Risk Prevention for Software Development Contracts

With the development of information technology, it is very normal for a company to appoint another company to develop software for operation, production or promotion, such as an official website, mobile APPs, management system software and so on. However, the disputes related to software development contracts raised accordingly.

The main reason of these disputes has 2 aspects. Firstly, the commissioning party is not familiar with the relevant technologies, and too many IT jargon words are involved in the contract, which make the commissioning party fails to design a specific contract; secondly, the developed achievement is intangible, which brings uncertain factors in the acceptance procedure.

Hereinafter, from the perspective of the commissioning party, we will analyze how to reduce the relevant risks.

As mentioned, the primary reason of such disputes is the agreement is not well designed. According to the “Summary on the Hearing of Computer Software Contract Disputes Cases 2015-2016” released by Shanghai Intellectual Property Court, the main disputes include: (1) the ownership of the developed achievement; (2) how to determine whether the quality and function of the developed achievement meet the requirements in a contract. In view of these, the commissioning party shall make sure the following aspects have been stipulated clearly in the contract.

Firstly, the ownership of the developed achievement. According to the “Contract Law”, “Copyright Law” and other laws, regulations and interpretations, if no explicit agreement is contained in a contract or no contract is concluded, the copyright shall vest in developer (namely “the commissioned party”). The commissioning party may use such developed achievement for free. Thus, if a commissioning party couldn’t obtain copyright, it is recommended to stipulate the scope of usage of the developed achievement for the commissioning party. Otherwise, the commissioning party could only use the developed achievement for the specified purpose. (See Zhejiang High People’s Court (2013) Zhe Zhi Zhong Zi No.289 Civil Judgement).

Secondly, to stipulate all the relevant items in detail, such as the function, module, development standards, requirements and processes of testing / acceptance / delivery, the solution and procedure on dealing with the amendment of the commissioning party’s demand, and so on. If any technology is sophisticated and complex, such relevant jargon words shall be defined strictly. For example, on the delivery of an APP, the contract shall state the source code, installation disk, technical documentation, backend documentation, user guide, operating manual, installation guide, test report, and even the number of BUG allowed to exist, all the information will be useful for the judges to determine the liabilities for breach of contract.

Thirdly, to stipulate the circumstances of breach of contract, and the relevant liabilities. The circumstances including but not limited to delivery, payment, confidentiality, subcontract and so on. In practice, it is common to see a developer asserts that the developed achievement has fulfilled the functional requirements, but the commissioning party does not agree, then a series of disputes rise. The commissioning party may claim for the quality of the developed achievement, and the developer may claim for payment. In order to minimize or prevent the risks, the commissioning party shall stipulate the specific requirements for the objection or acceptance, the phased written report and so on.

Finally, to stipulate the follow-up maintenance and confidentiality rules. It is necessary to stipulate the scope, methods, price, liabilities of the follow-up maintenance. Considering the commissioning party might disclose trade secrets to the developer, it would be better to stipulate that the developer shall undertake the confidential responsibility during the effective period of the contract, and after the termination of the contract.

However, a well-designed contract is useless if it is not implemented well. Especially, in the implementation of a software development contract, it is common to adjust/refine any function, or amend the development standards/demand, under such circumstances, the commissioning party shall reserve the relevant evidence effectively. For example, to sign a supplementary agreement, retain the relevant electronic evidence, such as email, chatting history and etc.

In addition, according to the analysis of Shanghai Intellectual Property Court on a series of software development contract disputes, the commissioning party should pay special attention to the following risks in the performance of a contract: (1) if the commissioning party failed to bring objection to the developed achievement in accordance with the contract, then the court might not be in favor of the commissioning party who claimed to dissolve the contract by the reason related to the objection; and (2) if the developer delayed to deliver the developed achievement, but the commissioning party still accepted the developed achievement, then the court might not be in favor of the commissioning party who claimed to dissolve the contract due to the developer’s delay.