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Can I Exclude a Loss of Profits in My Limitation of Liability Clause?

Landing a huge contract is exciting – and risky! The stakes are high when a large proportion of your business’ resources are dedicated to an important project – especially if the contract is terminated prematurely by the customer.

As drafters of commercial agreements, we understand how important it is to our clients to limit or exclude their liability as much as possible, whether they are the customer or the service provider. At the same time, we know you need to be paid for your services.

 

 

A recent case, Atos IT Solutions and Services v Sapient Canada Inc, highlighted a number of issues that can arise in a claim for breach of an IT services contract. The defendant, Sapient, subcontracted work to the plaintiff, Siemens, in connection with a $49.5M project to build a single software platform; convert existing data to the platform; and provide support for the new platform for up to three years. The defendant terminated the contract early, and the plaintiff sued for damages, including lost profits.

One of the issues was whether the plaintiff could sue for loss of profits (a whopping $3,575,990) even though ‘loss of profits’ was excluded in the limitation of liability clause. The clause provided that the parties “will be liable to the other with respect to this agreement and any other obligations related thereto only for direct damages…” Neither party was to be liable for “any indirect, special,consequential, punitive or for loss of profits (collectively “Excluded Damages”), even if the other party has been advised of the possibility of such damages…”

 

Source

 

The court held that the excluded damages applied only to indirect loss of profits, for example opportunities lost because of the acceptance of the contract, but did not apply to the direct loss of profits resulting from early termination of the project.

In relation to damages, a key principle of contract law is to place the plaintiff in the same position they would have been in had the contract been performed (i.e. make the plaintiff “whole”). In this case, the contract for up to three years of support services was priced on a fixed fee basis, and was a reliable indication of the amount of loss of direct profits.

Lessons learned from Atos:

1. The significance of  drafting a tight limitation of liability clause that takes into account the reasonable expectations of the parties and common law interpretations of similar clauses cannot be understated. While no claim for indirect loss of profits was made in this case, the court implied that the language of the limitation clause, which is similar to many clauses found in various commercial contracts, can exclude indirect profits.

2. If you want the protection of being able to claim for a loss of direct profits, it is important to specifically include that right in your contract without inadvertently limiting it in the limitation provisions.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Overview of Software Development Agreement

Overview of Software Development Agreement

 

What is this document?

A Software Development Agreement is an agreement between a developer and a customer, where the developer will be developing software for the customer.

 

When would I use this document?

A Software Development Agreement can be used when a customer would like to hire or scope an external developer or development company to create a software for their needs. For example, if a company needs to offer services or products on the internet but does not have the in-house ability to build the software, they would hire an external developer or development company. Another example would be where a person has a terrific idea for a new app, but does not have the software expertise to develop the app.

 

Who Signs this Agreement?

The developer or developer company and the customer will sign the agreement. Depending on the complexity of the agreement, there may be additional documents (eg. Work Orders or Statements of Work) to sign.

 

More details about this document

The party providing the software services is generally called a “Developer” or “Service Provider” and the party requesting the software services is generally called the “Customer” or the “Company”. The party names can vary depending on the drafter of the agreement.

Software Development Agreements vary in length, depending on the project timeline, compensation, and the software being developed. Depending on the negotiating power of the parties, a Software Development Agreement can be pro-customer or pro-developer.

A developer will want to include clauses such as strict payment, interest rate, deemed  acceptance, clear scope of work , and clauses protecting its background intellectual property.

A customer will want to include broad liability and indemnity clauses for the developer, security clauses, scope of work clauses, warranty clauses, the right to terminate the contract, and representations, warranties and covenant clauses protecting the customer.

 

What are the core elements of this document?

The core elements of a Software Development Agreement include: acceptance, scope of work, payment, warranty, intellectual property, liability, indemnity, termination, and representations, warranties and covenants.

A Software Development Agreement can include a number of other supporting clauses, including subcontractors, confidentiality, personal information, audit requirements, invoicing, and taxes.

 

Related Documents

Non-Disclosure Agreement (NDA)/Confidentiality Agreement – an agreement to protect confidential information

Terms of Use – a document that sets out the terms that deal with the use of a website

Privacy Policy – a document that sets out the policies of a website for use of private information

End User License Agreement – a document that licenses a service or product to the end user, often used on websites

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Software Development Master Services Agreements Part IX: Acceptance of the Delivered Work in an MSA

Links from this article:
Small Business Law Library

ACCEPTANCE OF THE DELIVERED WORK

For the vendor in a Master Services Agreement (MSA), acceptance of their delivered work is usually a required customer step before payment. With specific types of contracts where they have frequent or periodic milestones, acceptance is a normal part of the work delivery, approval and payment process. These steps protect the customer from having a defective product at the end of the agreement. The more milestones, the more the customer gets to see the product before it is finished. It is helpful to design formal testing criteria for both the vendor and customer during negotiations of the MSA. This allows the vendor to know what to test for before sending it in for acceptance. This also saves time on behalf of the customer.

