10 essential points to remember while drafting an IT contract

May 14, 2021

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This article is written by Kazi Ashique Azfar pursuing Diploma in Cyber Law, FinTech Regulations, and Technology Contracts from LawSikho.


IT contracts generally means the contracts related to or used in connection with the IT system (in whole or in part), including – leasing, hire purchase, licensing, maintenance, website hosting, outsourcing, security, back-up, disaster recovery, insurance, cloud computing and other types of services agreements. An IT contract serves as a multi-faceted tool for businesses to defend their interests while also setting the tone for consumer interactions and projecting a positive picture of their company to outsiders. The companies can establish the perception of their contract and the relationship that they will have with their client by following a set of uniform rules and ethical standards when drafting these important legal documents.

Listed below are some pointers for drafting IT contracts specifically and even agreements, in general, that will help all involved.

It is important to have a clear understanding of the transaction and the relationship that the parties want to establish. Often due to the technical nature of IT contracts, the parties tend to not open up about the underlying matter of the transaction, expecting it to be cumbersome to explain or due to being wary of the legal process. It is also the case that lawyers are not able to grasp the matter clearly, thus, it is important to go over the needs and requirements of the contract. 

It is also important to see if both parties are on the same page, as it might be the case that the one drafting has a clear understanding, but the other party does not. It’s possible, for example, that after being asked to draft a specific contract by one party, you produce a comprehensive draught only to discover that the other party had a completely different idea of the agreement. A good approach is to draft the agreement in simple language in a few paragraphs, have both parties read it, and check that it accurately represents their interpretation of the relationship and transaction.

Before starting to draft any contract, spend time understanding exactly what is to be done and what is intended to be achieved through the contract. Understanding the relationship between the parties is essential and, if possible, even the nature of the underlying transaction and working of the IT system.  

The most common mistake or oversight that takes place in the legal draft is the inadvertent use of what has come to be known as legalese. While drafting a contract, it is important to keep the reader in mind who is not necessarily a lawyer; most often, the client or reader is someone who does not understand legalese. Anyone involved in the transaction must be able to comprehend the contents of the contract without requiring the assistance of another lawyer. This enables the parties to understand what is being agreed upon and is also helpful in dispute prevention because there is clarity in terms and agreement over the same. Writing legal contracts in plain language also indicates goodwill and enhances trust. However, this does not mean that legal security can be compromised; it is imperative while drafting that all adequate measures are articulated through the draft, but at the same time, that does not imply the use of unnecessary, superfluous legal language. Further, special attention is to be given to terms that might have specific legal meaning or specific meaning attributed to it in the common parlance in the business. The terms should only mean what is intended to be conveyed. Adopting more straightforward language thus would lead to better comprehension, less confusion among the parties, and reduced time spent going over inquiries related to the language.

On a similar note, usage and location of conjunctions (e.g., “and,” “or,” and “but”) and modifiers (e.g., “actively,” “knowingly,” and so on) should be clear and unambiguous. 

Similar to how Technical terms are frequently used in most contracts, IT contracts are often filled with technical terms. For example, the abbreviation “AAA” – or “Triple-A” – is commonly used in IT contracts to refer to a system for intelligently managing access to computer resources, implementing regulations, auditing use, and supplying the information needed to bill for services. 

Another common abbreviation used is SLA (Service Level Agreement), which is a mainstay as an annexure to many IT contracts. Those who are not part of the IT industry may not be aware of the technical acronyms and their meaning, which might also conflict with a more general term. Therefore, it is imperative to provide proper definitions in the definitions section to make understanding easier and unambiguous, and it is also vital to avoid using technical abbreviations that aren’t strictly necessary.

It’s best to keep contracts as short as possible: one of the biggest advantages of shorter contracts is that there’s less space for misunderstanding. If possible, keep your document to a maximum of 10 pages, collect all technical details in the annexes if required. Also, never underestimate the value of your company’s legal stance in your contractual arrangements, which takes precedence over the contract’s duration.

Many countries allow electronic signatures to be used to sign IT contracts. This is faster and simpler than a handwritten signature and, in many situations, carries more legal weight. However, an electronic signature should be used cautiously when parties from different countries are involved in a contract because it can become a point of contention due to the various methods used in different countries.

One-sided contracts are often unenforceable, and negotiating and signing them takes a long time. This is because when one receives a draft contract and sends it for review, the tendency upon seeing a document that is heavily weighted in favour of the other group is to go overboard and draft in reply an agreement completely in his favour. This leads to a lot of going back and forth, requesting several improvements resulting in a lengthy negotiation. 

End-user agreements help a company deal with uncertainty by ensuring blanket protection. They not only shield the company from potential problems, but they also convey to the users a lot about the company and its policies. They decide what kinds of freedoms consumers and resellers have with the app. An end-user agreement contains a lot of complex material, so it’s critical to review it thoroughly.

The use of non-disclosure agreements (NDA) or confidentiality agreements (CAs) by tech buyers for the purpose of protecting data is flawed and a common mistake. Non-disclosure terms are supposed to be used to protect trade secrets only and not data held or accessed by the vendor—and certainly not private data.

A data security provision should include protocols for securing data, such as encryption, passwords, dual control restrictions, physical server security, and so on. There should be data clauses that go into detail about non-disclosure as well as into privacy and discovery regulations that discuss non-privileged data, including identifying and cooperating with the parties that should receive data.

In several IT contracts, the vendor agrees to indemnify the customer in the event of an IP lawsuit involving the vendor’s technology. Suppose a third party sues the customer, alleging that the customer’s use of the vendor’s technology infringes on a patent, copyright, or trade secret. In that case, the vendor usually protects itself, pays its own legal fees, and may be forced to pay any court settlement sum.

However, exceptions to the standard indemnity language can be used to prevent vendor liability. Therefore, it is important to go through all of the exceptions in the IT contract thoroughly to prevent such a scenario.

Relationships and transactions have evolved, the scope of the programmes might change. A licence may be required to cover a larger number of individuals. Good contracts allow for easy adjustment in the event of a transition. Separate the legal and contractual terms so that further work orders or scopes of work can be signed while still being bound by the same legal terms. 

Further, it is a problem seen in many agreements where the one drafting does not understand the technology properly and thus inadvertently draft vague terms. Most software, if not all, are adaptable and flexible and can perform a wide range of complicated tasks. Thus, it is a mistake to assume that all parties involved understand what it is supposed to do and understand how it can be exploited, including limitations thereof. The work that the software can be used to do should be specified within the agreement leaving no scope for ambiguity. Without proper specification, warranties become ambiguous or worthless because they guarantee that the technology will work, but no one understands what “work” means. As a result, having precise, well-written specifications is critical.


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