Don’t Click “I Accept” So Fast – Standard Software Licenses and Service Contracts May Leave You Unprotected

On behalf of Kaplin Stewart Meloff Reiter & Stein, P.C. posted in on Oct 28, 2016.

Sophisticated business management software now available for commercial enterprises, large and small, ranges from of the shelf programs for discrete tasks like billing to integration of marketing, sales, manufacturing, customer relations and financial operations in a customized Enterprise Resource Planning solution. High tech software can work tremendous positive change in your business and may be required for effective competition. But standard contracts in use by sellers of software and consulting services may leave you without meaningful recourse if a newly discovered bug or unsuccessful implementation causes an economic disaster.

Consider the initial failure of Nike’s cutting edge Supply Chain Management software which led to $48 million in lost profits, a public feud with the implementer damaging stock prices and reputations, and an expensive 3 year turnaround. Imagine the impact to a smaller business if due to the fault of others, the accounting software installed by the IT manager opened to the blank screen of complete data loss, or the Customer Relationship Management program melted down on a Monday morning, never to reboot. Would a free download of the same accounting program or a refund of the CRM installation price be adequate?

That may be all that the terms of the software license agreement or implementation contract provide, and they will likely be the exclusive source the purchaser’s rights and remedies, even if it fell victim to a defective disk, new bug or negligent customization. The majority rule of law is that purely economic losses by commercial entities must be dealt with under contract law, precluding tort claims such as negligence, misrepresentation or fraud that allow recovery of replacement costs, lost profits and other consequential damages.

Standard licenses offered by providers of both simple and sophisticated software commonly contain many terms that protect them from such damages and limit the purchaser’s available remedies. Examples of these provisions, which are routinely enforced by courts, include: (1) disclaimers of all warranties advising that software is sold “as is”; (2) limitation of remedies for malfunction to a replacement copy of the software or reperformance of the services; and (3) limitation of liability to the price paid for the product or services, precluding recovery of any other loss or damage. The similar terms are found in the service contracts of companies that do software implementation (i.e., installation, customizing and end-user training). Obviously, negotiation of better than standard terms is advisable and a different software strategy might be dictated where that is not possible.

Better terms may be obtained if more sophisticated, customized software is purchased or implementation is performed by professionals willing to bargain There is no negotiation, however, with off the shelf, fully functional software, which invariably has a “click-wrap” license agreement (the installer must click on an acceptance of the license terms to proceed). While “shrink-wrap” licenses on CD boxes were questionable, click-wrap agreements require affirmative choice and are enforced as binding contracts. Given the standard terms, the easiest, most economical choice may not be the best one, so pause before you click “I accept”.