Lawyers working on drafting technology agreements face several challenges. The difficulties that arise can be highlighted by the fact that a surprising percentage, i.e., practically 50% of Information Technology (IT) projects end in conflict and fail. It is in this scenario that a well drafted contract can be crucial to the parties. IT contracts in India are governed by the Indian Contract Act 1872. So, what should a technology lawyer do to assist his client? A lawyer handling an IT contract needs to have a basic understanding of the technology and the process by which it is implemented and maintained, the business needs of the client, the company’s requirements, and the solution. The ownership issues as to what Intellectual Property (IP) is the client getting? Is it a license, or is it ownership of the IP, or is it the third-party rights? To what extent will the supplier maintain the software? To what extent can the client obtain access to the code for modifications if the supplier stops maintaining the software? The IT and IP issues both arise in the context of software development, warranties, infringement, indemnification, and license and maintenance agreements.
The aim of drafting the IT contract is to ensure the maximum security for the contracts and thus reducing the high rate of IT project failure and lengthy and expensive litigation. The counsel assists in ensuring that each party is aware of their rights and responsibilities, proper mechanisms are in place to oversee implementation, and that dispute provisions can quickly and satisfactorily deal with any issues that may arise.
When writing or drafting there are essential areas and issues that one should consider and include in the contract. The fundamentals of contracting apply.
Other contractual safeguards include prohibition on the customer poaching staff; leeway in respect of time of delivery; obligations on the customer to assist and provide with appropriate facilities to enable successful completion of the project or services; the right to charge additional sums if the customer delays completion of the project or changes the goalposts mid-project. The IT industry is full of companies that believe their ‘standard’ contracts are safe. These companies are risking serious claims and financial liabilities. The consequences of failure include losses on several fronts such as reputation, brand image and business, failure of mission critical systems and so on. The cases of failure need to be understood and avoided.
There needs to be a clear offer, and a clear acceptance. Emails may constitute acceptance but it is still best practice to get together and sign the piece of paper. Clarity in terms and contract is essential so “oral agreements,” are better written down on paper. Counsel must ensure that everything is written down as specifically as possible. This includes accepted levels of performance, payment terms, and price.
Defining the scope of work is essential. The parameters of what one is supposed to provide must be unambiguously set out in the contract. The nightmare scenario of “changing goalposts” in which the customer’s demands change/expand during the course of the contract and supplier cannot back his stand, must be avoided. Often suppliers are faced with the choice to either render additional services without additional charge or risk being sued for breach of contract as well as not being paid. Suppliers often focus on the detailed plans in the statement of work, without a contract. The contracts required can be identified with a “contract scoping study”.
It is important to ensure that the specifications are part of the contract. Often the specifications are outside the agreements, or addendum that can easily be changed or considered to not be part of the contract. The specification must be as precise as possible. Whether it is a guarantee in regards to latency, packet loss, “up-time”, a delivery date, data integrity, or parity, it is important to place them in the contract.
An important part of the lawyers’ task is identifying all ideas or IP, who owns the IP and which party shall own the license, copyright or any other right to the deliverables. This includes use in portfolios or any other advertising. The ownership of the software should be clear from the language of the contract. “IP” refers to a bundle of exclusive rights that exist in relation to the manner in which ideas/ information are expressed or manifested. IP goes beyond the standard copyright, trademark, and patent law that are commonly associated. Anything that is core or key to a business model should be protected either through specific language, licensing language or agreement. There may be exposure of IP from third parties, whether that be material a business has licensed, acquired, or information that is exchanged in other agreements.
Currently, there is no concrete data protection legislation in India. Thus, if the contract does not include any such provisions, then there will be no obligations on the parties. The common law principles of confidentiality provide some safeguards for personal data.
Data protection in India is currently governed by the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 (“Data Protection Rules”) notified under the Information Technology Act, 2000 (“IT Act”). The Data Protection Rules impose certain obligations and compliance requirements on organisations that collect, process, store and transfer sensitive personal data or information of individuals such as obtaining consent, publishing a privacy policy, responding to requests from individuals, disclosure and transfer restrictions.
The Data Protection Rules further provides for the implementation of certain reasonable security practices and procedures (“RSPPs”) by organizations dealing with sensitive personal data or information of individuals.3 The Data Protection Rules provide as follows:
The Indian Penal Code 1860 prohibits theft of data, and the Information Technology Act 2000 prohibits computer hacking. The sharing of that data and express contract provisions dealing with all aspects of the processing of the data and the consequences for breach should be included. The data should also be expressly categorized as confidential information.
