Every cooperation in the IT outsourcing realm starts with a contract. And how it goes or ends will depend on how accurate the contract is. Most of the problems clients end up with at Tretten Lawyers’ doorstep are caused by poorly prepared contracts. You’d be surprised by how many tech companies I’ve seen in the 10 years of my career as an IT lawyer with contracts just downloaded from the web or received from the customer and signed as they were, without any review or amendments.
What could go wrong, right?
Well, a lot. It could work for a while, but sooner or later, those companies eventually faced “unforeseen consequences” like a client’s refusal to pay for services, sudden non-competing obligations, and other unpleasant things for their businesses due to breaches in the contract.
In this article, I’ll provide a comprehensive guide on managing a contract so you can be sure that your company’s interests are legally protected.
General Contract Terms. Watch out for…
Subject of the contract. This part must clearly and accurately define what you will produce under this contract. For example, a mobile application, a website, or whatever it’s expected to be. The more thoroughly you’ll describe it, the better.
Transferring rights of intellectual property (IP). Rights should be transferred after the customer fully pays for the object or IP. Make sure that this condition is reflected in the contract. In my practice, it helped many clients get paid.
IP clearance. In some contracts, you can find provisions like “The Contractor guarantees full clearance of intellectual property.” It means you are obliged to do nothing within this project that can violate someone’s IP rights in the whole world. If you don’t want to devote your life to checking up on every single piece of your code for plagiarism (which is hard and expensive, and in vain, because you won’t be sure anyway if anyone on Earth had never written the same thing as you did), you better do your best to remove this from the document. Or hope that no one takes this commitment seriously.
Undisputed invoices as a settlement condition. This one basically allows your customers to withhold payment because they are not happy with your work somehow (no matter what the reasons are because they are not listed in any way in the contract). And in order to get your check you’ll have to redesign the product at your own expense until they are satisfied. If they ever will be, of course.
Non-solicitation clause. Take care of including this part if it’s missing, and a significant penalty for violation ($50-100k will do). Remember, a simple ban on luring away staff with no fine won’t protect you. If your counterparty opposes it, think twice before signing anything with them.
Inordinate confidentiality requirements. If the project is mundane, don’t bother. But what if it’s potentially the Next Big Thing, and mentioning it in your portfolio could be extremely useful for your business in the future? Then, negotiations with the client are probably worth it. After all, they could just give you the standard contract, in fact, being open to discussion.
Non-compete clause. This one is dangerous for business. Imagine you’re one of the top fintech developers, very on-demand in the market. Would you agree never to work in fintech again after this particular project ends? If you sign this, you’re probably ready to retire. Otherwise, it simply isn’t wise, or you’re just not going to follow through on that commitment.
Jurisdiction for resolving disputes. It’s a common practice among customers to use some expensive jurisdictions like Great Britain or the U.S. to resolve disputes. Hopefully, no disagreements between parties may ever arise, but if they do, it can be unbearable for your company to initiate legal proceedings due to high costs and remoteness. The jurisdiction must be accessible geographically and financially for both parties, so pay attention to that.
Nuances in different types of contracts
There are four common types of contracts for IT companies, and it’s important not to confuse them or the general terms they contain. Depending on what type you work with, it is vital to ensure that the contract contains important clauses and no risky propositions.
Let me list the following nuances for each of the types.
1) Fixed Price type must contain:
-
- comprehensive and precise technical specifications (no fuzzy wording for your own sake),
- clear deadlines for acceptance of completed works so that your customers cannot drag out this process, creating problems for you,
- comprehensive, step-by-step outline for carrying out the “change request” procedure,
- a clause that provides for the possibility of extending deadlines in cases where the team could not work continuously due to the client’s fault,
- a warranty period (if you provide such) is better to be sensible and measured in months, not years.
2) The Time & Material type of contract shall come with no quality requirements and/or clause making quality one of the criteria of work acceptance for the client. According to the document, invoices should be settled within a particular period without additional prerequisites.
3) Dedicated Team, same with Time & Material, but also it must contain:
-
- names of the dedicated team members,
- conditions for paid sick leave and days off for dedicated team members,
- process for replacing specialists from the dedicated team with a specified quantity of possible replacements.
4) The Outstaff type is the same as the Dedicated Team, with some extra attributes:
-
- details regarding the recruitment process (requirements for candidates, terms and deadlines for their approval, etc.),
- special conditions for teamwork, which the company undertakes to create,
- clause underlying that the organizational and technical management of the outstaff team is being carried out by the customer.
Now, let’s get back on earth
I must note that these recommendations are just an example of an ideal contract that you can and should strive for to get the maximum benefits for your company. Unfortunately, life is not simple, and sometimes you must compromise to achieve your long-term goals. And that’s okay.
In any case, being aware of the risks allows you to prepare for them and learn how to avoid them. This checklist will help you negotiate and make informed decisions, considering potential outcomes.
