support provided through a help desk? Is there an additional cost? Is there a level of training provided? Will you offer phone support? What are the hours? I am sure you get the idea.


With software, especially software as a service (SaaS), developers should have contractual indemnities within the licence agreement to protect them from the licensee and end-users’ loss and damages. The aim of having the proper indemnity is to limit the software company in the event of software outages and data loss. You should also consider the nature of your industry and address the risk to the software end-user.

Important Considerations

As you will see, I am setting the below section in question form as they are the essential questions that software companies must contemplate before negotiating or drafting a software licence agreement.

What Access Level Does the Licence Provide?

After describing the software subject to the licence agreement, you should outline the user-level access you intend to provide as part of the licence.

How Many End-users Does the Licence Provide?

The software development companies offering commercial licences should consider how many end-user licences are subject to the licences.

Support and Maintenance

Who will be providing the support? For example, will you support the licensee and end users if you sell a commercial licence?

What are the terms of performing maintenance? For example, is maintenance required to be performed between certain hours? Is notice required to be given?

Will you provide phone support, or will support be provided via a help desk?

Payment and Term of the Licence Agreement

What date does the agreement start, and what date will it end? How can the parties terminate the agreement, and for what reason? These questions also relate to the timing of payments – for example, yearly or monthly license fees.

Frequently Asked Questions

Please find the FAQ below:

What Software Licence Agreements Cover?

The licence should set out the terms upon which the licensee can use the software. It should also address the software being licensed, the warranties of the software, the type of software being licensed, the term, and dispute resolution and termination rights – among many other contractual provisions.

How to Create a Software Licence Agreement?

A software licence agreement must be carefully drafted by a lawyer who understands the complexities of software development and licensing arrangements.

What Is Software Licensing?

Software licensing is a business model, where a software company sells a licence to use, sell or sublicense to third-parties.

Why You Need a Software Licence Agreement?

A software licence agreement creates a legal relationship between the software development company and the licensee and potentially its end users. With an agreement that governs the licence, the parties will be confident of each other’s rights, and a dispute could be imminent.

Why Software Licensing Is Important?

Software licensing is important because it sets out the rights and obligations of the software licensee and the licensor.

For assistance with your software licence agreements, contact Ben Waldeck to discuss.