It is important to clearly spell out the license and to inform the other party of rights associated with that license. There is a common misunderstanding that a piece of software, idea, patent, hardware, or section of code is licensed perpetually and for any use. Limiting the license not just in regards to time, but also to as to scope is the counsel’s job. Clearly defining how the product is to be used, and for what functions is essential and for this the lawyer must discuss with the parties the application of the IP and ways in which the license can be terminated.
Confidentiality Agreements Parties to IT contracts frequently enter into confidentiality agreements before a project agreement is signed. A negotiation letter agreement may state that all discussions are preliminary and should include a confidentiality obligation. It is however better to include in the project agreement itself to a separate confidentiality agreement, which will remain in effect regardless of the number of project agreements signed and regardless of their expiration or termination.
Confidentiality agreements are common and standard agreements and boilerplate language is used without thought. This can result in an overly restrictive agreement lacking necessary protections. Confidentiality may be one way or mutual. Return of materials clause requiring the recipient to return the confidential information to the discloser upon request must be included.
Parties to IT contracts frequently enter into confidentiality agreements before a project agreement is signed. A negotiation letter agreement may state that all discussions are preliminary and should include a confidentiality obligation. It is however better to include in the project agreement itself to a separate confidentiality agreement, which will remain in effect regardless of the number of project agreements signed and regardless of their expiration or termination.
It is important to ensure that there is a plan to modify and adapt the contract. Fluctuations in the market, in the product, or in the supply chain, whether that be data feeds, inconsistent “up-time”, delays in development, or increases in costs are common. Often technology contracts are a fixed price, “time and expenses” model, but it is important to be flexible and allow the contract to adapt and change.
It is highly advisable to build in indemnities from the customer. The client is covered if he incurs any liabilities, costs or expenses, as a result of work done in accordance with the customer’s specifications, which involve directly or indirectly, the infringement of any third party’s IPR, or sustain any damage or injury of any kind attributable to any act or omission by the customer, its employees or agents.
Limitation clauses limit the potential losses due to a breach of contract or act of negligence by an employee. They are essential in the IT industry as losses can far exceed the cost of the good or service. As an example, a hard disk in a PC is relatively inexpensive, but holds very valuable company information. If the disk were defective, the loss suffered by the company as a result of losing the information on it would far exceed the cost of the disk itself. The limitation of liability clause assists software vendors to restrict the maximum liability to which they are exposed, in the event that a project goes wrong and estimate the risk of a project and therefore price the agreements accordingly. This is a very complicated legal area where the inclusion or omission of a single word can make the difference between safety and financial ruin. Setting a cap on liability is sometimes a multiple of the contract value, but it is a good practice to set it on the professional indemnity insurance cover value.
Courts have traditionally been hostile to exclusion or limitation clauses. Now the extent of the protection is considered but construed strictly. Any ambiguity in the limitation clause will be decided against the party relying on the clause. Many times, the supplier may have to pay damages in excess of the liability cap in the contract. A limitation of liability clause is valid under Indian law, except by reason of death or personal injury, fraud or gross negligence. It must be reasonable and not amount to a penalty. The claim is limited to the actual damages or losses. As per section 73 of the Indian Contract Act in breach of contract, remote and indirect loss or damage cannot be awarded. This is different from English law where there is no such bar based on remoteness. Thus, the word ‘indirect loss’, must be avoided under Indian law to recover losses.
As per the Contract Act, a contract will not be enforceable to the extent that it restrains a person from exercising a lawful profession, trade or business such as noncompete and non-solicitation provisions. However, non-compete provisions that reasonably protect a party’s proprietary or commercial interests in relation to its acquisition of the goodwill of a business are an exception but must meet a “reasonableness” test. For example, a restrictive covenant which applies during the period of employment is more likely to be upheld then a covenant which operates after the termination of the employment. In Niranjan Shankar Golikari vs. Centre for Spinning and Manufacturing Company Limited, the Supreme Court upheld the restrictive covenant concerning trade secrets during the employment tenure.
A warranty that deliverables will perform in accordance with specifications requires adequately setting out your specifications.
Counsel must assist the client in laying down acceptance parameters and tests so that the customer has no excuse to avoid paying when the job is done. The acceptance tests are expressly tied in to the specification document. If the software or website is compliant with that specification, the customer must accept the software or website and pay accordingly. Safeguards must be built into the contract such as leeway for minor discrepancies between deliverance and the specification, the ability to rectify discrepancies without being in breach of contract. Deemed acceptance provisions should also be included so that if the customer does not respond within a certain amount of time after delivery, the software or website is deemed accepted and the final payment becomes due.
One of the most important things in any contract is clearly and easily defining how the contract can be terminated, and when it will end. It is rare that contracts are everlasting, with the exception of some rare automatic renewal contracts.
