by May 11, 2002 0 comments



Last month we started a three-part series on now to negotiate IT contracts well such that you don’t have to go to court later. This article will discuss some types of contracts that you may enter into–basic employee contracts, software licenses and hardware sales. Taking into consideration commercial and legal concerns alike, it will help you decide on the appropriate contractual structure for a prospective transaction.

BETWEEN PROVIDERS AND END USERS
As an IT provider you’ll need to know about some of the contracts described below. 

System turnkey agreement
A turnkey agreement guides the purchase and supply of computer hardware, the licensing or sub-licensing of software, their installation and testing together as a system and, finally, their ‘bringing into service’ and handing ‘the key’ (ie, the system) over to the customer. It also provides for an obligation to maintain the hardware and support the software (at least) for the warranty period. 

Protect
your software

The best
way for providers to protect software is through a software license
(operating system agreement), which should be signed before or upon
delivery (but prior to use) of the software. 
Many application programs are now supplied under a ‘shrink wrap’
license, which notifies the purchaser of a computer system that the
particular software is under license. 
However, operating system software is rarely subject to a separate
license nor is it always possible to have the particular software
license relating to the chosen system available at the time of selling a
computer system. Therefore, as a supplier you must have a form of
license incorporated in the sales agreement as a failsafe. 

In this contract, the contractor is the equipment manufacturer although this contract can easily be amended to apply to any contractor providing third-party hardware and software. 

To draft this contract to your (IT provider) benefit, minimize the extensive liability and responsibility involved in such an arrangement, especially where third-party hardware and software suppliers are required to provide goods and services as part of the system. 

Maintenance agreements
The terms of this contract, as the name suggests, relate to the maintenance and support of primarily the hardware of a computer system. However, the maintenance contractor must have some knowledge of the operating system software so that he can diagnose whether a problem truly relates to the hardware or is a software error. The contractor must also offer some degree of operating system software support even if this is only to liase problems directly between customer and software owner.

For new equipment, the manufacturer or supplier offers a warranty period or period of ‘free’ maintenance to its customers. Notwithstanding this ‘free’ maintenance period, the supplier would prefer customers to sign a maintenance agreement either with the supplier or with its appointed maintenance contractor on or as near the date of installation as possible, thus the necessity for an ‘effective date’ as opposed to the ‘date of installation’. The effective date will be the date of expiry of the warranty period. 

Computer hardware maintenance contracts have traditionally included ‘preventive’ maintenance, which involves the maintenance contractor visiting the customer during the period of the contract to check the equipment. The benefit of such visits is not only to ensure that the system hardware is checked regularly but also to afford the contractor the opportunity to keep in regular touch with the customer with a view to selling more consumables (disks, printer ribbons or cartridges), system accessories (new CD-disk drives and speakers, modems, scanners) or even contracting to support other equipment which the customer uses at the same location. 

System support agreement
As an end-user you should have an entire computer system (including hardware, software and peripherals) supported by one organization both from the point of view of cost and technically (since the malfunction in a system may equally be attributable to software or hardware fault). 

In such a case, however, the contractor may not have sufficient in-depth information in supporting an entire system with, perhaps, many application programs, accessories and peripherals. Therefore, the contractor, whilst acting as first line support for all fault calls, may sub-contract support of particular items.

System support agreement is a comprehensive agreement that includes most of the common options for support provision, like support by telephone, on-site, by modem, during office hours or out of such standard hours. In keeping with most support agreements drafted for the benefit of the contractor, it does not include response times to fault calls, nor does it provide for ‘loan’ equipment in the event that the customer’s system requires workshop rather than on-site repair. If the system is critical to the customer’s business, the provision of loan equipment is a useful, if not essential inclusion, although it can be costly. 

BETWEEN PROVIDERS AND DISTRIBUTORS

Distributorship agreement 
Distribution agreements are vital contracts for the widespread marketing of goods and services. In such agreements a supplier appoints a third party (the distributor) to market and perhaps also support the supplier’s goods or services, sometimes in a specific area (the territory) in which the distributor has already established itself and has an existing customer base. 

Therefore, in drafting such an agreement, consider the following points. 