 

 

In particular, software development agreements have frequent checkpoints based on design or functionality specifications. The requirement for acceptance is an important “gatekeeper” to make sure that the product matches specifications and is bug-free. To put it simply, customers do not want to be billed unless the developed software is working properly.

 

Clausehound’s Small Business Law Library has a number of different Software Development Agreement templates, suitable for a variety of situations.

 

 

DRAFTING AN ACCEPTANCE PROVISION

For the vendor – a loose acceptance provision, where the customer can continue to demand further development, could result in a tiresome loop of testing and retesting.

Vendors can try to impose a “drop-dead date” or date of “deemed” acceptance where, after a certain number of days or a specific deadline, it will be considered accepted for that milestone. This is to ensure that periods of silence from a busy customer will not threaten the work delivery and payment period.
For the customer – they will try and keep the deemed acceptance period as long as possible and may also require that the vendor properly delivery notice for when testing has commenced. Adequate notice may be a broadly worded provision within the agreement or may be as specific as requiring that a specific person or persons are contacted and/or are available i.e. not on vacation or out of office during the acceptance period.

 

Stay tuned for more blogs on this topic!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Software Development Master Services Agreements Part VIII: Customer Responsibilities from the Vendor’s Point of View in an MSA

CUSTOMER RESPONSIBILITIES WANTED FROM THE VENDOR

We have all run into this problem at some point in our business lives: trying to get a project or task done but you have to wait on another person to provide you with the necessary documents to finish it up. Not just annoying, these delays can be costly in terms of underutilized staff or penalties for missed deadlines, if we’re talking about deadlines in a Master Services Agreement (MSA).

The vendor (consultant, developer, etc.) in an MSA will want the customer to agree on certain obligations and responsibilities during the course of the agreement. This is important since it ensures that a vendor will not fail to meet deadlines due to customers not replying or providing the necessary information.
Ultimately if the customer is materially breaching the contract the Vendor will have certain common law remedies, but for the “gray area” issues that may or may not be construed a material breach, it is better to stipulate the customer responsibilities up front.

 

Click here to view Software Development Master Services Agreements through Clausehound.com!

legal-tender-logo-220x82-2_Artboard 2

 

PROTECTING THE VENDOR

Customer responsibilities can also extend to protect the vendor from the actions of the customer. An example would be that the customer has to comply with all applicable laws and, failing to do so, the vendor can terminate the agreement. It also prevents the vendor from being stuck in an agreement that they have no ability to terminate if the customer continues to make unreasonable requests.
Below are several examples of common customer responsibilities (note that being timely is important):

    • The Customer should be responsible to provide information and direction for the vendor. This information should be accurate (as we all know, inaccuracies can cause delays!);
    • The Customer should appoint a person who is a contact liaison for the vendor and is responsible to promptly respond to vendor inquiries and requests;
    • The Customer should ensure that the vendor has access to any required equipment and Facilities in a timely manner;
    • The Customer should promptly review any delivered work product (this requirement is also usually found within the acceptance provisions of an agreement);
    • The Customer should commit to promptly paying vender invoices (this obligation usually appears in the payment terms provisions of the agreement, and a covenant to make prompt payment is a nice-to-have);
    • The Customer should be asked to commit to complying with applicable law – and, actually, both the customer and vendor should be acting in accordance with law, but from the perspective of either party, this clause is useful to provide a termination mechanism in the event that illegal activities are suggested; and
    • The Customer should commit to purchasing any third party supplied equipment, software licenses and so on that are required to perform the activity (language to this effect may also be included in the expenses provision or in the fees provisions, but it may be helpful to include that here as well).

The extent to which these clauses are implemented is dependent on either party’s bargaining power.

 

You can view Clausehound’s sample Software Development Agreement here:

SDA

 

 

To continue reading additional articles within this series, click here.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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What legal agreements should be signed before giving a project to a software developer?

