The article is written by Akarsh Tripathi, a student of Symbiosis Law School, Noida. The article highlights 10 unique clauses that are present in technology agreements.
Table of Contents
Introduction
Technology contracts are one of the most common kinds of legal documents in today’s world. Irrespective of whether the goods are provided online or offline, most of these goods will have some other connection to the world of technology. Due to this increasing use of technological products and services, it is important for legal professionals, to understand the essential clauses and crucial aspects, which must be considered while drafting or negotiating such contracts.
But what is the meaning of “Technology Contracts?”. Well, these are the contracts which are used to indicate the agreements related to information technology products and services. They are also known as “IT Contracts”. There are different categories in technology laws, such as Application Service Provider, Software as a Service (SaaS), Resource Strategy Vendor Agreements, License Agreements, Cloud Computing, Evaluation Agreements, Technology Services Agreements, Software Licensing, Clickwrap/Browsewrap Agreements, Co-Location Agreements, Data Licenses, Maintenance Agreements, Master Services Agreements, etc. Although these contracts are different from each other with regards to their specific technologies and uses, most of them have some unique clauses which will be discussed in this article.
Unique clauses in technology agreements
Because of the widespread use of technology products and services, there are some clauses entailing a contract which should be given heed at the time of drafting or negotiating information technology contracts. Some of them are:
Intellectual property rights
It is not just IT contracts, but any contract, where the subject matter of the agreement can be protected by the use of intellectual property law, there exists a clause in the contract protecting the same by means of trademarks, copyrights, trade secrets, or patents, whichever is suitable. It is thus important that full details of the rights that are granted and the rights that are NOT granted, both, are mentioned in this clause, and the contract to be drafted with the utmost care and tailored in light of the party’s needs and intention.
This helps in removing any confusion between the owner and the customer, and to ensure that the owner’s intellectual property rights are not violated. Most of the rights are kept by the owner/supplier of the technology, but there are certain rights granted to the customer under the technology contract.
For instance, in case of a software licence agreement, the contract may prevent the technology from being modified, reverse engineered, or sub-licencing of the technology. However, the right to use the software and make a certain number of back-up copies may be granted. It is also important for the supplier of the intellectual property to warrant that they themselves have the right or the ownership of the rights that they are granting.
Limitation of liability
Limitation of Liability clause is considered to be a deal-breaker clause and is the most heavily negotiated part of a technology agreement. The meaning of “Limitation of Liability” can be easily understood by the name itself. The clause limits the amount one party has to pay to the other party in case the party suffers from loss due to unforeseeable damages in the technology, leading to the breach of contract.
The purpose behind such a clause is to manage the risk attached to a contract. It prevents the other party to claim for damages without any limitation on the amount, thus increasing the exposure to the risks of a contract.
The clause generally has two components: Liability Cap and Exclusion of Liability. The parties can decide mutually over an amount of maximum liability attached in case of breach of contract. This amount can be decided by using certain formulas depending on the value of the contract, or on the basis of the consideration paid as per the contract.
Or, in case of exclusion of liability, the parties can expressly exclude liability which may arise due to consequential damages. This means that once agreed, the owner/seller of the technology won’t be liable for any indirect, special, punitive or incidental damages to the subject matter of the agreement.
From the perspective of buyers/customers of the said technology, it is advised for them to press for uncapped supplier liability. Even if there is a cap on the liability, the amount should not be less than the value of the contract or equivalent to the consideration(fees) of 12 months. They should also avoid capping intellectual property indemnities.
Thus, the Limitation of Liability clause helps to reduce the risk and liability associated with the contract, and carve out the exposure of parties to the contract from unpredictable damages caused.
Indemnity
The indemnification clause is where the user has to indemnify the supplier of the technology and indemnify, defend and hold them harmless in case there is any breach by the user. The reason behind this clause is to protect one party from significant risk which may arise due to the claims of the third party which the user is doing business with.
