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This article is written by Nazai N, pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.com.

Introduction

Softwares form an integral part of our day to day activities such as businesses, education, governance, healthcare, social security, entertainment, defence and what not. A great deal of effort, money and time are put into building softwares that cater to varying needs of the buyer. The language of the softwares is complex and is far from the easy understanding of an ordinary man. Therefore, it is very important for the buyer of a software to understand the whole aspect concerning the software development and its functioning and maintenance, which in turn make it even more important to put down the details in black and white. Software Development Agreements are meant to capture the essential terms and conditions regarding the development of softwares and its subsequent operation. There are several phases in the development of a software application right from conception to testing and implementation to support. Hence, software development agreements are essential to bring in clarity in the entire process and provide steps to resolve potential future disputes between the parties.

Importance of software development agreements

Software Development Agreement, also referred to as Master Services Agreement (MSA), is an agreement entered into between a software developer and customer for the purpose of developing, selling, transferring and maintaining tailor made softwares to clients who will integrate it into their platforms, products, services or processes. In the course of such a relationship such relationship between the parties, there can arise several important questions relating to the ownership of the software, Intellectual Property, support and maintenance, source codes etc.

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A well drafted software development Agreement makes the journey smooth right from start to finish. It is often thought that drafting a software agreement requires one to understand all the details, techniques and know-how of software development. For most part it is a misnomer though, this has to be answered by looking at the nature of a business. For a business that runs mostly on traditional lines and needs software for basic functions or not so important tasks, knowledge of the technology behind the software is not mandatory. On the other hand, it is very useful for one who is in a technologyin technology based business to have a thorough knowledge of the technology used, coding language, and other information for it can go a long way in conceiving a well negotiated, well drafted agreement. It also minimises the chances of future disputes.

Such agreements are important for another reason. The relationship between the Parties do not come to an immediate stop once the developer delivers the final version of the software. It is, in fact, only the job half-done. It is possible that there can be initial glitches in the implementation of the software. Therefore, there has to be a constant monitoring and fast resolution to the issues. In some cases, the developer may also be tasked with training and handholding the employees of the customer company to manage the software beyond the contract period. Winding up or liquidation of the developer company can also not be ruled out. In such cases, it has to be clearly defined as to how the parties shall fulfil the terms in the agreement without hurting the operations of the customer. Therefore, a legally sound, comprehensive software development agreement must foresee such scenario and add provisions to effectively address them.

Types of software development agreements

Software development involves spending a largespending large amount of time and money. It is, therefore, important to clearly define the type of agreement that the developer and the customer want to enter into. Based on the requirements of the customer, the time needed to develop the software may vary. This may also result in the cost going up. Hence, being aware of different types of contractscontract will help decide the parties what suitsuits them best.

  • TIME & MATERIAL: In this agreement, the customer agrees to pay based on the time the developer spends on the project. This usually suits a large scale project as the customer’s primary focus lies more on getting the product as visualised than the cost. Therefore, this model will not suit an agreement with a limited budget. Because under this model, the realisation of the final output may take longer than expected which in turn may result in escalation of cost. Agreement under this method will be relatively easier to take off as it does not require much preparation. This idea is similar to the Agileto Agile model of software development, which represents a more flexible approach with room for continuous improvement.
  • FIXED BID & FIXED BUDGET: Under fixed bid method, the scope of work and the price are clearly defined. This method is preferred for small scale projects whose scope of work remains consistent throughout. For example, the customer wants a demo of the software or certain components to understand its working.

Fixed budget is the sameis same as a fixedas fixed bid method except for its flexibility in its scope of work. Even though the budget is fixed, the customer grants the developer to change the scope so as to get the best output with limited resources.

The above two methods represent the Waterfallrepresent Waterfall model of software developments in which the developer has limited or no liberty in terms of making changes beyond a certain point. It is diametrically opposite to time and material method.

  • FIXED BUDGET WITH BONUS: Fixed budget with bonus means providing bonus to the developer as an appreciation for finishing the project ahead of schedule. However, this can be positive and negative at the same time. It can be positive when it encourages the developer to put their best foot forward to finish the project on time without compromising the quality. On the other hand, it becomes counterproductive when the developer fast tracks his work to finish it ahead of the schedule and bag the bonus without paying due attention to the quality. Therefore, the customer has to clearly define the criteria for the bonus in the agreement.

