Contract negotiation · Startups

What are the must have clauses in contract / MoU agreement with IT Vendor for a tech solution?

Manav Chaudhary Healthcare | Consumer Experiences & Journeys | Analytics | Start-ups | Mentor

July 16th, 2016

Fellow Community Members, 

I am looking to draft an appropriate contract / partnership agreement to sign-off with an IT vendor to develop a solution with the understanding that eventually my in-house team will take ownership of the code and IP etc. Are there some must have clauses (such as non-compete, code ownership, NDA, IP etc) (check-list) OR some templates or draft agreements which I can refer to? Would appreciate fellow members to share some related resources. Thanks. 

Manav

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

July 18th, 2016

Hi Manav, I have seen many a situation where 'treps tried to go on their own without getting proper legal advice.  I strongly urge you to hire legal counsel.  You think it may cost a lot now; it will cost a lot more later to fix something, or worse, if you have to litigate. 

David Rueter Empowering businesses to improve and get lean through technology and best practices.

July 19th, 2016

I will share a long answer that I think might be helpful.


I've been on both sides of this type of deal, as a technology creator and as a buyer of development services. An MOU is a good way to outline the expectations of each party to make sure there is agreement as to the desired outcomes of the relationship--without the clutter and expense of specific language to compel (force) either party.


If you and your technology partner do not have shared desired outcomes, you will face difficulties that even a detailed contract may not fully resolve. If on the other hand you do have shared desired outcomes a contract is still helpful, but it becomes more of a formality to protect both parties than it is the foundation of the relationship.


I agree that professional legal advice and a professionally-written contract is important. But I would also say that the MOU is important, as it will clearly communicate the desired outcomes--not only between you and your vendor, but also to the attorney.


Attorneys know the law, and they know how to take steps to mitigate specific concerns. Attorneys do NOT necessarily know what you (or what the other party) wants to accomplish. The MOU is a great place for the parties to outline and agree to what they want to have happen. The attorney can then create a contract that is aimed at meeting those desired outcomes.


Your original question as to what points should be included in an MOU or contract is an important one--and is one that even your attorney may not be able to answer without hearing from you (and to a certain extent from the other party) what you are trying to accomplish.


Some suggested areas to consider addressing:


  1. Who owns the product? If you will, the attorney can help with specific language like "work for hire", "irrevocable assignment of ownership", etc.
  2. Remember that the technology creator is in the business of creating technology...and will therefore almost certainly be creating future technology for future clients. What limitations are you going to place on the developer? For example:
  3. Can the developer create solutions for other clients? Almost certainly, the answer to this must be "Yes"...both for the enforceability of the agreement, and for the viability of the developer.
  4. Can the developer create similar solutions for other clients in your industry? If this is to be limited in some way, your attorney can help with non-compete language...but depending on your local laws, this may be difficult to limit. (Also your developer may reasonably demand additional payment for some sort of exclusivity.)
  5. Can the developer create similar solutions for other clients not in your industry?
  6. Can the developer reuse portions of the code for other projects? I'd strongly encourage that the answer to this be "yes", as it is in the best interests of both parties. Practically, the developer is almost certainly bringing concepts and codes from past projects into your project. (Think about low-level things, like how to sort a list, how to interact with data in a database, how to handle authentication, etc.) Some of these may be part of the development environment or operating system (which may be licensed by a 3rd party), but some may have been created or enhanced by the developer. To say that the developer must write a new way to sort a list on a future project just because your project required some code to sort a list is really not practical. You are not trying to put the developer out of business, right?
  7. Does the developer have the right to sell you everything you are buying? The source code may include source that is from other parties (whether formally licensed under a proprietary license or under an open source license), or may have been created by other employees, contractors, or third parties who made it available online. Your attorney can help you with language to safeguard against "intellectual property taint", and to provide for "intellectual property indemnification" and "pass-through liability". You want to be sure that there aren't surprises...like a third party coming forward to assert that THEY own the solution that you bought.
  8. What responsibility does the developer have to support the solution, to fix bugs, to be liable for things that don't work, etc.? Again, your attorney can help you understand what is enforceable, what language to use in the contract, and so forth...but the MOU should outline what each of your expectations are.
  9. What specifically do you want to safeguard against? And what specifically does your developer want to safeguard against? Get these things listed out as points in the MOU. Possible examples: Do you want to patent the solution or some aspect of it? Identifying the specific claims would probably be helpful for both parties. Can the developer disclose that they have you as a client? Is the developer to help you set up a working development environment that can be used to compile your source code? There are many, many possibilities to consider: include what is important to you from a real-world business standpoint.
  10. Mutual non-disclosure agreement. You should already have an NDA in place. If so, reference it in the MOU. If not, at least clarify in the MOU expectations with respect to disclosure and confidential information--especially identification of what specifically is to be regarded as confidential: Existence of the business relationship? The industry or type of product you ware working on? Your business plan? Remember the MOU is about communicating the expectations, so you should be clear as to what you want to make sure does not get disclosed.
  11. Payment terms (of course)
  12. Timeframes and milestones
  13. Termination. What happens if you want to cancel the project? What happens if the developer wants to cancel the project?

Though long, the above comment is not comprehensive: there are likely other things to consider. But hopefully this gets you thinking about what is important to you.


