End user licensing: approaches to creating enforceable rights

11 Jul 2014
Alasdair Taylor

The term EULA is widely abused: I’ve just finished a telephone conference where it was applied, by someone who should know better, to a proposed contract covering not only licensed software but also hosted software services, consultancy, support and much else besides. I therefore want to clarify what I mean by EULA and “end user”.

In a wide sense, a EULA is an agreement between a software vendor and an end user governing the use of software. I tend however to use the term in a narrower sense, to apply only to end users who are not themselves direct customers. Where the end user is it the customer, I prefer to use the term “software licence agreement”.

In any case, this post is concerned with EULAs in the narrow sense.

This type of relationship creates a range of legal and practical obstacles to the creation of enforceable obligations. For instance, what consideration does the end user receive in exchanges for for binding contractual obligations? In what circumstances will paying customers accept the imposition of direct obligations on end users, who may for instance be employees of the customer? How can end user obligations be of any real value, when end users themselves may be un-sueable in practice?

There are at least 4 different approaches, each with its own advantages and disadvantages, to tackling these obstacles.

Approach 1: indirect rights

The most common approach, particularly where end users are employees, is to place no direct obligations on end users, but specify in the customer contract that the customer has a specific obligation to ensure that all end users comply with the software licensing terms.

The disadvantages of this approach, particularly in the case of non-employee end users, are obvious. If the customer is insolvent, or if it is not commercially practicable to issue proceedings against the customer (eg because of the customer’s importance to the business), how will misuse by end users be controlled? Whilst end users can in principle breach a copyright licence in this situation, it will be harder to enforce the licence without it having been accepted in some definite form by the relevant user.

For this reason, the “indirect rights” approach is often supplemented with some sort of end user licence.

Approach 2: Sublicensing plus third party rights

The Contracts (Rights of Third Parties) Act 1999 creates exceptions to the usual rules on contract privity. A software vendor can use these rules to create direct obligations against an end user. First, the customer agreement must provide that the customer is permitted to sub-license to the end users; second, the terms upon which sub-licensing is permitted should be set out in the customer agreement; and third, the customer agreement should provide that the sub-licence should include a term specifying that it is enforceable by the vendor as a third party beneficiary under the 1999 Act.

Approach 3: Non-contractual end user licence

It is possible to grant a licence of copyright without a contract. It is also possible to disclaim liability in relation to some matter without a contract. Hence, the third option: a non-contractual end user licence and disclaimer.
A licence is possible without a contract because of the nature of copyright: the default position is that certain actions in relation to a copyright work are prohibited without the permission of the copyright owner. A copyright owner may, however, agree to waive all or some subset of those rights without comply with the usual contract formalities. This is sometimes called a “bare licence”.

Non-contractual disclaimers, by the way, will still need to comply with the provisions of the Unfair Contract Terms Act 1977 if they are to be enforceable.

Some purportedly contractual end user licence agreements may in fact take effect as non-contractual licences/disclaimers upon this model, with those provisions that purport but fail to create contractual obligations simply being ignored.

Approach 4: Contractual end user licence agreement

A contractual EULA agreed between a vendor and an end user usually represents the strongest form of protection available to the vendor. As well as including a licence and disclaimers of liability, a contractual EULA can place positive obligations upon end users. For example, a vendor may want direct audit rights in respect of a non-employee end user.

One potentially interesting issue with contractual EULAs is consideration: what extra benefit is the end user getting by signing up to the restrictions in the EULA? In the case of employees, for example, it may not be clear that they gain any benefit at all.

Also, if the right to use the software is dependent upon end users accepting the EULA terms, what happens to the main customer contract if they don’t?

The best approach?

As usual, there is no single best approach.

Some general guidance may however help:

  • Customers should almost always be obliged to ensure that end users comply with appropriate licensing terms.
  • It is rare to use the third party rights legislation to create obligations against end users, but if there is a separate sub-licence grant process, and no option to create direct rights for a vendor against end users, this approach should be considered.
  • For employee end users, a non-contractual EULA, with its terms incorporated into the main customer agreement, may be appropriate.
  • For non-employee end users, a contractual EULA may be a better approach, particularly if there are no problems with establishing consideration. Even if there are problems of consideration, a “nominal” consideration clause may help avoid them.

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