Open Source Software Risks and Responsibilities in Commercial Contracts

Open source software (OSS) powers huge parts of modern software stacks — from operating systems and web servers to libraries and build tools. Its use brings speed, innovation, and cost-savings, but it also introduces legal, security, and operational risks that commercial contracts must address. This blog explains those risks, what businesses and lawyers should do about them, and offers practical contract language and a checklist to help protect your organization.

Why open source matters for commercial contracts

OSS is everywhere: companies embed third-party libraries, copy snippets from public repos, or ship products built on open foundations. Commercial contracts that don’t account for OSS expose parties to surprise liabilities, project delays, and downstream distribution problems. By treating OSS as a first-class contracting risk, teams reduce surprises, speed negotiations, and protect both IP and security posture.

Key risks introduced by OSS

1. License non-compliance

   • Copyleft vs permissive: some OSS licenses (GPL, AGPL) impose distribution/derivative obligations that can require making source code available; permissive licenses (MIT, BSD, Apache 2.0) are less intrusive but still have requirements (e.g., attribution, NOTICE).

   • Failure to comply can force remediation, injunctive relief, or reputational damage.

2. IP contamination / ownership disputes

   • Unclear provenance or contributions from third parties may mean code contains copyrighted material the company doesn’t own or can’t license properly.

   • Incorporating code with incompatible license terms can jeopardize product IP or distribution rights.

3. Security vulnerabilities and supply-chain risks

   • Vulnerabilities, poorly maintained packages, or maliciously altered dependencies create security risk and breach obligations under data/security clauses.

   • Transitive dependencies (dependencies of dependencies) increase the attack surface.

4. Maintenance & support uncertainty

   • OSS projects can become unmaintained; relying on such components can create technical debt and operational risk.

5. Export controls & sanctions

   • Some jurisdictions limit distribution of encryption or other technical items; OSS distribution may trigger export obligations.

6. Regulatory & contractual obligations

   • Data protection, certification, or sector-specific rules (medical, telecom, etc.) may interact badly with OSS licensing or lack of warranties.

7. Operational & compliance costs

   • Tracking, scanning, remediating, and auditing OSS usage consumes resources and can delay deliverables.

Contractual strategies: what to include and why

Below are contract provisions and business processes that allocate and mitigate OSS risks in commercial agreements.

1. Definitions and scope

• Define “Open Source Software” and list relevant licenses or categories (permissive, copyleft).

• Define scope: in-scope code (shippped binaries, source code, development environment, third-party libraries, plugins, container images).

2. Representations & warranties

• Supplier/Developer to Customer:

  • R&W that any OSS included is disclosed and that it is used in compliance with its license.

  • R&W about ownership: no third-party claims, and supplier has rights to distribute under stated license.

• Limitations:

  • Buyers should accept that OSS usually comes “as-is” from upstream; carve out strict warranties for upstream components but require disclosure and remediation obligations.

3. IP indemnity and limitations

• Indemnity for third-party IP claims: supplier indemnifies customer for claims arising from unlicensed or mislicensed OSS that materially impair the customer’s use.

• Scope & caps:

  • Carve out indemnity for willful misconduct or gross negligence.

  • Consider caps tied to fees (or uncapped for IP indemnities depending on negotiation leverage).

• Defense obligations:

  • Supplier controls defense with customer’s consent for settlements that impose obligations on the customer (e.g., source disclosure).

4. License compliance covenant

• Supplier must provide an inventory of OSS components (SBOM), license texts, and attribution/NOTICE materials used in the deliverable.

• Supplier must maintain compliance processes and produce evidence on request.

5. Bill of Materials and transparency

• Require a Software Bill of Materials (SBOM) listing components, versions, and licenses — updated at delivery and on material updates.

• Include a right to periodic audits or code scans (with reasonable notice/frequency and confidentiality protections).

6. Remediation & mitigation obligations

• If non-compliance or a security issue is discovered:

  • Supplier must promptly (and within defined SLA) remediate or provide mitigation.

  • For serious IP claims, supplier must either (a) obtain a license, (b) replace the component with non-infringing equivalent, or (c) allow customer to do so at supplier’s expense.

7. Security & vulnerability handling

• Require vulnerability disclosure procedures, timelines for critical patches, and coordination on public advisories.

• Obligate supplier to proactively monitor dependencies and notify customer of high/critical vulnerabilities affecting delivered software.

8. Source code escrow / access (where relevant)

• If product depends on OSS plus proprietary glue code, consider escrow for proprietary elements needed to maintain product if supplier ceases support.

9. Audit, compliance, and remedial audit remedies

• Right to audit OSS usage and license compliance; remediation steps and cost allocation if audit reveals non-compliance.

• Consequence ladder: cure period → remediation at supplier cost → indemnity or termination rights for persistent non-compliance.

10. Termination & injunctive relief

• If a license conflict requires distribution of customer’s confidential or proprietary source, give customer option to (i) require supplier to cure, (ii) terminate affected scope, or (iii) negotiate a license.

• Allow injunctive relief where compliance failure threatens IP or regulatory obligations.