Above all, understand that SETTING expectations is different than enforcing an agreement. Attorneys are rightfully focused on enforcement--both for litigation avoidance and for winning if the need to litigate arises. An attorney may be able to give you some ideas about what to think about, but the attorney is not going to be able to tell you what is important to you. A successful contract requires that the attorney understand what is important to you--and the MOU is a good place to outline these expectations.

Jessica Alter Entrepreneur & Advisor

July 17th, 2016

This is a question for an attorney. I'd go to Upcounsel and do it right Sent from my iPhone

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

July 17th, 2016

Your bio says that you are in India. You should contact a lawyer in India. Contract terms can be viewed differently, country to country and state to state. The idea that you can go to a website and pull down a form is amateurish.

Brendon Whateley Founder at Kugadi

July 19th, 2016

I'd like to add that from a technical point of view, it is very difficult to hand a technical project over to a new group of developers. Without your own development team being integrally involved in the development process, they will have a hard time taking over the project later. And you will also run the risk of getting a poorly architected solution.

Basically, outsourcing technology -- if it is a key to your companies success -- is very much more difficult than it might at first appear. And will certainly slow down your company at some point.

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

July 16th, 2016

Hi Manav, 

The following is not legal advice and is only to be used for informational purposes. 

You probably want NDA provisions in place so the developers cannot discuss any strategic information you give them to develop.

Are you buying the end result or the entire solution, from scratch?  If the former, then you'll need a license to use it.  If you're buying everything, including the code developed, you'll need all the code, and any intellectual property rights associated with the code to be transferred and assigned to you.  
I would really recommend consulting with a lawyer to have all of this properly drafted. I can already tell from your question that your uncertainty about what kind of agreement to sign.  There's a lot of ramifications to signing a partnership agreement, and I do not think that is what you want. 

Jacob

Tsung-Hao Kok Vice President, Head of Legal - Offshore Legal Services and Williams Lea Tag, Asia Pacific at DHL

July 19th, 2016

Hi Manav, I agree with the comments made above.  You're probably better off spending the money upfront to get the paperwork sorted out from the outset rather than have an expensive problem on your hands further down the track.


Manav Chaudhary Healthcare | Consumer Experiences & Journeys | Analytics | Start-ups | Mentor

July 18th, 2016

Thanks everybody for very valuable inputs. Really appreciated. 

@Jacob:  I am getting the full solution developed only for our venture. It is exclusive and the venture will own the code & IP not the vendor. 

@Jessica:  I have had conversations with couple of attorneys but in India unless I go to a very expensive lawyer, this paper work seems tricky. So reached out to the community on this platform to get a head start. 

@Marisa:  We did not start with an MoU - my mistake. So I am trying to now get a contract (binding) drafted which can protect some of the interests of the venture (if not all). Would it be possible to connect with you and get some more details on this? That would be great. 

@Irwin:  You are correct in your understanding that we are based out of India. I have spoken to couple of lawyers. One of them seems good but come at a price if I want complete draft. However, I am getting a sense that there might not be any other option. 

@Jim:  Appreciate your inputs. Will certainly keep those in mind. 

Marisa

July 17th, 2016

I cannot tell if you are using MOU/partnership agreement/contract interchangeably... But, they are (or can be) different things. Perhaps one of the most important items to determine is if you want it to be non-binding or binding. Generally, MOUs are non-binding, however, if you meet all the required elements of a contract - or it specifically states that it is binding - then you will have essentially signed a contract. The best way to ensure your intent (binding or non-binding), is to make sure there is a specific clause in the MOU that states that intent.  If you decide it is a binding MOU, but there are some parts of the agreement you are not sure how will pan out and, therefore, aren't sure if you know exactly what you want - it is ideal to add phrases like "as agreed upon by the parties." This will allow you to essentially continue to negotiate specific portions of the binding MOU in the future. I've used binding MOU's before, however, in general, I'd recommend they are non-binding. The benefit of using a binding MOU is usually just speed (you don't have to write as much and get into the legalese of everything before you get going.) However, the negatives are you can end up into a contract that is missing vital details & often the devil is in the details. So, usually just better to do the formal, full contract. If you've never done a binding MOU, I would recommend against it - it is sticky and dangerous to do if you don't have actively involved legal advisors.  If you decide you want it to be non-binding, which is usually the purpose of the MOU, then please make sure there is a specific clause that states that to ensure there is no confusion.    Marisa J. Bryce 650.248.8671 (C) marisabryce@yahoo.com

Joe Valof Independent General Counsel [IGC]

July 20th, 2016

Manav, just wanted to add my thoughts to all the good comments you have already received. I'm not familiar with Indian law, but here in the USA I have used a 'Developer Agreement' many, many times to accomplish your intended goal. It covers just about all the points made by David Rueter. The agreement must be a 'work made for hire, so your company would be the sole owner of all rights, title, and interests in the developed solution. A couple of critical additional points, however, commingling open source code with proprietary code is very dangerous as now ownership of the solution/product is unclear, also, you need to make sure that if the developer is no longer around you have language in the contract that appoints you as his/her 'attorney in fact' so you can sign important legal and patent documents without requiring the developers signature. My developers Agreement specifically covers this very important point. Hopefully, it also applies in India. Hope this all helps. On my website, www.nanosft.com/igc, I have several 'white' papers that may also help you. Good luck.