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The specification of the project is the controlling document in the agreement and the most critical.
Do not overlook anything. For example, if a software product is being developed, make sure issues
such as response time, technology configuration, network configuration, software standards, testing
standards, database standards, and documentation standards are included. If a specific hardware and
network configuration is not specified in the contract, the responsibility for the added burden of the
increased cost of the configuration will become a major source of contention.
When a company and vendor terminate a relationship, what obligations does a vendor have to assist
the company in transitioning to either an in-house capability or another vendor? For example, when an
outsourcing company takes over the data center of a company, it is common for the outsourcing
company to purchase all of the data center assets of the company and to hire its employees. What
happens at the end of the contract? The company no longer owns the technology, the employees, or in
some cases the building. All of the institutional memory of the technology rests in the vendor. Does
the vendor sell the equipment back to the company or its new vendor, and, if so, at what price? Do the
employees return to the company? Companies must consider this issue before committing to
outsourcing and must include language in the contract to protect themselves.
Under what circumstances can either party terminate the relationship? This, too, should be
articulated in the agreement. Usually, the vendor can cancel for nonpayment of its fees. However,
there should be a written notice provision with the opportunity to clear the default. Likewise, if the
vendor defaults on its obligations, there should be an opportunity to cure. The vendor‟s obligations
include warranties, service guarantees, timetables, personnel, and other obligations that are spelled out
in the agreement.
Who owns the intellectual property (IP)? If a company contracts with a vendor to develop software
or a product design, absent specific language to the contrary, ownership of the copyright for the
software or design belongs to the creator of the code. Ensuring that the company is getting the fruits of
its payments requires a “work for hire” clause in the contract that specifies which party will own the
IP.
If the vendor uses some of its own IP to develop a software product for the company, who owns the
derivative product? Without a license to use the new software, the company is out of luck. The vendor
must grant at least a nonexclusive license to utilize the products that are embedded within the resulting
software, even if the vendor uses freeware in the product. Freeware requires a license, and there is not
one standard license for freeware. There are approximately three different license forms for freeware,
depending on its source.
Also, make sure that the vendor indemnifies the company if it infringes another company‟s
copyright or patent. Hold the vendor responsible for defending the company in the potential lawsuit, in
addition to being responsible for damages. It is not unusual in today‟s environment for a company to
infringe another‟s IP without intent. If a company receives a letter accusing it of infringing another
company‟s patent or copyright, it is important for that notice to be taken seriously. The company must
make an effort to determine if it is really infringing another‟s IP. Failure to do so could result in a
judgment of willfulness with additional damages applied. Do not turn a blind eye to the notice letter. If
it is determined that the company is infringing, it will be necessary to either cease infringing or
negotiate a license to utilize the IP.