Technology adoption in any business is an unequivocal requisite to sustain and stay relevant in today’s digitally driven and automated world. Integrating technology helps enterprises unlock high level of efficiency, productivity, improved decision making and scalability for their ventures. Generally, businesses have opted for off-the-shelf technology solutions to automate their operations. However, in the present times, businesses, including small and medium scale enterprises, are choosing customized technology solutions to accommodate their needs and to have a competitive advantage.
Customized technology solutions for any enterprise is developed either by hiring an in-house technological team or by way of outsourcing the development to a third-party service provider. In the latter case, it is strongly advocated for the enterprise to execute a technology development agreement with the third-party developer.
A technology development agreement is a legal contract that outlines the terms and conditions, and the relationship between the developer of a technology and the service user, in relation to the creation, development, customization, transfer and maintenance of a technological solution or a product. A technology development agreement, like any other contract, is essential to protect the rights and interests of both the parties; to provide legal clarity towards the scope and expectations of both the parties; and to set out the ownership of the technological product.
Models of Technology Development Arrangements:
Based on the expectation of the work/technology product, the delivery timeline, and the commercial structure, the technology development arrangement can be broadly classified into the following:
I. Time and Material Contract:
A time and material technology development arrangement is generally employed when the scope of work or the technology product outcome is not pre-conceived. Under such an arrangement, the service provider charges a fee from the client on a basis of the amount of time spent and materials consumed for the development of the technology product, at a pre-determined rate.
Under the time and material arrangement, while the client has a higher flexibility to seek adequate changes and updates to the product, there is a risk associated with the unforeseen costs incurred for the development of such technology.
II. Fixed Cost Arrangement:
Under a fixed cost arrangement, the service provider undertakes the development of a technology product at a pre-determined fixed total cost. This arrangement is relied when the client has a defined budget, and a well-established scope of work and product specifications. This model of technology development arrangement deprives the client from flexibility to make changes to the specifications of the technology product.
III. Dedicated Team Arrangement:
This model of technology development arrangement is generally used in the need of an extensive development assistance by the service user. Under this model, the service provider deploys a dedicated team of developers with the service user for the development of technology. This model of technology development gives the service user with higher control over the project including the planning, resource allocation and budgeting.
Key Clauses under a Technology Development Agreement:
The service provider and the service user shall adequately evaluate and consider the following elements under any technology development agreement:
I. Scope of Work:
A technology development agreement shall clearly state out specifications pertaining to the technology solution or product proposed to be developed. Further, it is also beneficial for the service user to define the utility of the proposed technology product.
Under a Fixed Cost arrangement, it is functional for both the service provider and the service user to define specifications pertaining to the proposed technology product exhaustively. This ensures minimum leeway for any future discrepancies arising out of the developed technology solution.
Under a Time and Material arrangement, besides the specifications, the service user shall ensure having adequate flexibility for monitoring, directing and amending the project. Moreover, under a Dedicated Team arrangement, the particulars in relation to the expected team including their expertise, seniority and experience shall be stated out closely by the service user.
Apart from the scope of work in relation to the development of the product, the parties shall seek to clarify the post-delivery obligations of the service provider. Such obligations may include maintenance of the technology product/solution, warranty, updates and upgradations.
II. Delivery Timeline:
Apart from the scope of work, the parties shall clearly define the timeline and interim timelines for the development and delivery of the proposed technology products. In most projects, such timelines shall include milestones to be achieved for ensuring regular verification of the developed product and timely delivery of the same.
Besides the timelines for the development and delivery of the technology products, the parties should set out intervals for regular communication for reporting of the progress and follow-on changes/feedbacks of the developing technology.
III. Consideration and Payment Terms:
The agreement shall state out the service charges and fees payable by the service user for the development of the technology product. In a Time and Material arrangement, it is crucial for the service user to define the time rates such as, the hourly charges, and the cost associated with the material in detail to avoid any hidden costs.
Further, the parties shall define the timeline of payment of the service fees including advance, if any. The parties shall also seek clarity in relation to the taxes to be paid under the applicable laws and determine which of the parties will take the onus of such tax payment.
IV. Quality Check and Assurance:
The service provider shall seek to demonstrate the work-in-progress technology solution/product to the service user, from time to time, to obtain a feedback or a go-ahead from the service user. This helps both the parties to save time and costs on re-doing any part of the technology solution.
Further, the agreement shall provide for a timeframe after the delivery of the technology solution for the service user to ensure that the quality and specifications of the technology developed is in accordance with the scope set out in the agreement.
V. Intellectual Property Rights:
This clause is definitely amongst the most fundamental clauses of a technology development agreement. The parties shall recognize that the true value of the proposed technology solution or a product will lie in the intellectual property rights associated with such product/solution. Most of the technology development agreements are on a ‘work for hire’ basis, and the intellectual property rights associated with the technology product or solution is exclusively owned by the service user. Under such arrangements, the service user shall exhaustively define the constituents of intellectual property rights and ensure that such rights are adequately transferred/assigned to the service users in a determined jurisdiction.
On the other hand, the service provider shall diligently assess the construct of the clause to ensure that the transfer of rights to the service user does not restrict or deprive the service provider of any right to use or own any intellectual property which is beyond the scope of deliverables under the agreement, such as the source codes.
Further, the service user shall take adequate representations and warranties from the service provider stating that the technology product developed under the agreement is not in breach of any third-party intellectual property rights.
VI. Confidentiality:
As a process of developing a technology product, the service user may share sensitive and confidential information to the service provider including the trade secrets, the market research statistics and customer data. Further, under a Dedicated Team arrangement, the staff deployed by the service provider may have a higher access to such confidential information of the service user. It is pertinent for the service user to ensure that the service provider or any other their staff do not make any unauthorized use or share any information which is sensitive to the service user.
VII. Non-Solicitation:
This clause restricts one party to the agreement from directly or indirectly hiring or soliciting the other party’s employees, contractors, or clients. This clause is an essential for a service provider, specifically in a Dedicated Team arrangement, whereby the service user is restricted from directly or indirectly employing any staff deployed by the service provider for the development of the technology product.
VIII. Relationship:
Most of the technology development agreements between a third-party service provider and an enterprise is in a nature of ‘contract for service’. Wherein, the parties i.e., the service provider and the service user, function independently as principals, and there is no relationship of agency, partnership or employment between them. It is imperative to set out the relationship between the parties in the agreement along with the limitations associated with such relation. This construct comforts the parties by avoiding any liabilities which may be vicarious or which may arise due to any misrepresented association between the parties.