A Critical Concern for Start-Ups: Agreements in SoftwareIndustryBY: YUVRAJ P. NARVANKARBSL LLM DCl D.Corp.L DHLAdvocate, B...
either beneficial or stringent to either side. It is necessary to identify these greyareas and to deal with them effective...
agreement transferring ownership from the developer to the client. There aremany ownership options available, ranging from...
resolution or choice of jurisdiction clause though seem to be insignificant, needlot of attention and customization as per...
Penalty haunt the youngsters. However, the enforceability of such terms can bealways challenged in the Court of Law in lig...
Penalty haunt the youngsters. However, the enforceability of such terms can bealways challenged in the Court of Law in lig...
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START-UPS: PROTECT YOUR RIGHTS IN SOFTWARE INDUSTRY

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The growing IT sector and growth of Start-ups necessitated the better documentation to protect the respective rights and IPR. In India, the agreements should to be suited to the local condition with due regard to the court system and judicial response to such clauses. Any copy-paste approach may prove appalling in long term. Inadvertent drafting of payment Clauses meant for ensuring effective payment are seen to be attracting huge tax liability. Similarly blind adoption of arbitration clauses may lead to tremendous expense shoot-up making it costly deal for the Start-ups. Any casual approach can prove fatal for Star-ups in long term.