  • Should the appointment be exclusive or non-exclusive?
  • Should the appointment have territorial restrictions?
  • Should the appointment include a right to support the product?
  • If the supplier of the product is also supplying software, will the distributor be granted the right to license, sub-license or merely to act as an agent on the supplier’s behalf?
  • Should the supplier grant the distributor the right to appoint dealers or sub-distributors?

Shrink wrap licence
This contract is used to license high-volume, low cost, off-the-shelf software which is now the most common mode of mass-market distribution of software, where it is neither economically practical nor physically possible to obtain the signature of the end-user to a conventional license in order to create a valid contract. In such circumstances ‘constructive acceptance’ of the license terms is necessary. 

Who owns the source code?

Without the source code of a program a programmer cannot modify, enhance, debug, support or rectify defects of the program. The source code is not required for the normal commercial use of the program by an end-user. It is, therefore, highly confidential.

However, if the program is essential to a user or distributor’s business, he may require the source code in the event that the software owner goes out of business or breaches his obligations to support and maintain the software to a proper operational standard.

The escrow agreement is now commonly made with an independent third party, an escrow agent, appointed by mutual agreement of both parties. The escrow agent holds the source code until the parties’ agreement or license expires. 

But the mere depositing of the software source code is insufficient to assure the licensee that the source code is useable and up-to-date for securing the continuity of the end-user licensee’s investment in computerization. Therefore, more licensees (especially institutional organizations) are demanding the deposit of more information with regular updates and that all such deposits are verified by the escrow agent to ensure that it is useable and is the version which the licensee is using.

The original method used to achieve constructive acceptance (which is still used) is the placing of the software disk inside a package around which the software license is placed under a clear, sealed wrapping (shrink-wrap) through which all the terms and conditions of the license can be read and a statement that ‘breaking the sealed wrapping’ will be deemed ‘acceptance’ of the license. Another commonly used method is placing the software disks in a sealed envelope and placing a label over the envelope which states that ‘opening the envelope’/’ breaking the label’ will be deemed acceptance of the software license accompanying the software which license is usually contained within the same box or package as the envelope containing the software disks. This contract can be used in both the above circumstances. 

Establishing constructive acceptance of a unilateral contract is never easy. To further increase the evidence that the license conditions have been accepted, some licensors also place the terms of the software license in the loading screen of the software itself, as well as enclosing ‘registration’, warranty or support cards for end-users to complete and return to the licensor. This also serves to identify and establish a known customer base to whom updates and marketing information can be sent. 

Software distribution agreement
This is drafted for the benefit of the software owner, and allows a software developer (software owner) to distribute (usually pre-packaged) software through an independent third-party distributor. 
In this contract, the distribu-tor wishes to market a specialized high-value software (ie, not
off the-shelf software which would be covered by a Shrink Wrap or Web Wrap software license), for use on specific equipment that the distributor also markets. The contract can also easily be adapted not to refer to specific equipment. 

The contract also allows the software owner to control the amount of technical information it wants to disclose to the distributor and allows the software owner to impose (if required) minimum quantities of the software that the distributor is expected to distribute. Where the distributor is allowed to reproduce the software for redistribution, there is provision that each copy is serialized. 

Assignment of software agreement
A software program consists of computer programming code (source and object code), together with the written documentation, (software listings, schematics, manuals, flowcharts and drawings) which make up the preparatory design and specification work and which leads to the development of the finished software.
Not all of the code or written documentation can be owned by the software developer, since much of the programming languages, algorithms and logic are in the public domain. What is owned by the software developer is the original way in which the developer has used his know-how and expertise to create an original end product (software program) which is his own ‘expression’.

This original expression is protected by copyright law in most countries and it is this part of the software which can be bought and sold by the developer like any asset.

However, to properly transfer all rights in that asset to a purchaser, the developer must assign all of his original rights (intellectual property rights) to the purchaser and if the assignment is drafted for the purchaser’s benefit he should also seek an undertaking from the developer not to create that same software again.

The assignment must also secure the rights to any enhancements, modifications or other variations which the developer may create or be capable of creating, as well as the right to apply for patents or other protections anywhere in the world.

Finally, since software is created through the developer’s know-how, it is important to secure the developer’s continued help in understanding the software and securing such rights of ownership as are possible to obtain.

Rodney D Ryder, Advocate, Supreme Court of India, is a
consultant on trade and technology laws

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