Importance of Software Development Agreement

Do you want to start your own business? Had a wonderful concept to be developed as an application? Are you looking for software developer to help you to build the brick of your dreams? You can very well go ahead but in today’s time, engaging a software developer is not as easy as it seems.

A well-executed contract is the need of an hour to get the complete control and ownership over the software, else, it might happen that you will find yourself in a situation where you have spent lots of money on development of software and all the efforts goes into vain.

Tough, there can’t be “One Size Fits All” kind of contract for software/ app development, but in this Article, we would emphasize our focus area to make Businessman understand the clauses and negotiation points to be discussed while taking services of software developer.

  1. Engagement & Scope of work: It is considerable that both the Parties have agreed to work in good faith with complete free consent and presence of mind i.e. without any kind of coercion, fraud, undue influence and misrepresentation.
    Also when Businessman discuss with the software developer, it have to dealt with an out of box thinking approach, as it play a key role in deliverables of the software/ app to be developed. Its scope of work must be very exhaustive and detailed one so that chances of dispute due to difference between the expected work and actual work can be mitigated.
  2. Change in Specification: As we discussed above, that scope of work must be detailed one. But we all know that the imagination of final product looks different from actual product. So what would be the scenario, when certain changes in the specification of software / app as already mentioned in the contract need to be modified and altered. It is certainly advisable to have discussion and clause related to how the change in specification of deliverables going to be handled. Will the same be done at extra cost of money and what would be the timeline for the same.
  3. Commercials and applicability of Taxes etc.: Cost for development of software / app needs to be clarified in order to remove ambiguity at later stage. It also needs to be ensured that how the charges would be applicable like On basis of working hours or one time charge
    Also the stages of payment need to be disclosed upfront. Will the same be charged after completion or before starting of work, or in instalments like after achieving certain milestones which has to be clearly specified in the contract/agreement
    Its pertinent to mention in the contract/agreement that whether the aforesaid cost would be inclusive of GST or exclusive of GST and the same would be subject to deduction of TDS or not.
  4. Out of Pocket Expense Reimbursement: For successful execution of contract parties is supposed to meet frequently or they may also conduct any research for completion of work. A contract should include a clause whereby it is clearly mentioned as to how these out of pocket expenses like travel expense, research work charge, meeting charges etc will be paid or reimbursed and in what manner.
  5. Fluctuation in Price: Developing an app like Facebook, twitter, tiktok takes lots of effort, time and manpower. Most of the time it has been observed that due to effort being put by the software developer or market conditions of the material being purchased leads to fluctuation in price of software/ app. So how the same would be dealt with, will the same be included in professional charges taken by the software developer or it would be paid extra.
  6. Time Line and Extension thereof: It is important for businessman to launch the software/app on its scheduled time to sustain the competition in the market therefore it becomes necessary to specify the timeline required for the development of software while entering into contract/agreement. However, often deployment of software/app got delayed due to some unavoidable circumstances and it becomes necessary to extend the timeline already agreed. Agreement/contract should include clause that specifies those circumstance and situation or upto what limit the timeline for software deployment would get extended.
  7. Acceptance of Testing Software: Launching a software/ app, without getting the same tested is like going on war without a weapon where you actually don’t know when you will take your last breath. So it is considerable to mention and negotiate specifically how the testing of software would be done and what would be the timeline and support from the software developer side.
  8. Training: Everyone is not well acquainted with operating the software/app, therefore it is necessary to get basic training to operate the software. Prior hands on the software before launching the same are beneficial for the services taker to eliminate any technical issue on initial stage.
  9. Post Support: when any software/ app go live for the usage of general public. There would be so many issues which would come around where timely action will be required. So it is very essential to ensure the post deliverable support to be taken from the software developer at least for 4-6 months without any extra cost.
  10. Term: what would be the term of the Agreement that has to be written down specifically and how the same would be dealt in case of expiry of term of the Agreement like will it be extended for a further period automatically or before extending the same party has to discuss and propose accordingly.
  11. Duties of Software Developer: whatever be the obligations of the Software Developer that has to be stated clearly without any lacuna in the language. For instance. Not to give any false statement, Assign the work to the experienced personnel’s, the Timeline for work completion, work according to scope of work, not to indulge in any wrong practice, post deliverable support etc.
  12. Duties of Entrepreneur: Duties and role of businessman needs to be elaborated as without the active support from the Entrepreneur side, the Software Developer shall not be able to end up with the scope of work successfully. For Instance: provide timely support and assistance, clear dues timely, don’t make false commitment or statement etc.
  13. Confidentiality: In order to keep the data, information or any document shared with Software Developer by the businessman as secured and protected from un-wanted disclosures, it is important to have detailed Confidential Information clause in the Agreement between Software Developer and businessman. So accordingly Parties needs to define what will amount to confidential and what will not be considered as confidential and how the same would be dealt with.
    This also needs to be make sure that at the time of termination of agreement due to any reason whatsoever, the confidential information as received by any Party during the subsistence of the Agreement shall be refunded and cancelled and destroyed.
  14. Warranties and representation: Warranties and representation help out in deciding the capability, experience, authorisation and other important things not only at the initial stage of signing of an Agreement but throughout the period of the Agreement. It helps a lot at the time of dispute to claim damages and recovery of losses in the court of law.
    Some of the Instances of W&R Clauses are (1) Parties has registration, license etc. and have all legal approvals as required for rendering the software development services (2) Parties has power to enter into an Agreement (3) Parties have been duly authorised to enter into an agreement and (4) have proper infrastructure, experience and knowledge to carry-out the scope of work (5) Parties will inform other in case of breach of any of the W&R or any terms and condition of the Agreement as soon practically possible.
  15. Intellectual Property Right: As the work is being on done on “Work for hire basis” so, all the Intellectual Property rights and related information and documents like goodwill, data, content, coding, trade secrets, rights in relevant patent, trademark copyright, shall be belongs to the businessman and the Software Developer is entrusted to assign and transfer all the rights, if available, in favour of businessman and Software Developer may be entitled to use the Deliverables, if required, on the specific request made t to businessman.
  16. Ownership of Software Developed: Businessman shall be the sole owner of the Software/ app being developed. This would also include any records, documents, data, content, paper, trade secret etc. shared with Software Developer and the Software Developer shall not claim any ownership related to things belongs to Entrepreneur and for which charges has been paid by the Entrepreneur.
  17. Indemnity: Term indemnity has been construed under the provision of section 124 of the Indian Contract Act, 1872 wherein it is stated that “A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”. It is to be specifically mentioned that in case either Party make and/ or do anything due to which other Party had suffered losses then the party in wrong would indemnify/ compensate the other Party at its own cost. So what would be the case where compensation would be payable against the wrong doer , this has to be captured in the agreement.
    For Instance: Software Developer has breached the Confidential Information clause during the subsistence of the Agreement, now due to this businessman might suffer losses for which the Software Developer would compensate.