Practical sample contract clauses

Below are compact, negotiable clause drafts you can adapt. (Local law review required.)

1) OSS Disclosure & SBOM

Open Source Disclosure and SBOM. Supplier shall provide, at Delivery and upon any material update, a Software Bill of Materials (SBOM) listing all open source components, their versions, and licenses. Supplier shall also provide copies of any required license text, attribution, and NOTICE files necessary to comply with such licenses.

2) License Compliance Warranty

License Compliance. Supplier warrants that (a) it has the necessary rights to incorporate and distribute any OSS listed in the SBOM under the applicable license terms, and (b) to Supplier’s knowledge, the use or distribution of such OSS in the Deliverables does not breach the intellectual property rights of any third party. Supplier’s sole obligation for breach of this warranty shall be to cure as set forth in the Remediation clause.

3) IP Indemnity (limited)

IP Indemnity. Supplier shall defend, indemnify and hold Customer harmless from any third-party claim alleging that the Deliverables, as delivered by Supplier, infringe or misappropriate a third party’s intellectual property rights, provided that Customer promptly notifies Supplier of the claim and allows Supplier to control defense and settlement. Supplier shall not settle any claim that imposes obligations on Customer without Customer’s prior written consent.

4) Remediation for OSS License Failure

Remediation. If Supplier’s use or distribution of OSS requires Customer to disclose its proprietary source code or otherwise violates Customer’s rights, Supplier shall, at Supplier’s sole cost and election, (a) obtain the necessary license or permissions, (b) replace or modify the Deliverables to remove the obligation, or (c) if neither (a) nor (b) is commercially practicable, refund Customer fees for the affected Deliverables and terminate the affected rights.

5) Security & Vulnerability Response

Vulnerability Management. Supplier shall maintain a vulnerability management process, promptly notify Customer of any security vulnerability rated as “critical” or “high” that affects the Deliverables, and provide patches/mitigations in accordance with the Service Levels described in Exhibit X.

Due diligence & operational controls (what to actually do)

For legal teams

• OSS policy: Create a clear corporate OSS policy: allowed licenses, approval process for copyleft, review for inbound contributions.

• Contract playbook: Maintain standard OSS clauses and negotiation positions.

• Audit rights & SBOM demands: Build these into procurement and vendor contracts.

For engineering teams

• Component inventory: Use automated tools to generate and maintain SBOMs.

• Dependency scanning: Integrate SCA (software composition analysis) in CI/CD to detect license and vulnerability issues early.

• Approval workflow: Require legal approval before using copyleft or unfamiliar licenses.

• Contribution rules: Ensure contributors sign a CLA or DCO with clear assignment/permission rules.

Cross-functional collaboration

• Create a cross-functional OSS review board (legal + security + engineering + product) for high-risk decisions (e.g., selecting AGPL component).

• Maintain a single source of truth (CMDB/SBOM tool) about libraries and versions.

Negotiation tips — what to watch for

• Be practical: Buyers often ask for broad warranties on all code; sellers should limit warranties for third-party OSS and instead promise disclosure and remediation.

• Cap IP indemnities appropriately: Indemnity for IP claims is valuable — negotiate scope and cap carefully.

• Audit balance: Limit audit frequency and define confidentiality measures and cost allocation for findings.

• Avoid overbroad definitions: Narrow “derivative work” definitions where possible to avoid accidental triggering of copyleft obligations.

• Escrow where continuity matters: If supplier’s proprietary code + OSS equals critical infrastructure, consider escrow.

Short checklist for contract negotiation & engineering handoff

• Has the supplier provided an SBOM (component, version, license)? ✅

• Are any copyleft licenses present (GPL/AGPL/LGPL)? If yes, get legal sign-off. ✅/❌

• Is there an IP indemnity for third-party claims that includes OSS? ✅/❌

• Are remediation and patch SLAs defined for security issues? ✅/❌

• Is there a right to audit license compliance and a defined cure process? ✅/❌

• Are export, regulatory, and data-privacy obligations checked against OSS usage? ✅/❌

• Is there a policy for inbound contributions (CLA/DCO)? ✅/❌

Common pitfalls (and how to avoid them)

• Blind trust in upstream: Don’t assume a widely used project is safe—verify provenance and maintenance status.

• Ignoring transitive dependencies: Scanners should include transitive dependencies; they often carry unexpected licenses.

• Treating OSS like proprietary code: OSS often comes “as-is”; try to push disclosure/remediation obligations instead of broad uptime or warranty promises.

• Missing attribution: Small mistakes like failing to include NOTICE files can trigger compliance violations.

Conclusion — practical balance

Open source is a strategic asset, not a legal toxin. The goal in commercial contracts is not to ban OSS or eliminate risk (impossible), but to manage it intelligently: enforce transparency (SBOMs), allocate responsibility (warranties, indemnities, remediation), and operationalize detection and response (SCA, patch SLAs). With clear policies, cross-functional workflows, and focused contractual language, organizations can harness the benefits of open source while avoiding the common traps.