15 May 2020
Whether you're a software developer, a service provider or an ecommerce company, practically every business requires a set of legal agreements with its users.
Confused about which one you need? Want to know how to create a valid EULA or a Terms and Conditions agreement? In this article, we're going to explain the main features of both types of agreements.
An End User License Agreement (EULA) (sometimes known as a "software license") is an agreement between the developer or publisher of a software product and the user of that software.
By agreeing to an EULA, a user is granted certain rights over the software. The user also accepts certain responsibilities, and they may also accept legal liability in the event that they cause the developer a loss.
Again, upon agreeing to a Terms and Conditions, the user is granted the right to use or receive the service, and they accept certain responsibilities and liabilities for using it.
Here's how to decide whether you should be creating an EULA or a Terms and Conditions:
There's no law requiring software developers to provide an EULA. However, failing to do so can create all sorts of legal problems.
Essentially, creating an EULA ensures you are allowing your user to install a copy of your product, rather than actually selling them the right to own and distribute your product.
In addition to the legal benefit described above, an EULA:
Yes, an EULA can be a contract between you and your user.
If it's clear, fair, and has been accepted by your user, an EULA will be enforced by the courts.
No, there's no legal requirement to create a Terms and Conditions agreement. However, it's an essential document for any business that offers goods or services.
Creating a clear and robust Terms and Conditions agreement brings many benefits:
Just like an EULA, a Terms and Conditions agreement can be a legally binding contract.
If it's clear, fair, and has been accepted by your user, a Terms and Conditions agreement will be enforced by the courts.
First, we'll look at some of the clauses that commonly appear in both EULAs and Terms and Conditions agreements, with examples from both types of agreement.
In some cases, this section serves to give another agreement precedence over the EULA or Terms and Conditions. Here's an example from Blackbird's EULA:
The clause means that any special agreement with a corporate licensee will take precedence over Blackbird's EULA if the two agreements contradict one another.
Terms and Conditions agreements often incorporate other agreements, meaning that acceptance of the Terms and Conditions also constitutes acceptance of other agreements.
Here's an example from PayPal:
In most countries, "implied warranties" cover the sale of goods and services.
Think of implied warranties as automatic guarantees as to the quality of your goods or services. Under certain conditions, it may be possible to avoid making these guarantees using your EULA or Terms and Conditions.
There are two main examples of implied warranties in the United States:
Under the Uniform Commercial Code § 2-316 (available here) you may be able to disclaim these implied warranties if you use specific language (for example, "Goods are sold with all faults"), and make your disclaimers conspicuous (many companies use uppercase letters for this section).
This does not excuse you from providing goods or services of a reasonable quality. But it may give you some leeway in disputes with your customers.
Note that laws on disclaimers vary from place to place, and even between U.S. states. This is why most companies state that they are disclaiming the implied warranties "to the maximum extent permitted by law."
Here's an example of a disclaimer of warranties from Versasec's EULA:
For one reason or another, using your product, service, or even your website might result in a "loss" for the user.
This is why most EULAs and Terms and Conditions agreements contain a "limitation of liability clause." If a user takes you to court, this clause puts a limit on the amount of damages you'll have to pay.
A limitation of liability clause is an alternative to an "exclusion of liability" clause. This type of clause attempts to limit the amount of damages a company will pay to zero. Exclusion of liability clauses are increasingly uncommon as they can be seen by the courts as unfair.
Limitation of liability clauses often use similar wording.
Here's an example from Nest's EULA:
Again, note the phrase "to the maximum extent permitted by applicable law."
Many countries have national laws that set rules about limitation of liability clauses. In the UK, for example, the courts won't recognize limits to liability for injury or death caused by negligence.
Another important point in Nest's limitation of liability clause is the statement that Nest will not be liable for "consequential, exemplary, special, or incidental damages." This means that Nest won't pay for losses that result indirectly from any potential mistake.
Finally, note the sentence stating that "Nest Labs' total cumulative liability [will not] exceed the fees actually paid by you to Nest."
Here's an example of a limitation of liability clause from NFU Mutual's Terms and Conditions:
Note that NFU Mutual's Terms and Conditions govern the use of its website. This clause actually attempts to exclude the company's liability altogether, except for under the limited circumstances listed at the end of the paragraph.
If a dispute occurs between your company and one of your users, it could end up in court. The user won't necessarily live wherever your company is based, so it might not be obvious where the case should be heard.
As the person drafting your EULA or Terms and Conditions agreement, you get to choose the jurisdiction in which such cases will be heard. Generally speaking, it's better to choose the jurisdiction in which your company is based.
