proof of concept agreement
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This article is written by Pragati Pachisia, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here she discusses “Key Clauses of Proof of Concept Agreement”.

Introduction

A Proof of Concept or Proof of Concept agreement is an exercise in which the main focus is on determining whether an idea can be turned into a reality and if the idea is practical enough to be executed. A Proof of Concept is usually small and incomplete. It is also known as Proof of Principle.

The intention of a proof of concept is not to explore market demand for the idea, it is also not intended to determine the most efficient production techniques. Rather, its focus is to test whether the idea is practical in nature — giving the involved personnel in the proof-of-concept exercise an opportunity to explore the idea’s potential to be developed or built.

Developing a Proof of Concept allows the product owner to decipher its potential. It also reveals any technical or logistical problem that might intervene with the success of the product. This development gives the organisation to gain valuable feedback through the internal sources of the organisation, providing the stakeholders with an opportunity to give their inputs in the development stages of the product or service for the betterment of the same and creating stakeholder involvement.

Developing a Proof of Concept requires the appropriate technology and the necessary physical aid to manufacture or create the product or service. This tedious process, however, allows the product designer to measure the idea’s feasibility before starting the production process and engaging resources in order to convert a mere idea to a finished product or service.

Proof of Concept is used in various sectors such as science and engineering sectors, drug discovery, hardware, software, manufacturing, etc. to assess the procedure of the idea before further pursuing the idea and converting it into full-scale production. A Proof of Concept should explain in what ways the product or service shall be used, the objectives to be achieved via this idea, any other business requirements.

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A few aspects that should be kept in mind while drafting a Proof of Concept agreement and they are :

  1. Duration of the said agreement
  2. Clearly stated criteria for acceptance and success pf the product or service
  3. On what basis the Proof of Concept shall be evaluated
  4. How to move forward if the Proof of Concept proves to be successful or unsuccessful

Since various sectors use Proof of Concept agreements, there are some standard clauses that are imperative to the agreement. These clauses can be found in almost every Porrof of Concept agreement.  The key clauses of a Proof of Concept agreement are:

Definitions

This clause contains the definitions of all the various terms that are exclusive to the agreement. This clause is required for a clear definition and understanding of certain specific words exclusive to the agreement. This clause also establishes the scope of certain terms that may later lead to ambiguity and uncertainty.

This clause is usually the first clause in the agreement as it contains the definitions of the words further mentioned in the agreement, so that the reader can clearly understand in what sense the terms have been used and if they include or exclude any special meanings.

Tenure

This clause is fairly simple as it specifies the time period for which the Proof of Concept agreement shall be carried out. The clause shall mention the exact dates of the enforcement of the agreement and when and how the agreement is to come to an end or be terminated.

If the clause mentions the number of years from the date of enforcement as till when the agreement is to remain effective then the agreement shall immediately be terminated after the lapse of the mentioned time period.

General Performance Obligation

This clause comprises of the details of the product or service for which the agreement has been drafted. The performance clause differs from sector to sector as different kinds of products with different features and different results are manufactured by these sectors.

Even though there are various sectors that manufacture various products the questions answered by the general performance clause are usually common. These questions are:

  1. What kind of product or service does the agreement offer?
  2. Who is the target audience?
  3. What are the functions of the said product or service?
  4. What is the main purpose for the manufacturing the same?
  5. What are the desired results from the usage of the product or service?
  6. Any precautionary measures that should be taken
  7. Any accidents/mishaps that should be avoided 

General performance clause answers all these questions regarding the product or service mentioned in the agreement. If any information which is exclusive to a particular product or service then that shall also be stated in this clause itself.

Ownership

The ownership clause is one of the clauses that is imperative to a Proof of Concept agreement. This clause declares that notwithstanding anything mentioned in any other clause the rights to the product or service mentioned in the agreement belong to its manufacturer. 

The rights mentioned above include all the patent, copyright, trademark, trade secrets and any other intellectual property rights. It includes all copies, modifications, changes made in the product or service by either of the parties to the agreement. Even if words like ‘purchase’ or/and ‘sale’ are mentioned in the agreement still it does not give any right to the receiving party to buy or sell the product or service.

Any other product or service that is derived from the existing product or service mentioned in the agreement shall also be a property of the manufacturer and no receiving party shall have any rights on it.

The receiving party shall use the product or service in the manner as specified in the general performance clause, however, if the manufacturer creates/produces/invents another product or service to aid such usage or add value to the mentioned product or service then the additional product or service also belongs to the manufacturer along with its rights.

Payment

This clause states the consideration that is to be made towards the manufacturer by the receiving party in exchange for the product or service used by them. The payment clause includes the following:

  1. The amount to be paid as consideration
  2. Extra charges, if any
  3. Any damages if the product or service is damaged or misused, by the party that has caused the damage
  4. Reimbursements towards the receiving party, if any
  5. Interest charged/received if any

Confidentiality

According to this clause the receiving party shall not disclose/reveal/publish/make public any confidential information regarding the manufacturer unless the manufacturer has granted the permission to do so or revealed such information about him and his organisation by himself. Confidential information means any information that is sensitive to the organisation and if made public knowledge would result in great losses to be borne by the organisation.

If the receiving party has to reveal any confidential information to any of its employees, affiliates, personnel, etc  then it is the responsibility of the receiving party that the said information is not disclosed and the said employees, affiliates and personnel are also bound by the same confidentiality clause as the receiving party.

However confidential information is not :

  1. Information that is or becomes publicly available on the website of the organisation
  2. Information that was known to the receiving party about the manufacturer or organisation before getting into an agreement with the same. In this case, the information is not to be kept confidential out of obligation.
  3. Information that was obtained by the receiving party via a third party who was not bound by the confidentiality clause of the agreement.

Warranty and Representation

The warranty clause ensures that the parties to the agreement are competent to enter into an agreement. When the parties to the agreement sign on the agreement they declare that they are competent to be parties to an agreement. 

This clause also ensures that the product or service has been created and manufactured by trained professionals in accordance to the applicable laws and if any mishaps occur due to the negligence of the manufacturer then he shall pay the damages. 

This clause shall also include a declaration by the receiving party that they are authorised to do so and have the necessary licenses, permits or consents to enter into the agreement.

Governing Laws

This clause contains the laws that govern the product or service mentioned in the agreement, the parties to the agreement, the corporations and companies mentioned in the agreement and the agreement itself. These laws state the rules and regulations that are to be followed by the parties to the agreement and make the necessary compliances if any.

These laws also state the punishment in case of breach of the law. These punishments are to be given when the parties to the agreement breach the clauses of the agreement or violate the law.


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