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This article has been written by Mihir Sinai Kakodkar pursuing the Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho). 

Introduction

The drafting of a technology agreement entails the understanding of the technical jargon which must be incorporated into the agreement, and to translate the commercial intentions of technology-driven transactions into enforceable legal obligations. While the basic structure of a technology agreement emanates from the structure of an ordinary agreement, technology agreements are almost always executed in the electronic mode wherein the first party is usually common, and the second party comprises millions of end-users, usually individuals. Such technology agreements like ‘TERMS OF SERVICE ‘, ‘USER POLICY ‘, and ‘TERMS OF USE‘, are invariably pre-drafted, identical, independent contracts, executed by Click-Wrap or Browse Wrap, and their terms are non-negotiable. Negotiated technology agreements are entered into mostly for providing Cloud Computation Services and IT Professional Services. In electronic contracts, a vast volume of data is generated in an online database. Even negotiated IT Professional Services agreements require handling and storage of data. Consequently, Data Management, Confidentiality, Data Security, and Data Privacy is of utmost importance. Hence, technology agreements have certain Operative Clauses with an objective to safeguard the data, which clauses are specific to technology agreements.  While most Boilerplate Clauses are common to technology and ordinary agreements, their drafting in relation to technology agreements requires a deeper technical understanding of the sector and the full spectrum of the peculiar facts of each transaction, to enable their customization to the needs of the agreement being drafted. 

Usage of grammar

Technology Agreements are usually of high value, are often across geographies, and executed by parties with cultural differences and different usages and meanings of words. In case of dispute, the text of the agreement could be left to the scrutiny and interpretation of arbitrators based in third geography with an entirely different cultural ethos. In such a situation, it is absolutely essential that the usage of grammar and punctuation be absolutely meticulous. Verbs like ‘ Will ‘ and ‘ Shall ‘, ‘ May’ ‘ Might ‘ and ‘ Must ‘, ‘ Would ‘ and ‘ Could ’ , ‘ only ‘, ‘ and ‘ or ‘ or ‘  or ‘ and/or ‘ must be carefully used to convey the precise intention. Even a wrong placement of the word ‘ only ‘ in the same sentence can convey a vastly different meaning.

Structure clauses   

Specific attention should be paid to the drafting of key clauses like-

  1. Consideration Clause
  2. Recitals vs background
  3. Headings of Clauses 
  4. Definitions and Interpretations 

Clauses of a Technology Agreement

  1. Title 

This should clearly capture the specific nature and essence of the relationship between the parties.

  1. Date 

These comprise the Date of execution of the agreement and the Effective Date of its commencement.

  1. Names and Information of the Contracting Parties 

Brief details and legal status of each of the Parties is enumerated herein so that each of the parties is uniquely identified along with their legal authority to enter into the binding agreement.

  1. Recitals 

The introduction and brief background of each party along with their respective competencies in relation to their role in the subject matter of the agreement is recorded. 

  1. Preamble 

This states the principal objective of the parties to enter into the instant agreement.

  1. Definitions 

This provides definitions to any terms that have a technical meaning or to which a technical meaning or a limited scope of meaning or an expanded scope of meaning is intended to be given in the agreement. 

  1. Interpretation 

This interprets the inclusions, limitations, and exclusions of any general words that may be used in the agreement.

  1. Obligations and Payment 

These clauses state the obligations and tasks to be undertaken by each party towards the other which constitutes the basis of the transaction between the parties, and the generic details, quality specifications and scheduled timelines for the supply of Goods or Services which form the objective of the agreement. 

With respect to Supply –

  1. the mode of Measurement of Performance for measuring the commercial transaction ;
  2. Performance Guarantee / Success Rate ;
  3. Delivery of Goods & Services and the Criteria for Acceptability.

With respect to the Recipient- 

  1. Total consideration payable for the goods and services to be provided along with stage-wise milestones linked payment schedule ;
  2. Penalty clause.