You had a brilliant idea, set up your company, and now it’s finally time to make your dreams a reality and bring your product to life! When hiring a developer to help build your software or mobile application, it is important to take the time to agree on points such as:

  • The scope of the project;
  • The relationship between the parties;
  • Confidentiality obligations; and
  • Ownership of intellectual property.

 

A long-form software development agreement can cover all of these points, but if you’re looking for customized and specific terms, you may decide to draft agreements specific to your needs and retain them as schedules.

 

Software Development Agreement

A software development agreement is a standard agreement stating a developer’s intent to develop a software product, or “work”, for a company. Boilerplate terms that a standard software development agreement will cover include:

  • The scope of work to be provided, including project milestones, testing procedures, and pricing;
  • The transfer of intellectual property from the developer to the company; and
  • The parties’ liability and indemnification obligations.

Often, parties will include or negotiate additional clauses based on their needs, like:

  • Subcontracting rights;
  • Warranty provisions; and  
  • Insurance obligations.

Consulting Agreement

Typically, a software developer may not be considered an employee of the company, so covering the contractual nature of the developer’s work can serve to clearly assert this boundary. For example, a company entering into a consulting relationship with a developer will often include the following terms:

  • Compliance with the company’s policies;
  • Limitations on the consulting relationship (i.e., the consultant is not an employee); and
  • Non-competition and non-solicitation obligations.

Confidentiality Agreement

When a developer has access to a company’s customer data and records, it is understandable the company will want to prevent this information from being disclosed to its competitors.

You can view and customize a sample consulting agreement on Clausehound:

All employees, developers, and even subcontractors should be bound by confidentiality provisions. Depending on how comprehensive a company wants the confidentiality obligations to be, it can either include a standard confidentiality clause in a software development agreement or include a specific confidentiality agreement in a schedule to the agreement. A confidentiality agreement will generally include the following terms:

  • The inclusions of confidential information;
  • The purpose the information may be used for; and
  • The handling of the confidential information and return of the confidential information.

 

Intellectual Property Transfer Agreement

The developer is developing a work product that is based partly on the work of the company, but mostly on the work of the developer. The developer may have other employees or subcontractors working on the final deliverable for the company.

To protect its rights to the fullest, many companies will ask the developers to and have their employees/subcontractors sign separate intellectual property transfer agreements. Such an agreement could include clauses such as:

  • A transfer of the intellectual property and a license to the developer’s’ background intellectual property;
  • A transfer of moral rights; and
  • A representation of no third party infringement in developing the “work”.

 

To see a standard software development agreement, visit our Small Business Law Library!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Software Development Master Services Agreements Part VII: The Term of an MSA

Links from this article:
“scope of work”
here

TERM OF A MASTER SERVICES AGREEMENT

The term of a consulting agreement that is a Master Services Agreement (MSA) may be for an extended period, because the scope of work may, in fact, be a series of scopes of work that are defined at different points in time over the course of several years. An MSA allows for the two parties to quickly renegotiate future transactions or agreements since they can rely on the terms of the existing master agreement.

RESUMING A MASTER SERVICES AGREEMENT

Once the much lengthier master agreement has been finalized, the consulting engagement may start and stop several times but the parties are able to negotiate the “scope of work”, which is usually in the form of a schedule that is attached to the agreement, fairly quickly. Since an MSA lasts quite a long time, conditions for revision or amendments to the MSA (as opposed to changes in scope) will, of course, be useful.

These amendment clauses usually require the approval of both parties in order to take effect. There may also be a provision for certain terms to change on a periodic basis. For example, an MSA contract might have a five-year term, but a provision that allows for the contractor’s hourly rate to be changed at a certain point in time each year to account for inflation.

To continue reading additional articles within this series, click here.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Software Development/Master Services Agreements Part VI: Payment Terms

Links from this article:
Part II
Part IV
here

DEPOSIT/RETAINER
We had discussed the payment of a deposit or retainer prior to commencement of the services within Part II of this series. Once the engagement commences, invoicing made by the vendor in a Master Services Agreement (MSA) is particularly important as it can be a form of control by the customer. If the MSA includes milestones for which invoices are submitted, the customer may require that the contractor can only provide invoices for approved or accepted work products.

PAYMENT TIMING
The parties may agree to a payment based on dates or milestones. With respect to milestones, the customer may require that the contractor only provide invoices for approved or accepted work product. To make the invoicing process even more stringent, the may further require that invoices contain an approved purchase order number that has been obtained from the company in advance of invoicing.

