Best practices for negotiating an agreement with a software house

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Negotiating an agreement with a software house

In the realities of the third decade of the twenty-first century, the use of the services of an IT specialist is becoming an integral part of running almost any business. Each such cooperation should be based on a professionally prepared contract adapted to the provisions of law in force in a given country. In my article I describe what you should consider when negotiating an IT contract with a Polish entity and I indicate the most important provisions of such agreement.

In this era of digital transformation, almost every company has or will have to deal with software development companies (software houses), implementation companies (e.g., implementing licensed software from a company such as Microsoft, etc.) or companies providing other IT services such as maintenance services (under an SLA) or consulting services. There are many types of agreements in the IT industry. Among the most important are:

  • implementation agreement (a contract for work, in which what matters is the delivery of a specific result),
  • provision of programming services agreement,
  • master agreement for the provision of programming services,
  • service level agreement (SLA),
  • agreements for disposal of intellectual property (agreement for the transfer of proprietary copyrights and license agreement),
  • body leasing agreement

Agreements used in the IT industry are often mixed, which means that one agreement may contain elements characteristic for several of the above examples of agreements.

What to look for when negotiating an IT agreement?

So what should you pay attention to when ordering software, an application, a website or IT services? There are several elements that the ordering party should pay particular attention to.

The key ones are:

  • Contractor’s responsibility,
  • The scope of interaction between the ordering party and the contractor,
  • Relationship of guarantee with maintenance services (SLA),
  • Transfer of proprietary copyrights,
  • Prohibition on hiring contractor’s employees.

Contractor’s responsibility

When ordering an IT project, you need to pay attention to whether the contractor is trying to limit its liability. The agreement ideal for the ordering party is one in which there are no provisions on liability. This means that the contractor will be liable to the fullest extent possible.

What does this mean?

This means that the contractor will be liable for damage caused directly by the contractor’s action (actual damage), the ordering party’s lost profits, and assume warranty liability. Contractors most often attempt to limit liability in the above-indicated extent. Examples include attempting to limit liability for actual damages to the amount of received consideration and excluding liability for lost profits and warranties. For more information, read the article titled Liability in an Implementation Agreement.

The scope of interaction between the ordering party and the contractor

The issue of interaction between the ordering party and the contractor is an extremely important issue in implementation agreements that qualify as specific work contracts. In the absence of cooperation, the contractor has the right to withdraw from the agreement. This is often the contractor’s only weapon against the ordering party. Hence, contractors try to define a very broad and open catalogue of interaction activities. More on this topic can be found in the entry titled Ordering Party’s interaction in IT projects .

Warranty versus maintenance services (SLA)

In IT agreements that lead to the delivery of a computer program, the contractor often provides a warranty for the program’s performance. More about guarantees in an implementation agreement can be found in this article. In negotiations, however, as a contracting authority you will likely encounter the contractor’s argument that if the contractor provides maintenance services under a separate SLA, the contracting authority no longer needs the warranty. Such a situation is potentially harmful for the ordering party. An SLA is an agreement that can be terminated by the contractor at any time. In situations where a warranty has not been previously provided, the ordering party may be left without protection in this regard.

Transfer of proprietary copyrights

The key issue for the ordering party should be securing intellectual property in the form of a computer program created by the software house. The optimal solution is for the contractor to transfer proprietary copyrights to the work constituting a computer program. The ordering party should pay attention to whether the agreement includes all fields of exploitation (i.e. those arising from both Articles 50 and 74 of the Copyright and Related Rights Act).

Additionally, it is ideal for the ordering party, if the copyrights pass when the work (or a portion of it) is transferred to them by the contractor. You can read more about transfer of proprietary copyrights in the article titled Transfer of Proprietary Copyrights in an IT Agreement.

Prohibition on hiring contractor’s employees

It is now almost standard for contractors to include in their contracts prohibition on the employment of their personnel by the ordering party. The ordering party should make sure that the scope of the prohibition is neither too broad nor too long. For example, such a prohibition should exclude situations in which a contractor’s employee responds to an ordering party’s advertisement intended for an unspecified audience posted on a publicly accessible recruitment portal.