Follow these steps to avoid the most common problems with licensed software

Most businesses have software systems to handle accounting, inventory control, scheduling, shipping and other functions. Most of that software is licensed from a vendor. Unlike off-the-shelf software, customized software may have license fees in the $10,000 to $1 million range.
Most disputes between the software vendor and the licensee after the software is installed fall into a few major types and often are avoidable with careful drafting of the license agreement.
There are steps that businesses can take to avoid the most common disputes. A look at some of those steps follows.
Software defects discovered after installation
Few software installations are problem-free. But some installations result in problem after problem, with the vendor unsuccessfully attempting to fix the defects over a period of months. This scenario often results in litigation.
Most of those problems may be avoided if the licensee has the opportunity to accept or reject the software within a specified time after the installation. Unlike major business acquisitions, the software license agreement typically does not give the licensee the right to test the software and terminate the license if the software does not perform as promised.
As a solution, the agreement may allow the licensee to run acceptance tests for a period of time after installation, such as 30 to 90 days. Any problems and defects discovered during the testing period are discussed with the vendor, who then tries to correct the problems.
After the vendor fixes the problem, the licensee resumes its acceptance testing and has another period of time, such as 15 days, to discover any other problems. The process is repeated until the problems are solved or until a set period of time has passed, such as 90 to 180 days after installation. At that time, the licensee may terminate the agreement, all money is refunded and neither party has any further liability to the other.
Payment schedules
Many license agreements provide that the entire license fee is due upon software installation or within 30 days of installation, before the licensee has an opportunity to test the software.
If defects are discovered after installation, the licensee’s remedy is to request the vendor to fix them. Since the licensee typically does not have a right to cancel the agreement and obtain a refund, it has little leverage if the licensor does not fix the defects quickly or properly.
The solution to this problem actually is quite simple: schedule the payments to coincide with milestones being met, much like construction contracts. A certain portion of the license fee may be due upon contract execution, such as 25 to 33%. Another portion may be due upon installation, such as 25 to 33%. The remainder may be due upon acceptance, or upon the completion of any additional programming services to be performed by the vendor.
If there are multiple installations or additional modules to be installed at a later time, a portion of the total license fee may be held back and released upon the successful completion of each installation.
Maintenance and support issues
Software maintenance agreements – and warranty provisions in the main license agreement itself – typically provide that the vendor must fix “defects” in the software. The term “defects” sometimes is undefined, but more commonly is defined as a failure of the software to perform “in accordance with the documentation.” If the term “documentation” is defined at all, it may be defined as the online help, the user manuals that accompany the software or the software specifications.
In view of the different definitions of terms like “defect” and “documentation,” few vendors and licensees really understand what the warranty or maintenance provisions cover.
As a result, there are many disputes between vendors and licensees over whether a particular failure of the software is a “defect” that the vendor must fix at its expense, or a “modification” that is made at the licensee’s expense.
To avoid this problem, the terms “defect” and “documentation” should be defined clearly in the license and maintenance agreements. Also, the licensee should inspect the documentation before signing agreements to verify that every function which the licensee expects the software to perform, including each report to be generated, is discussed or shown in the documentation. If a desired function is not found in the documentation, the documentation or the agreement should be amended to include a specific reference to that function. If the function is agreed to be a modification to the software, the modification should be specified in detail in an attachment to the agreement.
Summary
Most disputes involving software licenses may be avoided by careful drafting. Clearly defining the conditions for acceptance, payment and fixing defects will avoid some of the most common disputes and improve the relationship between the parties.
Casimir F. Laska is a partner in the Milwaukee law office of Michael, Best & Friedrich.