Damages Section 74 of the Indian Contract Act 1872 provides that when a contract has been breached, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract ‘reasonable compensation’ not exceeding the amount so named or, as the case may be, the penalty stipulated for. A liquidated damages provision may be treated as valid, but the plaintiff still might not recover the specified amount but may instead receive a level of reasonable compensation as determined by the courts not exceeding the stated liquidated damages.
Section 74 refers to both “a sum named in the contract as the amount to be paid in case of such breach”, and “any other stipulation by way of penalty” and says that in both the reasonable compensation entitlement is determined. Maula Bux vs. Union of India (1969) and Oil & Natural Gas Corporation vs. Saw Pipes (2003) lay down that the liquidated damages provisions must be clearly calculated and the claimant must demonstrate that the amount was a genuine pre-estimate of the loss or damage likely to be suffered or the court may award a level of reasonable compensation below the stated liquidated damages.
ADR is a means to avoid the risks and expense of litigation, it is quicker and cheaper. ADR seeks to establish acceptable common ground between the parties and continuing the relationship with the customer in spite of the dispute. Counsel should clearly define ways of resolving disputes, how to give notice, and terms and situations in which the contract will end. The smoother the exit strategy, the more likely companies will do business with each other in the future. Contracts that exclude effective dispute resolution are prone to lengthy delay periods whenever minor problems arise.
Other Contractual Safeguards Other contractual safeguards include prohibition on the customer poaching staff; leeway in respect of time of delivery; obligations on the customer to assist and provide with appropriate facilities to enable successful completion of the project or services; the right to charge additional sums if the customer delays completion of the project or changes the goalposts mid-project. The IT industry is full of companies that believe their ‘standard’ contracts are safe. These companies are risking serious claims and financial liabilities. The consequences of failure include losses on several fronts such as reputation, brand image and business, failure of mission critical systems and so on. The cases of failure need to be understood and avoided.
Often company management has unrealistic expectations of what software can do. Sometimes this unrealistic expectation is created or reinforced by the unrealistic promises of the vendor. Where the software is from overseas, the local reseller may contract for modifications on a basis that is not supported by the overseas software house’s license. The scope or requirements of the project may be inadequately defined. Lack of communication between the customer and vendor during the course of the project or the vendor may make changes or perform other work outside of the original contract without signed work orders. Change requests are an inevitable part of complex IT projects and are the major cause of disputes. Unless the contract is clear as to the extent of allowable variations and the rights of each party to initiate or object to a change, any changes made may be construed a breach of contract. The contract itself may not be signed or the work may be done without any contract at all. Often parties even fail to establish a clear structure for their contractual relationship at the outset. Each party may be negotiating under different assumptions as to their responsibilities and duties. This can lead to projects being stalled at the last minute. Contracting with parties that lack authority is another basic issue.
Whenever a project requires multiple contracts, for example hardware, software and service, a multitude of contracts containing conflicting clauses which are confusing and ineffective may be the result. This is common and outright dangerous. Interrelated contracts must be carefully drafted to ensure that the obligations of the parties are clearly consistent.
Estimating software construction costs is complex and difficult. Risk estimation is properly the job of the supplier and the contract should explicitly provide for this. Here are some suggestions to improve your contract
Modular contracting solves the problem of multiple agreements by breaking the contract down into its component parts. Components can be added or removed to suit the range of activities under contract. This allows one to separately negotiate individual components such as supply of hardware, software licensing or service level agreements
Insurance is often overlooked when entering into large and expensive IT contracts. It is important to properly draft the project management sections of the contract to integrate the contract with the requirements of the insurance contract. Most policies provide that any admission of liability will void the policy. Insurers have to be notified immediately in case of dispute.
Discovery is a legal process that is often overlooked. It enables one party to obtain evidence (such as letters and memos) from another person that relates to any legal proceedings. If a supplier has a teaming or sub-contracting agreement with another party, then correspondence between the supplier and other party will be discoverable by the customer if relevant to the legal proceedings between the supplier and customer. Clients need to be aware that the customer may obtain copies of sensitive documents through discovery
Lawyers in the field of Information Technology have to develop the ability to identify and address the issues that matter the most and develop technology expertise to avoid poorly structured and poorly worded contracts. This is an underrated factor in causing disputes due to ambiguities and irrelevancies that sometimes appear in technology related contractual documentation. Easily understandable clear English is better than complex legal jargon which is riddled with confusion. To draft clear and precise agreements, an in-depth understanding of technology issues must also be developed to focus on commercial issues that arise in projects. Lawyers who put in this effort will be making a great contribution to the growth and development of the IT industry.
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