  19. Limitation of Liability: Under this clause Parties to the contract can restrict their maximum liability in case of wrong doing. Normally parties mentioned specifically in the contract that no party shall be liable for the indirect, special, punitive etc. kind of losses of other Party in case of wrong doing.
  20. Force Majeure: There are certain events which are beyond the control of Parties to the Agreement which when occur, defeat the sole purpose of the Agreement, so that has to be captured carefully. In some of the situation the same is governed by section 32 and/ or section 56 of the Indian Contract Act, 1872.
    For the ready reference, a clause that how a Force Majeure Event can be defined is reproduced below:
    “Either Party shall not be held responsible for any consequence or liabilities under the Lease Deed if it is prevented in performing its obligations or is unable to perform or is delayed in performing its obligations by reason of Laws or regulations, action by any Government or local body or other authority (such action taken not due to negligence or failure of the Party to comply with Law), violence of any army or mob or enemies of the country, or due to reasons which may include but not limited to riots, insurrection, war, terrorist actions, strikes, acts of God, floods, tempest, lightning, earthquake, pandemic, epidemic, endemic, outbreak or fire (not caused by any wilful act or negligence of the Lessee or its employees) or orders of any court/ tribunal/ local, statutory or regulatory authorities, natural calamities, lockdown/ shutdown by any government authority, or an irresistible force, or any other act of similar nature or condition or circumstance whatsoever, which is beyond the control of the respective Party (Force Majeure Events).”
  21. Termination: Cases when the Agreement can be terminated need to be mentioned specifically. For Instances:
    • Completion of Scope of work
    • Expiry of Period of the Agreement
    • Delay in performance of the either Party
    • Breach of Terms and Conditions of the Agreement
    • misuse of information and records
    • Default in timely payment

    Notice Period also need to be mentioned.

  22. Miscellaneous General Clauses:
    • Bribery: No Bribe has been or shall be offered by the Software Developer to get the assignment.
    • Relationship: Relationship between both the Parties to be defined whether it would be Employee and Employer or Principal to Principal etc.
    • Notice: Where the Notice/ Communication shall be made by the Parties meaning thereby details of party i.e. name, address, email id etc to be mentioned.
    • Severability: It is to be mentioned specifically that in case any provision of the Agreement is not enforceable under the court of law, then the entire agreement shall not be neglected but only that portion shall be removed and remaining agreement shall be survive with full effect.
    • Time is Essence: Time is Essence means that the work has to be completed within the given time period to complete the scope of work in timely manner without any delay
    • Assignment: Whether the work, benefit, obligation etc can be assigned to any third party or not? If yes, then will there be any prior approval for the same.
    • Modification: The Software Development Agreement shall be modified only with the mutual consent of the Parties.
  23. Arbitration: In the event of any dispute, how the same would be resolved, so Arbitration clause to be mentioned which shall be govern by the provision of Arbitration and Conciliation Act, 1996 and amendment therein from time to time.
  24. Jurisdiction: Court of law which shall have the right to entertain the dispute.

As we discussed above that there can’t be One Size Fit All kind of Agreement and similarly all the above clauses are illustrative not exhaustive, Terms and conditions vary on basis of parties, nature of work, scope of services etc. Majorly above clauses creates a significant impact on the agreement and makes it more qualitative.

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