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Those IT Contractors Working in Your Office - What Are They Up to? A Pub Tale in Two Parts: Part 2 - The Legal Side


When we last left our two IT professionals - Steve the IT manager at Beta Corporation and Bosco the IT lawyer - they were at Brewery Vivant, discussing the business precautions that should be taken when Acme Software's contractors are developing the Next Big Thing software program for Beta Corporation. After downing a modest number of Undertaker ales, the guys now talk about a contract between Acme (the software developer) and Beta (its customer). 

 Bosco: I suggest that Beta have a Software Development and Services Contract with Acme.

 Steve: That sounds like big bucks in legal fees! And what if Acme refuses to sign it? 

 Bosco: If Acme is a reputable software development company and is interested in keeping Beta as a customer, they should have no problem signing a contract of this nature with a minimum of negotiation. They've probably signed similar contracts with other clients! About my fee to prepare this contract, because I've drafted similar contracts for other clients and don't have to "re-invent the wheel," I can charge you a reasonable fixed fee. 

 Steve: What if Acme has their own contract that they want us to sign?

 Bosco: No problem, we'll get their document in Microsoft Word format and make reasonable changes and additions  - and then send them a version that highlights our modifications. We can then close any gaps at a meeting or conference call. 

 Steve: OK, so what's going to be in the contract- besides holding Acme to the business provisions that we just discussed? 

Bosco: The key provisions will shift certain legal risks from Beta to Acme, such as requiring Acme as the developer to:

  • Deliver the software on-time, for the stated fee, and according to the specifications contained in the Statement of Work that you and Acme agreed to. We'll include a reasonable change control provision to prevent "scope creep." 
  • Warrant that the software contains no malicious code, malware, time-bombs, or other code that would interfere with the program's normal operation according to the specifications in the Statement of Work. 
  • Transfer all intellectual property rights to the software's source code and object code to Beta. Or if the quoted fee didn't include the transfer of these property rights, Acme must grant Beta a royalty-free, exclusive, and worldwide license to use the software within Beta's entire enterprise. And you should consider a source code escrow arrangement whereby Beta can obtain the application's source code from a reputable escrow agent if Acme should ever cease business or fail to support the software.  
  • Defend and indemnify Beta against third-party claims and liability concerning the software, including intellectual property infringement claims and claims for personal injury or property damage caused by the software.
  • Include Beta as an additional named insured on Acme's commercial general liability insurance (including contractual liability) and also require Acme to maintain data processing errors and omissions insurance. And if Acme is going to host the application or contract with a third party to do so, proof that the hosting service has a cyber-risk insurance policy and maintains industry-standard precautions to safeguard the application and its data from unauthorized intrusions. Acme should also provide Beta with service level guaranties so that the application is available to Beta's customers on a 7x24 basis, with reasonable downtime for scheduled maintenance. 
  • Agree that Acme won't list Beta as its customer in any advertising or public announcement (or on Acme's website) without Beta's prior approval. 
  • Agree that disputes between the parties (that can't be resolved by their senior executives) be decided only by arbitration in Kent County, Michigan, the location of Beta's corporate headquarters. And Michigan law controls.
  • Continue the previously-signed NDA or make sure that deal-specific confidentiality provisions are agreed to. 
  • Not perform similar services for a Beta competitor without Beta's prior consent.
  • To have no limitation or exclusion of damages provisions that unfairly restrict Beta's right to recover damages from Acme for breach of contract. 
  • Agree that if there is any conflict between the contract and the Statement of Work, the contract controls. 
  • To file suit against Beta for any cause of action under the contract within a 2-year period after the cause of action arose, or Acme loses its right to sue. 
Steve: These provisions sound complicated. How will I ever understand them? 

 Bosco: I'll explain them to you and your management team in detail. And I always draft (or revise, if reviewing the other side's contract) my contracts in plain English, avoiding legal jargon. And at no extra charge! Ha.  

Steve: That's great Bosco, you're hired  - and thanks! 

Bosco: Happy to help! But all this talk about the contract makes me hungry. How about going across the street to The Green Well for Otto's Chicken & Waffles?

Steve: Ah, comfort food! Sounds like a plan!
______________________________________________

Executive Summary:

A vendor hired to provide software development and related services should sign a contract with appropriate risk-shifting provisions, including:

Requirements that the vendor to deliver the software code on time, within budget, and in compliance with an agreed Statement of Work; 

Insurance and indemnity coverage; 

Intellectual property ownership or license provisions;
Safeguards to prevent the application and related data from unauthorized access if the vendor or its contractor hosts the application; and
Appropriate change order, dispute resolution, and governing law provisions. 


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