PAYMENT DEADLINE
From the vendor’s perspective, specifying a payment deadline is important, and such a deadline may be either specified in advance in the contract (e.g. a monthly retainer that is due and payable within five days after the end of every month), or may be a deadline specific to each invoice (e.g. payment is due within a certain number of days after the invoice is delivered). A deadline is an important payment term for the vendor, without which it would be difficult to request a remedy for non-payment (such as: immediate request for payment failing which work will pause, intellectual property will cease to be assigned, the agreement may be terminated, and/or the dispute resolution mechanisms may be triggered.)

FORM OF PAYMENT
The form of payment can be in whatever form in agreed by the parties – including cheque, wire transfer, even in cash in some circumstances. As also noted in Part IV of this Series, if payment is received in cash, keep in mind that it is difficult to deposit more than a certain dollar amount without receiving a red flag from the banking authorities who are tracking the flow of funds to comply with anti-money laundering, and anti-terrorist legislation.

INTEREST RATE
Specifying an interest rate is a typical payment term. Often times the vendor will specify a rate that applies after 30 days of non-payment without the intention of charging the interest to a good client – as an interest charge on a long-time client can sour the relationship. However, it is important to include an interest rate for (at least) two reasons:

(1) the rate provides an incentive or lever for payment to be made, especially if it is a rate that is greater than the prevailing bank interest rate (and without which the cost to the customer of making payment is possibly greater than the value to be generated by delaying payment);

and

(2) in the event that the customer fails to pay to such an extent that the vendor is required to bring legal action to enforce payment, the claimant (vendor) will want to include interest accrued as part of the claim.

Keep in mind when specifying interest that the criminal code in certain jurisdictions will preclude “usury” or charging of an unfair interest rate. Consult with the criminal code or similar legislation to ensure that the usury rules are not being breached.

CURRENCY
When establishing payment terms, the form of currency related to payments and expenses in a Master Services Agreement (MSA) should be stipulated. This may seem fairly trivial for business that are operating and selling services in the same jurisdiction but, if the currency rates fluctuate, with enough customers in that local jurisdiction, an opportunity could present itself for the customers to open a local office or bank account in that local currency. This could skew the payment that the vendor was expecting. For businesses that operate in multiple jurisdictions, it is even more important to specify which currency that compensation will be paid in as it could leave the vendor with a large amount of money in an unwanted currency. It is important to keep in mind that if a significant amount of business is conducted in a particular jurisdiction, that there are rules for registering a business in that jurisdiction.

To continue reading additional articles within this series, click here.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

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Software Development/Master Services Agreements Part V: Compensation Levers

Links from this article:
here

SUCCESS FEES AND DISCOUNTS
Fees discounts and/or success fees may be applied and this can either be formalized or discretionary. For example a discount may be applied in the event that the transaction or engagement does not proceed beyond a certain point. Alternatively, a success fee may be applied in the event that the engagement is completed on schedule. Other mechanisms for discount/premium could include a variance (for example a plus or minus of 5% of fees charged) that is based on customer satisfaction.

RATE CARD
As noted previously, fees quoted on a time and materials will require a rate card i.e. an hourly rate for each individual working on the client engagement. It is fairly common to provide a rate schedule for members of the contractor’s team who are working in different roles on the team, or with different levels of experience. The customer may negotiate that certain (for example low-level) work will only be performed by team members with a specific role or at a certain pay level. Furthermore the vendor may wish negotiate a blended rate for their entire team that takes into account a mix of junior and senior level contractors, which makes the task of recording and calculating time administratively easier. Language is often included that allows for an increase in the rates on the rate card periodically (e.g. once per year), which is intended to account for inflationary pressures on the cost of living.

FEES FOR ONBOARDING REPLACEMENT STAFF
Fees for the onboarding of staff on the project, specifically replacement staff, may be a point of negotiation. Naturally, a fixed fee scope would address this from the customers perspective, but on a time and materials/fee estimate or fee capped engagement, the customer may not want to pay for the onboarding time for key personnel replacements, and may request a reduced rate for staff during their training or onboarding period.

The vendor may address this by building a solid transition process to keep the downtime or overlapping staffing on a project, or learning time, to a minimum.

RESEARCH TAX CREDITS
Government tax incentive programs may allow for reduced expenses related to technology-related staff and expenses, where innovation is occuring. The vendor and the customer can negotiate to decide who will be benefitting from those tax credits. A vendor that is able to capture the credits may be able to grow it’s team more quickly as a result of tax incentives. No matter who ultimately decides to claim this benefit, it can be used as a bargaining chip for potentially reduced rates.

To continue reading additional articles within this series, click here.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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