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START-UPS: PROTECT YOUR RIGHTS IN SOFTWARE INDUSTRY

  1. 1. A Critical Concern for Start-Ups: Agreements in SoftwareIndustryBY: YUVRAJ P. NARVANKARBSL LLM DCl D.Corp.L DHLAdvocate, Bombay High CourtWe are witnessing humongous growth in the IT sector in India and aparallel growth in the career opportunities in this lucrative arena. Salubriousclimate, progressive local community and the presence of many educationalinstitutes have attracted many multinational IT companies to India. Cities likePune and Mumbai offer world class IT facilities and are the IT hubs of the city.This unprecedented growth has resulted in growth of two limbs in the ITindustry, one in terms of jobs and other in terms of the independent businessopportunities. A trend of taking some experience in the mid-size companies andlater on opting for independent ventures can be essentially observed among theyoungsters. May it be job or independent venture, the most crucial part is thedocumentation of respective rights and obligations. In the job-oriented industrylike IT, great emphasis is put on the well documented employee agreements,non-disclosure agreements whereas the documents like non-competeagreements, software-development agreements appear prominently in theindependent ventures arena. Generally the start-ups in the IT industry face thisdocumentary trauma to a great extent while dealing with the large ITconglomerates. The start-ups often face undue subjugation to the onerous termsand conditions due to lack of bargaining power and due to ignorance of thedrafting of the well-balanced clauses and their negotiations. There are also whatare called as ‘Boiler-plate’ clauses which appear in every contract and thoughappear harmless, can prove fatal in the event of any dispute.This wide-spread documentation has necessitated the start-ups to devoteconsiderable attention to the details of these agreements and be vigilant fortricky terms and clauses. Each agreement has some skeletons in closet which are
  2. 2. either beneficial or stringent to either side. It is necessary to identify these greyareas and to deal with them effectively.Clauses like non-disclosure agreements are used widely, ranging from theemployment agreements to the software development agreements. Any blind-folded or ignorant approach in drafting these clauses can lead to the legalcomplications landing in courts of law. It is necessary to label the preciseinformation as confidential and any vague wording can create problems for the‘disclosing party’ as well as ‘receiving party’. Further it is necessary to set outpreventive as well as compensatory remedies for any breach of the obligationsunder the contract. The remedies set out must be practically enforceable in thecourts of law and any copy-paste approach can lead to appalling situation.Software-Development agreement is the back-bone of the IT industry anda lot depends on the flawless and balanced drafting of these agreements.Especially a start-up whose future prospect hinges on such agreement, may finditself in an awkward situation when some Conglomerate-Developer refuses toabide by some essential term of the contract or exploits some lacunae in anagreement in a prejudicial manner. The software specifications are the heart ofthe Software-Development agreement. They attempt to define the software to becreated and provide a guide for quality control and maintenance of the standard.The more comprehensive the specifications, the less is the likelihood ofmisunderstandings, client dissatisfaction, and bitter litigation. There are twobasic ways to pay a developer for creating custom software viz. a pay-per-hour(time and materials) agreement, or a fixed-price agreement.One of the most important functions of the attorney working on thesoftware development agreement is to establish who will own the intellectualproperty rights to the software to be created. This is often one of the most hotlycontested issues between the developer and client and can easily become a deal-breaker. Developers own the copyright to software unless the developer is theclients employee or the software is part of a larger work made for hire under awritten agreement. In order to own the copyright, the client must have an
  3. 3. agreement transferring ownership from the developer to the client. There aremany ownership options available, ranging from sole ownership by the client toownership by the developer with the clients merely having a license to use thesoftware. And there are also many substitutes between these two extremes.There are some areas where even big-conglomerates haven fallen prey tothe tricky clauses. Generally software developers will normally have variousdevelopment tools, routines, subroutines and other programs, data, andmaterials that they bring to the job and use to make up the final product. Oneterm for these ‘raw material’ items is "background technology." If the developertransfers ownership of the software to the client, the client may end up owningeven this “background technology” as well. If this so happens, then every timeafter the term of contract is over, the Developer has to again start from ground-zero for any upcoming project which will cause immense loss of humanresources and time. The Developer can’t afford to begin from the scratch againfor every new project. Developers should avoid this by ensuring that thedevelopment agreement provides that the developer retains all ownership rightsin this material i.e. “background technology” and also in the base-system used tobuild the customized programme. But, in this event, the agreement should givethe client a nonexclusive license to use the background technology that thedeveloper includes in the software.The issue of title and ownership of the software or product is the crucialpart of the agreement and has to be cleverly worded to avoid any unwarrantedtax liability. It is observed many times that, for ensuring timely payment, theDeveloper retains the right and title in the Software and agrees to transfer it tothe client only on the payment of the agreed consideration. However suchagreements can be treated as “Sale” attracting huge sales tax liability though thereal intention of the parties was to vest the property in the software always withthe Client and such clause was meant only to ensure timely payment.Warranty of software performance, title and non-infringement are alsomajor issues to be addressed in any IT related contract. The clauses like Dispute
  4. 4. resolution or choice of jurisdiction clause though seem to be insignificant, needlot of attention and customization as per the need of the party. E.g thougharbitration as an alternative mode of resolution seems attractive at first brush,the expenditure and the present day plight of this process outweigh its benefitsmaking it an expensive deal for the start-ups. One has to have a practicalknowledge of the arbitral process and its current plight in India for theappropriate advice. The issue of judicial intervention in the Arbitral Award isalso a matter of concern for the companies.Similarly any clause excluding jurisdiction of any court will serve nopurpose as the same is against Section 28 of the Indian Contract Act of 1872 asthe Agreements in restraint of legal proceedings are void. Further thejurisdiction can also not be conferred on any of the court which has nojurisdiction if the dispute arises. Thus for effective drafting of ‘jurisdiction clause’it is necessary to know as to which courts are likely to exercise a jurisdictionover the dispute as per Civil Procedure Code and only thereafter the exclusivejurisdiction can be conferred on one of those courts. Further it is also necessaryto specifically exclude the jurisdiction of any other court exercising concurrentjurisdiction.Software Maintenance and Updating Contract, Customer Agreements andPayment Gateway contract in any E-commerce sites project, IndependentConsultant Agreements, Indemnity Agreement, Web-hosting and MaintenanceAgreement, Employer-Employee Agreements and many such agreements shape-up the transactions in the IT industry.The dilemma of the contracts is not only faced by the start-ups but also bythe software professionals or fresher who takes up a job in some IT company.The companies, for ensuring that the new-comers do not switch the job easily,thrust upon them clauses like Lock-in period, non-compete clauses, non-solicitation clauses etc. Such clauses also provide for the penalty to be paid bythe employee in the event of resigning during the Lock-in period. Particularly,when the new job opportunities are on the horizon, the clauses of Lock-in and
  5. 5. Penalty haunt the youngsters. However, the enforceability of such terms can bealways challenged in the Court of Law in light of section 27 of the Indian ContractAct, 1872 which deal with Agreement in restraint of trade and validity of suchclauses largely depend upon the reasonableness and toning of such clauses.Generally the conglomerates or mid-sized IT or service providercompanies are well equipped with in-house legal teams. However the small start-ups can not afford the luxury of maintaining their own in-house legal team. Inmany cases, even the in-house legal teams, fail to secure interests of the companydue to copy-paste job.The start-ups or software engineers have to ensure that such agreementare reviewed and vetted by the specialized advocates with the know-how of thetechnology and possible traps of the industry. Often, when handed a contract tosign, we do not take the time to review it carefully, and possibly even discuss itwith an attorney as sometime the contract pertains to a matter that theindividual thinks is trivial or insignificant. Yet this simple step could prevent agreat deal of heartache, headache and expense in the future. One should alwaysproceed with caution before putting pen to paper. It is always easier to avoidunfavourable terms in a contract by reviewing and understanding them beforeyou sign, than it is to try to avoid the contract’s effects later. So, when handed acontract, put down your pen. Take a long pause and take the time to read it. Ifyou do not understand something in it, consider discussing it with your attorney.An expenditure of consulting a qualified lawyer can certainly save a great deal ofmoney and harassment in future.BY: YUVRAJ P. NARVANKARBSL LLM (Gold Medallist)Bombay High Court[Specializing in E-contracts and cyber law related issues)Author can be reached at:Cell: +91-98227867631yuvraj.narvankar@yahoo.co.in
  6. 6. Penalty haunt the youngsters. However, the enforceability of such terms can bealways challenged in the Court of Law in light of section 27 of the Indian ContractAct, 1872 which deal with Agreement in restraint of trade and validity of suchclauses largely depend upon the reasonableness and toning of such clauses.Generally the conglomerates or mid-sized IT or service providercompanies are well equipped with in-house legal teams. However the small start-ups can not afford the luxury of maintaining their own in-house legal team. Inmany cases, even the in-house legal teams, fail to secure interests of the companydue to copy-paste job.The start-ups or software engineers have to ensure that such agreementare reviewed and vetted by the specialized advocates with the know-how of thetechnology and possible traps of the industry. Often, when handed a contract tosign, we do not take the time to review it carefully, and possibly even discuss itwith an attorney as sometime the contract pertains to a matter that theindividual thinks is trivial or insignificant. Yet this simple step could prevent agreat deal of heartache, headache and expense in the future. One should alwaysproceed with caution before putting pen to paper. It is always easier to avoidunfavourable terms in a contract by reviewing and understanding them beforeyou sign, than it is to try to avoid the contract’s effects later. So, when handed acontract, put down your pen. Take a long pause and take the time to read it. Ifyou do not understand something in it, consider discussing it with your attorney.An expenditure of consulting a qualified lawyer can certainly save a great deal ofmoney and harassment in future.BY: YUVRAJ P. NARVANKARBSL LLM (Gold Medallist)Bombay High Court[Specializing in E-contracts and cyber law related issues)Author can be reached at:Cell: +91-98227867631yuvraj.narvankar@yahoo.co.in

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