With respect to the commercial aspect of the transaction –

  1. Computation of value payable ;
  2. Mode of invoicing ;
  3. Processing of Invoices and time lines ;
  4. Payment of Invoices including currency, mode of payment;
  5. Advances, Deductions & Recoveries. 
  1. Term and Termination 

The clauses herein state the –

  1. Effective date of commencement on which date the mutual obligations of the parties is activated. This could be the date of the agreement or retrospectively, or prospectively upon the completion of an event specified in a separate Conditions Precedent Clause ;
  2. Scheduled date of End of Agreement, which could either be a fixed date or upon the actual completion of a contractual event ;
  3. Whether the agreement is Renewable, and if so, the details thereof including whether it is automatic, or at whose option, whether it is binding on the other party, the period for such renewal, the terms, including any that can vary on renewal ;
  4. Termination of Agreement Clause laying down the various specific causes thereto, option of termination for convenience, and the mode for termination of the agreement ; 
  5. Reverse Transaction Services and Terms regarding Handover of technology and belongings at End of the Agreement or upon its prior termination. 
  1. Covenants 

They specify every action that each of the parties commits to undertake or abstain from.

  1. Breach of Agreement, Consequences of Breach, and Remedies.

They define the ‘Event of Default ‘ constituting ‘Breach of Agreement’, and the remedies available to the injured Party including Rescission of Agreement, Damages, Specific Performance, and Injunction.

  1. Representations & Warranties 

This lists down the underlying statements of fact or assertions about quality by each party to the other based on which the respective parties have entered into the agreement. Misrepresentation can lead to cancellation of agreement and invite a legal suit. Erroneous Warranty can lead to Claim for Damages.  It is necessary to define clearly what the Warranty Clause will cover and the Monetary Cap.

  1. Indemnity 

This safeguards the interests of one party arising due to breach of contractual responsibility by the other, which can lead to losses for the non-defaulting party. In technology agreements, some of the most common form of indemnities include –

  1. IP indemnity for third party claims made for IP infringement ;
  2. Personal and property damage ;
  3. Disclosure of confidential information ;
  4. Misuse of licenced software for unlawful activities ;

This also states –

  1. the Cause of Action for invocation of Indemnity ; 
  2. Mode and process for invocation of Indemnity ;
  3. Specific aspects covered ;
  4. Limitation of Liability Clause does not apply ;
  5. Ways and means for Mitigation of Issues under Indemnification;
  6. Insurance to cover claims.
  1. Limitation of Liability 

This limits the liability for breach to a predetermined amount. In technology agreements, there can be huge claims of Direct Damages and Indirect Damages. The Monetary Limit on the liability arising out of such claims is limited by this clause. Typically in technology agreements, the value of all such claims is limited to –

  1. A predetermined lump sum value or  
  2. The Value of Invoice or its percentage.

This clause will include ‘ Exclusion of Consequential Damages ‘. 

  1. Liquidated Damages 

This specifies the amount of money that will be payable in the event of default in performance of contractual obligations. 

  1. Specific Performance 

This has to be granted by a Court. Courts will grant specific performance in cases where the actual damage from the non-performance of the contract cannot be ascertained, or where monetary compensation would not be adequate relief.

  1. Escrow Mechanism

This provides for nomination of a third party as Escrow Agent to store and hold the critical ‘ Source Code ‘ in trust so that the licensee of the Software is not in difficulty in the event that the owner of the ‘Source Code’ ceases functioning.  

  1. Confidentiality 
  1. Technology agreements involve transfer of know-how, sensitive business information, and Personally Identifiable Information. In case of breach, licensee might face financial harm. 
  2. It is necessary to identify and clearly define what constitutes ‘Confidential Information ‘
  3. This clause specifies the standard of care to be taken by the licensee in handling the data including provisions for physical security, signing of non-disclosure agreements with its employees, internal security protocols and procedures, and compliances stipulated to minimize the risk of information breach. 
  4. The consequences, obligations and remedies of both parties in case a breach happens is specified.
  5. Provisions for indemnity, subject to cap, in case of breach. 
  6. Exceptions to this clause should be clearly stated 
  1. Data Security 

This is essential as they invariably involve transfer and storage of sensitive technical and commercial information. 

