Risk Shifting in Licenses
This article by William Denny is a few years old, but it gives a nice summary the ways parties to a license agreement shift risk:
A. Express and Implied Warranties The extent of warranty protection in a software license is usually a matter of business leverage. Basic warranties usually included in a license agreement are that the software materially conforms to the specifications and documentation, that the vendor has good title to the software and has the right to license it free of any encumbrances, and that the software is virus-free and does not contain worms, trojan horses or other harmful code. Often there is a time duration associated with express warranties.
B. Indemnification Against Third Party Claims Indemnification clauses deal with third-party claims or suits against one of the contracting parties. A common indemnity clause in a software license agreement is for the vendor to defend and indemnify the customer and hold the customer harmless from and against third party claims for infringement of intellectual property rights, for claims of injury, death or property damage brought by the vendor's employees, agents or contractors resulting from services at the customer site. Because third party claims are not within the contracting parties' control, the damages resulting from such claims should be addressed separately from other provisions allocating risks between the parties.
C. Limitations of Liability The limitation of liability section typically relates to the liability of the parties to each other, as opposed to third party actions covered by the indemnification section. These provisions normally include a mutual waiver of incidental, consequential, indirect and punitive or special damages, and an overall cap on the vendor's liability to the customer for direct damages. A larger or more influential customer may negotiate certain exceptions to the mutual waiver of incidental or consequential damages or to the cap on direct damages. For example, a vendor may agree to carve out an exception to the waiver of incidental or consequential damages in the event of breach of the confidentiality provision, or it may agree to exclude from the cap on direct damages any liability resulting from its gross negligence.
D. Insurance An insurance provision is important where the software is part of a business critical application in the customer's business, and there is no commercially reasonable alternative in the market. It is also important in cases where the vendor will have its personnel performing services at the customer's site. The customer should ask the vendor to provide complete commercial general liability coverage, workers' compensation coverage, automobile liability coverage and employee fidelity coverage. If the vendor is going to customize software to meet the customer's unique requirements, the customer should request data processing errors and omissions insurance.
The rest is here.