Here's an example from HERE's EULA:
And here's an example from the Terms and Conditions of Smoothwall:
Note that Smoothwall states that its Terms and Conditions are "governed by and construed in accordance with law of England." This is because certain principles and terminology are interpreted differently in different places.
The following clauses are usually contained in an EULA, but not a Terms and Conditions agreement. If you're creating a Terms and Conditions agreement, click here to skip ahead.
Most EULAs begin with a section that grants the user a license to use the product.
Here's an example from Lasa:
Note that this EULA grants users the right to use, make copies of, and distribute the software. This is more extensive than the "grant of license" clause found in many EULAs, which simply grants users the right to use the software.
Along with granting the user a license to use the software, most EULAs also contain a description of the user's other rights and limitations.
Here's an example from Structure Sensor:
This clause sets out some common license limitations, including that:
An EULA will normally set out the conditions under which the license might be terminated by the business, and sometimes by the user.
Here's an example from Goodwall:
By incorporating these clauses into your EULA, you'll have most of the important areas covered.
Our EULA Generator makes it easy to create an EULA. Just follow these steps:
Enter your email address where you'd like your EULA sent and click "Generate."
You'll be able to instantly access and download your new EULA.
Now we're going to take a look at some clauses that are commonly found in a Terms and Conditions agreement, but that might be less relevant to an EULA.
In some cases, it's easy to obtain acceptance of your Terms and Conditions, for example if the user has to create an account or place an order in order to use your services.
In other circumstances, such as where a Terms and Conditions agreement covers the use of a website or web app, it might not always be possible to obtain the user's explicit acceptance.
In such circumstances, a Terms and Conditions agreement might contain a clause stating that the user has accepted the agreement by taking a certain action. For example, "using the services," or "browsing the website." This is known as a browsewrap clause.
Here's an example from Fonehouse:
Note that this method of obtaining acceptance is unlikely to be enforced by a court. However, it might be helpful if you ever need to hold one of your users to your Terms and Conditions.
If you charge a fee for your services, it's important to set out the terms of payment in your Terms and Conditions.
Here's an example from Secure Fast Hosting:
You can see how this clause might be helpful to Secure Fast Hosting if a dispute arises with a customer. It sets out:
Your Terms and Conditions should grant you the right to suspend or terminate your users' accounts. You should also set out the reasons for which you may need to do this.
Here's an example from Solve For Why TV:
Note that these terms specify that a user will still be liable for fees if they have caused the suspension of their account.
Our Terms and Conditions Generator makes it easy to create a Terms and Conditions agreement for your business. Just follow these steps:
Enter your email address where you'd like your agreement sent and click "Generate."
You'll be able to instantly access and download your new agreement.
Remember that your EULA or Terms and Conditions agreement can be a legally-binding agreement that will be enforced by the courts: if it's clear that your user has agreed to it.
This means that you should take all reasonable steps to ensure that you obtain your users' acceptance of your agreement. There are several ways of doing this.
It's relatively easy to obtain acceptance of an EULA.
For physical copies of software products, publishers would typically include a copy of the EULA within the shrinkwrap cover of the box. Opening the shrinkwrap was supposed to constitute acceptance of the EULA.
If you distribute your software product digitally, there's an even easier way to obtain acceptance of your EULA: not "shrinkwrap," but "clickwrap."
A clickwrap agreement asks the user to check a box or click a button in order to accept the terms of the agreement. You can present this option to users when they're installing your app or software product. If they don't accept the EULA, they must not install the software.
Here's an example from Opera:
You should also ensure your EULA is accessible to your users within the software itself.
Here's an example from Opera's mobile app. The EULA is accessible within the "About Opera" page of the app's "Settings" menu:
It's crucial to make sure your users accept your EULA, and it should be relatively straightforward to do so.
You should have several opportunities to obtain acceptance of your Terms and Conditions agreement.
For example, you can obtain acceptance of your Terms and Conditions when your user creates an account with your service.
Here's how Asana does this:
You can also ask customers to accept your Terms and Conditions when making a purchase.
Here's an example from H&M:
It's more difficult to obtain acceptance where your Terms and Conditions govern the use of a website, as we've seen in the Acceptance of Terms section above.
Both an EULA and a Terms and Conditions agreement govern the use of a product or service. If they are fair, clear, and have been accepted by your users, these agreements can constitute legally binding contracts.
Both types of agreement usually contain the following sections:
An EULA typically contains the following additional sections:
A Terms and Conditions agreement typically contains the following additional sections:
You should obtain acceptance of your agreement if you want it to be legally binding.