  1. Data Security Policies 

Data Security being important, it is necessary to specify in detail the security policy for handling, transfer, storage, and preserving of data between the parties as also by each of the parties. The primary Data Security Policies are Access Control Policy, Data Encryption Policy, Clean Desk Policy, Bring Your Own Device Policy, Employee Background Checks, Audits and Testing, Certification, and Insurance to cover the claims arising out of any breaches in Data Security matters.

  1. Data Management 

This states how the data will be accessed, and the ownership of data

  1. Disaster Recovery 

Where critical data is stored on a cloud a disaster can lead to shut-down. To avoid this, technology agreements require the Vendor to keep the operations running even in the face of Force Majeure situations, and restore the service functions after a disaster. A detailed Disaster Recovery Plan is incorporated.

  1. Assignment of Contract 

This places restrictions by the Licensor on the licensee with respect to assignment of the contract or engagement of third parties for execution of any part of the contractual work so that the licensed technology or sensitive information is not accessible to competitors 

  1. Intellectual Property 

This clearly states who owns the Intellectual Property that is created out of the agreement, and the mode and details of its transfer 

  1. Exclusivity 

This states that for the duration of the agreement or the discussions leading to a possible agreement, the contracting parties will not enter into negotiations or an agreement with a third party for similar nature of work / product / services.

  1. Variation / Amendment 

The purpose of this is to formally effect the amendments, if any, necessitated on account of various extraneous reasons.

  1. Force Majeure 

This specifies all the unforeseen situations beyond the control of the parties, and under which the parties cannot be compelled to perform under the agreement, except for making payments. 

  1. Waiver  

The Non Waiver Clause enables to keep a contract flexible in case of tolerable infringements

  1. Notice and Communication 

This creates the framework for the parties for inter-party communication, and the mode for addressing of Notice, the time period for its issue, the mode and process for its dispatch, service, evidence of delivery, deemed delivery, etc.

  1. Severability 

This states that agreement will not end because certain clauses of the agreement have become unenforceable or void, and that the balance will remain valid. 

  1. Joint and Several Liability 

This specifies the liability of each of the members constituting a party 

  1. Governing Law

This specifies the law applicable to the agreement and sets out the legal framework that will govern any sort of disputes that may arise between the parties. There should be some nexus between the contracting parties or the transaction, and the chosen Governing Law. 

  1. Dispute Resolution 

This sets out the framework how a dispute between the parties will be resolved, the mode of resolution (Litigation or Alternate Dispute Redressal mechanism like Consultation, Mediation, and Arbitration ), the venue, Rules of which jurisdiction shall be applicable and the number of Arbitrators ( to Arbitration Proceedings), the Time Period, and the Language. 

  1. Jurisdiction 

This provides which Court will have jurisdiction in the matter, preferably ‘ Exclusive Jurisdiction‘.

  1. Non-Compete 

This provides that a person with whom a relationship is entered into does not directly compete or work with the competitors.

  1. Non-Solicit 

This ensures that the people who work with clients do not engage client’s employees or consultants to work with them.

  1. Independent Contractor

This states that the parties are working on a principal-to-principal basis.

  1. Entire Agreement

This states that the Agreement is the entire agreement between the parties and all other previous oral and written arrangements between the parties are not enforceable. 

  1. Construction 

This precludes the Court from holding any unclear term or clause of the agreement against the party who has drafted the clause

  1. Survival Clauses 

Some clauses need to survive the termination of agreement up to a certain period of time after the termination to make the agreement complete and effective

A technology agreement, in electronic mode, shall end with the acknowledgement of acceptance by the Second party by clicking of a ‘Tick’ to an ‘I Agree’ button, whereas in physical mode it would be signed by all the parties on one document or in counterparts

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. Technology 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 jargon must be avoided. It is also advisable to keep the Information Technology contracts comprehensive and short, yet they should cover every important component reducing the risk and liability associated with the contract.


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