Important clauses of software development agreement

A contract is only as good as the quality and comprehensiveness of its clauses. Agreement for software development is no different. It addresses many concerns of the parties and facilitates a smooth relationship throughout. Unlike the traditional contracts, software agreements have certain peculiar clauses to be incorporated. Now, we will discuss such clauses and understand how important they are.

  1. INTELLECTUAL PROPERTY RIGHTS: Developing a software from scratch means something new that was not there before comes into existence. This naturally gives rise to the question – ‘who owns the product?’. Is it the developer by whose skill the software is developed or the customer who pays for it? The normal practice is to vest the ownership and every other rights on the the software with the customer though, having a solid clause in this regard would help avoid any unwarranted claims by the developer in future.
  2. SOURCE CODE ESCROW: The source code or the language used by the developer forms the crux of the software technology. Therefore, it is very important to ensure that the customer has access to it even if the developer company goes out of business. Escrow, in the context of software development, means depositing the source code with a trusted third party. In case the developer is unable to support, source code escrow helps the customer to ensure that the code does not disappear with the developer. It is also crucial for continued support and maintenance of the software. Also, if the customer wishes to go with another developer, this clause shall help save him from any risk.
  3. CONFIDENTIALITY: Confidentiality is of paramount importance in any contract. But in technology contracts, it matters even more. Confidentiality clause helps determine what information should be kept confidential. This clause survives the agreement itself i.e., confidentiality must be maintained even after the contract achieves its purpose.
  4. TESTING: A complete software may warrant multiple rounds of testing. This will help the developer to perfect the software. Incorporating a clause that details the testing and the conditions to be satisfied during the testing to consider a softwares as successful would help the parties in setting up the expectations better.
  5. MAINTENANCE: Even after successfully going live in the production environment, the customer may still require the support of the developer. It can be just for maintenance or for further improvements based on user experience. Capturing the relationship of the parties for continued support and the duration of the support, among others, can go a long way in minimising possible disputes.
  6. TRAINING: In cases where the developer works as independent contractor and the software developed is ‘work made for hire’, it becomes imperative to train the customer and their employees for the purpose of its use as well as maintenance.

These clauses can be considered to be unique to technology contracts such as software development agreement. However, such clauses alone cannot constitute an effective agreement without the routine clauses. Those important clauses are:

  • Consideration
  • Dispute resolution 
  • Warranties and representation
  • Term and termination 
  • Notices
  • Governing law and jurisdiction 
  • Boilerplate clauses

Pros and cons of software development agreements

As discussed above, the two important types of Software development agreements are Time and Material & Fixed budget. The parties may agree on either of them based on the nature of the work. Before agreeing on the type of the agreement, it is helpful to have a good understanding of pros and cons of both models.

Time and material

PROS:

  • Taking off of the project shall be easy as it is not preceded by marathon preparatory discussions.
  • Provides the developer and the customer room for continuous improvement.
  • Engages the customer in every stage and focus on giving shape to the product as envisioned by the customer.
  • Not constrained by budget and short deadlines.
  • Gives the developer more flexibility as they may conduct the testing in parallel with the development.

CONS:

  • Only suitable for large scale projects.
  • The customer often have only a limited control over the entire process.
  • It can take longer than expected which may result in cost escalation.
  • Over flexibility of the parties, especially of developers, can prove to be counterproductive.

Fixed Budget

PROS:

  • The developer gets a detailed description of what he needs to work on right from the beginning.
  • A definite timeline for completion is decided before the commencement of the work.
  • Cost effective.
  • Helps the customer understand the quality of the work of the developer without risking the entire project.

CONS:

  • Suitable only for small scale projects.
  • Least or no flexibility for the customer.
  • Change in scope of work may incur additional expenses.
  • Requires a long and detailed preparation before the project takes off.
  • Limited budget may impact the quality of the output.

Conclusion

Technology has invaded all spheres of our lives. For one who is in the business of creating technology solutions, it is very important to conceive a well drafted software development agreement to minimise potential risks. Unlike normal contracts, software development agreements contain certain clauses that are unique. Clauses such as intellectual property rights, source code escrow, testing, training and maintenance, among others, are crucial to a software agreement. The parties may decide between fixed budget agreements or time and material agreements based on the size and scale of the project. An appropriate dispute resolution clause can bring in clarity as to the steps to be taken in the event of a dispute, especially in transnational transactions. While including all relevant provisions, the parties have to consciously keep the language of the agreement simple and comprehensive as a software is very technical in nature and may naturally come across as difficult in the eyes of an ordinary man. In a nutshell, it will not be wrong to say that the software agreement is as important as the software itself. 

References

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