IT Agreements – 7 Key issues

We represent many Software Developers, Web Developers and other IT providers. We draft and negotiate IT contracts on a daily basis and advise providers on many Software and Website legal disputes. To put yourselves in the best position, you need to have a solid contract in place.

Please call us if you need help on any contractual issues. We will be pleased to give you a free assessment of your situation and of the best way to proceed.  Please contact us.

However as a starter, we shall examine seven key areas which should help you to put together the essentials of the contract. However, as you would expect us to say, you should get proper input from an expert IT lawyer as a well-drafted contract can save you a lot of time, money and grief.

1. Scope of Work

Whatever you are doing, whether it be the development or provision of software, websites, hardware or other IT services, you should ensure that the parameters of what you are supposed to provide are unambiguously set out in the contract. If you do this, you should eliminate the nightmare scenario of “changing goalposts” in which the customer’s demands change and expand during the course of the contract and you cannot point to a definitive statement of the full extent of your obligations. In this situation, you may well find yourselves in a “Catch 22” where your choice is to render additional services without additional charge which erodes or eliminates your profitability or to hold your ground and risk being sued for breach of contract as well as not being paid.

2. Ownership of Intellectual Property Rights (IPR)

Under English law, the basic rule is that it is the author of the code who owns the copyright in the software or website. This is not affected by the fact that the person commissioning the work has paid for the work. There are two major exceptions to this rule. The first is where the work was done by an employee of a company. In that case, it is the employer who will own the copyright. The second is where the author has transferred the ownership of the copyright by means of a written document which provides for the assignment of the ownership from the author to another party, usually the client.

Thus, if there is no provision in the contract transferring ownership of the IPR to the customer, it often makes sense for the provider to say nothing and rely on the default position at law if a dispute arises.

3. Limitation of Liability

This is a very complicated legal area where the inclusion or omission of a single word can make the difference between safety and financial ruin.

The clauses need to be drafted very carefully and, as far as reasonably possible, address all the potential areas of liability in a reasonable way reflecting case law and statute in this area. Usually, it makes sense to separate the clauses out into separate sections in the hope that if some are considered unreasonable by the court, others will survive to eliminate or reduce your exposure.

As a longstop clause, it makes sense to include a provision setting a cap on your liability so that if the other clauses don’t save you from liability for breach of contract, you should, at least, be able to contain the fall out. In setting that cap, in order to maximise the chances of enforceability, you need to apply a logical limit. This is sometimes a multiple of the contract value but probably better set at the level of the ceiling on the professional indemnity insurance cover that you should have taken out.

4. Acceptance Tests

If you are developing a software program or website, you want to make sure that if you do what you are supposed to do, the customer has no excuse to avoid paying you.

In this context, it is advisable to tie the acceptance tests expressly in to the specification document referred to above on the basis that if the software or website is compliant with that specification, the customer should be obliged to accept the software or website and to pay you accordingly.

In order to avoid other typical problems, it is best to build in various other safeguards including leeway for minor discrepancies between what you deliver and the specification, the ability for you to rectify your work so that if it does not pass the tests first time around, you have chances to put things right without being in breach of contract. Deemed acceptance provisions should also be included so that if the customer does not respond within a certain amount of time after you have made delivery, the software or website is deemed accepted and the final payment becomes due.

5. Indemnities

It is highly advisable to build in indemnities from the customer so that you are covered if you incur any liabilities, costs or expenses as a result of work done in accordance with the customer’s specifications which involve directly or indirectly the infringement of any third party’s IPR or if you sustain any damage or injury of any kind caused by or attributable to any act or omission by the customer, its employees or agents.

6. Other Contractual Safeguards

It makes sense to build in a raft of other provisions to protect your commercial and legal position. These include:

  1. prohibition on the customer poaching your staff;
  2. leeway for you in respect of time of delivery;
  3. obligations on the customer to assist you and provide you with appropriate facilities to enable successful completion of the project or services;
  4. the right to charge additional sums if the customer delays your completion of the project or changes the goalposts mid-project.

7. Alternative Dispute Resolution (ADR)

The contract should provide for ADR as this enhances the prospects of any contractual problems being successfully overcome without the risks and expense of litigation.

ADR is often very successful as it seeks to establish acceptable common ground between the parties and no decision is imposed on them so that any resolution is in accordance with each party’s freewill.

Often this works out considerably cheaper and quicker than court proceedings. Also, it is clearly advantageous if your best interests would be served by a continuing relationship with the customer albeit that you don’t see eye to eye at the present.

Further Information

Hopefully, this article will have helped you to determine your legal position. However, if you have a specific problem, please call Simon Halberstam on 020 3206 2781 or via email to [email protected] or visit us at our central London offices for a free assessment of your legal IT contract issue.

© This article is copyright Simon Halberstam 2008 and should not be construed as legal advice or opinion in any specific facts or circumstances. the contents are intended for generic information purposes only. You are urged to contact a suitably qualified lawyer for specific advice.