Usually, the vendor avoids indemnity for intellectual property claims which are triggered by the breach of contract by the customer or by any unauthorized use or modification like reverse-engineering of the software by the customer. Similarly, the supplier can limit its liability and risk for any intellectual property rights claims which may arise from the use of the software with third-party technology.
In some cases, the supplier of the technology which is the subject matter of the IT contract may ask for indemnity in case the behaviour of the customer triggers third party claims. For eg, the customer’s online conduct may breach any third parties’ intellectual property rights, or violate any other specific loss.
In case a customer is sued by a third party, claiming that the use of the technology is infringing some intellectual property rights, or any other patent claim, etc. Then, the vendor indemnifies the customer and will pay for any kind of settlement or judgement.
The standard indemnity language may include several exceptions, and that is where customers get tripped up. This is the reason why buyers must resist suppliers asking for indemnities which can be inappropriate.
Thus, it is also important to review the terms of usage of any agreement, as it may lead to a breach of contract and make the party liable to indemnify the supplier of the technology. Buyers usually expect indemnities for wilful default or negligence and intellectual property rights infringement where applicable.
Escrow provisions
IT contracts also include technology escrow provisions An escrow agreement is a contract that outlines the terms and conditions between parties involved, and the responsibility of each. These agreements usually involve an independent third party, known as an escrow agent, who holds an asset of value with himself(in escrow) until the specified conditions of the contract are fulfilled.
An escrow agreement is a way to minimize the risks involved in the purchase of technology services There are several types of escrow agreements, like source code escrow, technology escrow, etc depending on how the licensor delivers the technology.
A software escrow agreement allows the licensee to request that the escrow agent release the source code of the product to the licensee so that the licensee may make the necessary adjustments to the software at its own expense and allow it to operate properly.
On the other hand, a technology escrow agreement offers protection for many of these risks for annual costs, depending on the size and complexity of the service offering and the data retained by the escrow agent.
In many cases, the delivery of the software or the data is dependent on the ability of the provider of such software or data, to continue doing business. If the provider gets insolvent, bankrupt or comes under any such situation, there need to be provisions and clauses in the technology agreement protecting the companies.
Thus, companies who are considering new technology or renewing their existing technology, it is important for them to evaluate the risk associated with the use of the software. It may help in minimizing the risks associated with lost data or a licensor’s intentional or unintended termination of access to the software and data.
Term and termination
The ‘term’ clause of a technology agreement mentions the date when the agreement begins and the ending date of the agreement. It shall also mention the conditions which can lead to an extension of the term of the contract. The method of calculation of this term can be mutually decided by the parties
If any party wants to cancel the contract and terminate the agreement at any point of time, then they can do it under the ‘termination’ clause of the agreement. The clause mentions all the situations under which a contract can be terminated or cancelled and to legally discharge the parties from the contract, all the fees and consideration should be made.
This clause is typically placed within the ‘Terms and Conditions Agreement’ of IT contracts related to software and data.
Dispute resolution
Going to court for settling a dispute can be expensive, and a time-consuming process. Also, called as ‘Alternative Dispute Resolution’(ADR) clauses, it is used to ensure that the important elements are provided in the contract, and there is no ambiguity present in the contract.
Confidential information
Technology or software may include some confidential data or trade secrets or any other sensitive business information. For this, we have Non-Disclosure Agreements and Data Protection Clause.
Non-disclosure agreements (NDAs) are legally binding contracts with an aim to protect confidential information or material shared between parties. It is a requisite when it comes to protecting intellectual property rights and other business assets as it provides explicit legal consequences for a party who breaches the confidentiality clause
One of the common mistakes made by buyers of technology is to rely on NDA, i.e. Non-disclosure agreements present in the contract. They need to keep in mind that NDA’s are not used for Data Security. They only protect trade secrets and not the private data held by the vendor.
