Understanding Software Development Agreements

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Developing software and protecting Intellectual Property (IP) rights is frequently overlooked.

In order to prevent ownership disputes, and clearly define the terms surrounding the development of software including IP rights, it is crucial that any software developer and client of the developed software enter into a written agreement to cover key considerations.

This can be achieved by a Software Development Agreement (SDA). A SDA is a contract in which one party (Developer) agrees to develop software for another party (Client) based on the ‘scoping’ requirements provided by the client.

What follows is an overview of the key elements that may be found in a SDA.

Key Elements in SDAs

As every SDA is as unique as the software it covers, there is no clear cut rule on what must your SDA must cover. In saying this, there are a number of key factors that must be deliberated, in order to effectively balance the competing interests of the Developer and the Client.

When entering into a SDA, key considerations include:

  • acceptance testing – what particulars does the Developer have to meet for the Client to accept the software? Will the Client have the opportunity to test the software and provide feedback?;
  • confidentiality – do the parties acknowledge the confidential and proprietary nature of the software, and agree to restrictions on the obligations on each party? What happens to the confidential information when the project ends?;
  • dispute resolution – have the parties identified which jurisdiction governs their contractual obligations? This is particularly critical if you are engaging in cross-border work. Are disputes between the parties able to be settled by mediation, arbitration or another form of ADR?;
  • exclusivity – will the Client require the software be provided to them exclusively?;
  • hosting – which party is responsible for hosting the software?;
  • indemnity –will the Developer indemnify the Client if the software is found to infringe on someone else’s rights?;
  • marketing – is the Developer allowed to market the software they created for the Client?;
  • ownership – which party owns the copyright to the software source code? Will the client simply be ‘leasing’ the software? Is the Developer allowed to sell this software to competitors of the Client? Is the Client allowed to licence, or transfer this software to another party?;
  • payment terms –will the Developer get paid on an hourly basis or once the project is completed? Will the Developer charge the Client based on the number of users of the software, or will there be a fixed price?;
  • restraint of trade – will the Client limit the right of the Developer in creating software to their direct competitors?;
  • source code escrow – how will the parties mitigate risk when they are negotiating a software licence? Who will have access to the source code?;
  • subcontracting – is the Developer outsourcing part of the software development to third parties? If so, have the relevant confidentiality agreements been implemented?;
  • termination – when will the agreement be terminated? Do both parties have the right to unilaterally terminate this agreement, or will it be valid until termination is mutually agreed upon by the parties?; and
  • variations – will the parties agree to variations created under the SDA? Which party (if any) will have the right to vary any clause of the contract? Which party (if any) will be able to vary the software? Will this require an additional contract?;
  • warranties – will the Developer provide warranties to the Client in relation to the IP ownership, software performance, stability or security? How long is the software expected to operate without errors? Will the Developer fix it free of charge if this is not the case?
So Who Owns the IP?

Regardless of whether you are the Developer or Client of the software subject to the SDA, it is crucial that you are aware of what rights and responsibilities in relation to the software. The ever-present conflicting interests of the Developer and the Client are required to be defined and balanced in order to prevent and lessen the possibility of disputes in the future.

Generally speaking, pursuant to the Copyright Act 1968 (Cth), the copyright of new IP lies with the original creator of the work, i.e. the Developer. On the other side of the coin, Clients harbor the misapprehension that they own the software based on the fact that they have scoped it and ordered its development. Although, this is not the case, in most circumstances, in the event of a dispute of IP rights, IP ownership is negotiable, whether you are a Developer, Client or an employee responsible for the creation of software.

The ownership of the IP can be identified through using an amalgamation of licensing and non-competition provisions. The developer retains the IP ownership, and licenses the software to the client, with the condition that they restrict the purposes for varying and reusing the software. This will link directly to the questions surrounding restraint of trade, and the imposition of a time restriction on this.

Although employees of the Developer may have contributed heavily to the work required by the Client generally they do not have any ownership rights to the developed software. This means that they are unable to claim this as their own intellectual property or and distribute it unhindered in the public domain.

Although various risks and misunderstandings surrounding the ownership of the IP can be alleviated by taking a preventative approach and implementing a SDA prior to development, this will not entirely impede disputes or problems arising. It is crucial that your SDA is carefully drafted to ensure the requirements of both parties are met.

Pavuk Legal can provide you with detailed contracts and transaction review and legal advice in relation to drafting and negotiating software agreements, intellectual property disputes, license agreements, site and specific user agreements and licenses, website terms and conditions, and advice on privacy, data protection and cyber-related legal and commercial issues.

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