A software development contract is a legally binding agreement that governs the terms for developing a software product, typically between a software developer and its customer. Software products include programs, mobile applications and platforms, web applications and platforms , and online integration or upgrades of existing software. As companies and businesses seek to adopt digital technology and integration, the need for software development contracts is becoming increasingly common. Whilst it is important to understand standard terms in software development contracts, customers should ensure that legal requirements and/or clauses are drafted carefully in software development contracts to avoid ambiguity and future disputes.
The process of developing software is unique and each software development project or service may entail different timelines, milestones, testing requirements, specifications and obligations in the software development contract. There are also different types of services in relation to software development based on the needs of a client. For example, a software development contract will be prepared for a project to design and develop a software, and the services may include design, development, implementation, support and maintenance. In other instances, a software contract may only govern the terms for an update or upgrade of the software. Regardless, the terms under these software development contracts must be clear and concise to address the objectives of the contracting parties. These contracts bind the software developer and its customer, to ensure that service and payment obligations are fulfilled within the agreed time frame.
Importance of Software Development Contracts
Every software development project will undoubtedly face its own challenges. However, a contract setting out agreed timelines, milestones and obligations will afford parties the opportunity to reduce potential risks and disputes, ensure safeguards and manage expectations in a clear and concise manner. More importantly, it allows parties to define the way the project is to be delivered and its specifications.
Software development contracts should also include provisions to establish the ownership of the source codes created for the software. The intellectual property rights of the software created is an important aspect of these contracts to avoid future disputes in terms of ownership. Other key areas in software development contracts include variations and testing requirements for milestones depending on the project. By incorporating these elements, parties are able to gauge a rough timeline for completion, set out terms to address variations which may be requested during the project implementation, and set the criteria to determine whether the software is functional during testing in accordance with the agreed specifications before delivery of the final product.
Standard terms in a Software Development Contract
There are different types of software development contracts, the choice of which will depend on the type of software being developed and whether the contract is based on time and materials or is a fixed/lump sum contract. When it comes to clauses addressing termination, dispute resolution, governing law and other boilerplate clauses, these software development contracts are similar to a contract for service. Please see our article on boilerplate clauses which can be found here.
Below the clauses commonly found in a software development contract.
1. Services to be provided and obligations
- The type of service required of the software developer and type of software to be developed.
2. Cost and payment terms
- The total cost and payment terms will either be based on progressive milestone payments (time and materials) or a fixed/lump sum payment.
3. Project timeline
- The timeline sets out the commencement date of the project development and the term of the contract. It is also important to address whether extensions of time are allowed and the consequences of delays.
- Variation clauses address terms and conditions to cater for variations to the software required by the customer before completion of the project. These variations refer to changes to either the specifications, features or design of the software and usually come at an added cost to the customer by the software developer.
5. Testing – User Acceptance Test/ Final Acceptance Test
- User acceptance tests are based on user requirements and specifications to be carried out upon completion of the design, development and installation of the software which involve either a conditional trial run period or the client testing.
- Final acceptance tests are the final stages of testing the software (if required) after the user acceptance test, which involves testing of rectified bugs, errors or other defects highlighted in the user acceptance test (if any).
6. Liquidated Ascertained Damages
- Liquidated ascertained damages clauses are included to compensate the customer at predetermined rates in the event of any delay towards completion of the project.
7. Intellectual Property Rights
- To address ownership rights of the software and other intellectual properties developed in connection with the contract upon completion and, in some cases, ownership rights of property relating to the software before completion.
8. Confidentiality and Non-Disclosure
- Confidentiality clauses for software development contracts is an important element to ensure parties maintain confidentiality during the development and implementation phases. Confidentiality obligations typically survive the expiration or termination of the contract.
9. Support and Maintenance
- It is common for software development contracts to include pre-agreed service level agreements to be attached as annexures to cater for support and maintenance of operating the software after development by the same software developer. This would cover technical elements of when, how and where the support and maintenance services will be provided as well as cost for such services for a specified period of time.
AIAC’s Standard Form Contract
On 19 November 2021, the Asian International Arbitration Centre (AIAC) released a standard form contract for software development under its AIAC Technology Expert Committee (TEC) which aims to provide an easy-to-use template encompassing the technology industry practices to ensure the rights of stakeholders involved are balanced.However, whilst the standard form includes most standard terms, customers should be weary to follow the template without legal advice and/or amendment. Each customer and project requires different needs on how software development is to be developed and implemented. Review of the standard form should be sought to include specific terms and conditions to address the needs of parties and the project.
The above standard clauses are non-exhaustive and should be drafted or reviewed carefully to address the needs of each project between a customer and the software developer. It is always helpful to engage lawyers to effectively advise on, assist with negotiations and draft clauses in a software development contract to meet the project objectives and effectively record agreed terms between the parties.