It is important for technology developers to take precautions to secure their rights of innovation and other confidential pieces of information. In the world of technology, data moves from one platform to another and reaches numerous service providers who transmit, use and store such data. Thus, special data security provisions should be embedded in IT contracts in an effort to prevent disclosure of sensitive 3rd party information.
To add more sense to these Non-Disclosure Agreements and Data Protection Clauses, it is recommended to add specific details related to the jurisdiction in case of dispute, and the right of parties to seek an injunction and prevent the other party from committing a breach of contract.
Warranty
A warranty clause is one of the most important yet overlooked contract provisions in an IT contract. It deals with the performance of the software and the claim made by the licensor regarding what the software will or will not do. It also has a time period in some cases, depending upon the agreement and the mutual conformity of both the parties.
These performance warranties present in the technology agreements must be heavily negotiated, especially in cases of agreements related to software licencing. The reason behind this is that there are many factors that can affect the performance of software, however many a time the publisher of the software tries to limit the warranty and limit the remedies in case of a breach.
Usually, these warranties are given for firstly, the ‘title’ of the software which explain that who is the owner or who has the right over the subject matter of the technology. Secondly for the ‘performance’ of the software simply defining the capabilities of the software and what all can be done by the particular software. Thirdly, the ‘virus’ which mentions that the subject matter of the technology is free from any material defects and has no harmful codes.
Force majeure clause
A Force Majeure clause (French for “superior force”) is a provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
It is a contractual clause altering the parties’ obligation and liability under a contract, by using an extraordinary circumstance as a reasonable explanation of non-performance of the contract. Parties to the contract should be careful about the terminologies used in the clause. The main question which arises is whether an act will trigger the Force Majeure clause or not?
A fundamental requirement of the force majeure clause is ‘foreseeability’. Thus, the fact that whether the so-called extraordinary circumstance could be foreseen or not, and whether reasonable precautions were taken by both the parties to limit the damage or not? Are the essentials which shall be taken into consideration before two parties come to a conclusion that what can be done to discharge the liability of the contract.
Audit and regulatory compliance
According to the Audit and Regulatory Compliance clause, at the cost and upon the request of the vendee, the vendor shall permit and assist the vendee or its representatives [with reasonable prior notice] to conduct regular audit checks. The clause strengthens the security and privacy controls to organizations and allows for identification of risky business partners.
The general audit rights include the right to audit the service provider’s facilities, systems and records. This is done to verify the compliance with the obligations under the agreements and to ensure that the services being provided are in accordance with the service levels, compliance with the law, compliance with the security requirements and amounts charged under the agreement.
The importance of Audit and Regulatory compliance is that When organizations know they could be audited at any time, they will be motivated to ensure that their information security and privacy controls meet all compliance requirements and are effective.
There are some myths related to compliance which are absolutely false. Some of them are that, if an Audit clause is added, then you are obligated to perform an audit. The clause only reserves the right to audit and determine whether the services provided are in compliance with the agreement or not.
Conclusion
In the world of technology contracts, lawyers need to make sure that each and every clause is negotiated carefully, and the specifications must be given proper attention. These tech contracts often fail to explain the actual capabilities of the subject matter of the agreement. The above-mentioned list of unique clauses is present in almost every technology agreement.
Lawyers need to keep in mind, that while drafting such contracts, there should be transparency, use of plain language, and unnecessary technical abbreviations must be avoided. It is also advisable to keep the IT Contracts comprehensive and short, yet they should cover every important component reducing the risk and liability associated with the contract.
References
- https://tonyagibbslaw.com/10-common-contract-clauses-and-what-they-mean/
- https://blog.capterra.com/negotiating-software-and-it-contracts/
- https://www.computereconomics.com/article.cfm?id=1407
- https://www.computerweekly.com/opinion/IT-contracts-standard-terms-conditions-explained
- https://improveit.org/learn/it-management/what-look-it-contract
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