Alexei@Nitobi

We’re a software company and we sell software products. We require that customers agree to the terms of our EULA (license) when they use our software. The EULA lays out some general terms that describe what we will do for the customer, what the customer will do for us, and who is responsible for what. A large part of that is indemnification. Basically, we don’t want to put our business, and employee’s livelihood at risk if somebody screws up and sues us because they think our product caused them harm or damage (even indirectly). Honestly, we don’t think this is a likely outcome (or we wouldn’t be selling it), but it’s very customary for companies in our position to protect ourselves and our employees in this way.

What I don’t understand is why sometimes when we deal with larger companies and lawyers get involved before buying our product, they ask us to remove clauses that protect our people from liability. Why on earth would we agree to that for one sale? Why in good conscience would they ask us to do this? Another request we get sometimes is to add clauses to the license that require us to deliver significantly more to the client than we otherwise would, without any consideration for these deliverables. In other words, we’ll do much more for the customer than we would for another customer for no compensation.

Here is a recent example. In this paragraph, the client has modified the EULA to limit our protection from law suits. So if the client uses the product in a high-risk situation and indirectly experiences a loss, we can be held responsible. You lawyers out there may see this differently, and I invite your comments.

C. In addition to the other requirements set forth in this Section V, you hereby agree to indemnify, hold harmless, and defend Nitobi from and against any and all liabilities, damages, losses, costs and expenses (including reasonable attorneys’ fees) arising from or related to any third party claim, action, proceeding or allegation that arises or results, either directly or indirectly solely from your the use and distribution of any of your software application product(s) or components that include the REDISTRIBUTABLES.

Example 2. The amount of our liability has been arbitrarily increased to double the amount of the license fee. In my view this serves no strategic purpose other than to sweeten the pot should we in some scenario be liable for damages. The fact is that we sell software components worth on average $500. The cost of modifying this agreement no doubt exceeded this enormously. Also, terms protecting the client against willful misconduct on our part (fair enough) AND gross negligence where added. The term gross negligence is very troubling as it is open to interpretation – would leaving a bug in the software be termed negligence? In software especially it would not be my preference to have this interpreted by someone with no engineering background.

Nitobi’s liability, whether in contract, tort, or otherwise, arising out of Licensee’s use of, or in connection with, the SOFTWARE, or otherwise under this Agreement, shall not exceed a sum equal to two times the amount of the license fee paid by you to Nitobi. EXCEPT FOR Nitobi’S INDEMNIFICATION OBLIGATIONS IN SECTION VII OR ANY LOSSES OR DAMAGES ARISING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF Nitobi, IN NO EVENT SHALL…

Here’s another quick one.. changing the jusdiction to their local state instead of our region. This dramatically increases the cost of responding to a complaint should the situation arise. This seems like gold-plating to me, and I’m surprised a large firm would require this of a small components vendor for a $500 license. This was one particular client, but of course this has come up more than once. The state has been changed to preserve anonymity.

You agree that you will not export or re-export the Software without the appropriate Canadian or foreign government licenses. This LICENSE is governed by the laws of the State of New York. Canadian province of British Columbia as applied to agreements entered into and to be performed entirely within British Columbia.

The point here is that there seems to be a perception among some
lawyers that because we are a ’small business’ we will accept any terms
given to us. I’m personally surprised that they would spend the time and money inserting these clauses and bartering with us over minor terms for dollar values that are typically in the petty-cash range.

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This entry was posted on Thursday, May 25th, 2006 at 4:58 pm and is filed under business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.