Navigating Technology Contracts: A Guide to Types, Clauses, and Negotiation Pointers.

I.? INTRODUCTION

In today’s digital era, technology contracts serve as an essential legal document delineating terms and conditions for acquiring, developing, or utilizing products or services. These agreements establish a transparent understanding among involved parties, fostering efficiency, mitigating risks, and fostering accountability. Amidst the dynamic landscape of technology, contracts serve as vital instruments for navigating relationships and conducting business with technological offerings. They outline the rights, responsibilities, and commitments of all parties, furnishing a legal framework for business operations and conflict resolution

II.?TYPES OF TECHNOLOGY CONTRACTS

Various types of Technology Contracts are as follows:

1. Software License AgreementsThese agreements facilitate the transfer of Intellectual Property Rights (“IPR”) embedded within the software from the vendor (the entity that has developed and owns the associated IPR) to the customer. Such agreements may either entail a mere license to use the product (the IPR), where the ownership of the IPR remains with the vendor or involve the sale of ownership rights of the IPR from the vendor to the customer. A licensee may utilize the licensed software for various purposes, such as managing business operations or communicating with employees and clients.A software licensing agreement typically includes additional policies and terms. It can generate revenue for the licensor and serve to uphold the licensor’s ownership and control of its intellectual property rights in the software. These agreements can be further classified into End-User License Agreements (including click-wrap and browse-wrap contracts) (“EULA”), Intellectual Property Licensing Agreements, Enterprise Licenses, Distribution Contracts, Assignments, Work-For-Hire Agreements, and more.
2. Cloud Computing Services AgreementContracts in which the vendor is tasked with hosting cloud infrastructure and facilitating software to grant the customer internet-based remote access to the cloud are termed Cloud Services Agreements. A vital characteristic of these agreements is the delivery of services entirely through automated computer processes, with no human intervention from the vendor to the customer. The customer solely obtains access to the cloud infrastructure and software without receiving a copy of the software, distinguishing it from a Software Licensing or Ownership Agreement. Typically, these agreements entail subscription-based access for the customer and can be classified into:a)??Software as a service (“SaaS”): SaaS is a contractual arrangement wherein a customer obtains computer software services from a service provider. In a SaaS agreement, the customer gains access to software hosted on the service provider’s server rather than on the customer’s own server or hardware. Usually, SaaS agreements are accompanied by additional documents such as a service-level agreement and privacy policy.b)?Software as a Platform (“SaaP”): Contracts with SaaP offerings essentially require a person to purchase (strictly speaking, hold a restrictive license of) a software product. SaaP offerings, as a model, popularly emerged in the late 1990s and are rarely observed today. In this model, users buy a copy of the software or a license (as a one-time purchase) and then install it locally on their devices.c)?Platform as a Service (“PaaS”): PaaS is a cloud computing service model that provides a platform allowing customers to develop, run, and manage applications without the complexity of building and maintaining the underlying infrastructure. With PaaS, customers can focus on the development and deployment of their applications while the service provider manages aspects such as servers, storage, networking, and middleware. PaaS typically includes tools for the development, testing, deployment, scaling, and management of applications, making it easier and more efficient for developers to create and deploy software applications.d)?Infrastructure as a Service (“IaaS”): IaaS is a cloud computing service model that provides virtualized computing resources over the internet. With IaaS, customers can rent virtualized servers, storage, networking, and other computing resources from a cloud provider on a pay-as-you-go basis. This allows customers to avoid the costs and complexity of owning and maintaining physical hardware and infrastructure. Instead, they can scale their infrastructure up or down as needed, paying only for the resources they use. IaaS provides flexibility, scalability, and cost-effectiveness for businesses and organizations looking to run applications, store data, or build and test software in the cloud.
3. Software Development AgreementWithin a software or IP development agreement, a contractor, programmer, inventor, or developer is engaged to craft a novel intellectual property or tailor-made software or programmable application. Such agreements entail professional services and necessitate the seamless transfer of ownership from the developer to the contracting party. Typically, these agreements are supplemented with an invoice or order form, which the buyer furnishes to the software developer, outlining the buyer’s specifications and the mutually agreed-upon fees.
4. Data Processing Agreements (“DPA”)DPA is a contract between a data controller, like a company, and a data processor, such as a third-party service provider. Data processing encompasses various operations involving the collection, translation, communication, and classification of data to generate meaningful information. Companies often engage third parties to handle and analyze customers’ data, necessitating the implementation of a DPA.A data processing agreement outlines the technical specifications that both the controller and processor must adhere to during data processing activities. This entails establishing terms for data storage, protection, processing methods, access protocols, and permissible usage. Additionally, the agreement delineates the actions a processor is authorized or prohibited from taking concerning the data.

III.?KEY DIFFERENCES BETWEEN SAAS & SAAP[1]

1. Usage Rights & Hosting:SaaS provides a subscription-based model where customers often make monthly payments for the software. The hosting environment is under the control and ownership of the service provider. In contrast, consumers can buy the SaaP software outright because it has a perpetual license. Options for hosting, such as on-premises or cloud-based hosting, are more customizable for users.
2. Support & Updates:SaaS providers often give thorough support and frequent updates as part of the subscription package. Automatic updates and bug fixes help users without requiring manual involvement. In contrast,?SaaP users might get support and updates based on their unique agreements. They may have to handle updates and problem fixes independently, which takes more time and resources.?
3. Flexibility & Freedom:Scalability is flexible with SaaS since users can quickly change the number of licenses or subscriptions to suit their requirements. It allows users to use any internet-connected device to access the software. Meanwhile, SaaP is installed locally, allowing additional software customization and management. Although users can change the software to meet their own needs, doing so can add complexity and require more maintenance work.
4. Monitoring:SaaS offers a streamlined monitoring experience because the service provider manages most infrastructure and applications. At the same time, SaaP demands that the user spend money on maintaining their systems.

IV.?IMPORTANT PROVISIONS IN EVERY TECHNOLOGY CONTRACT

Following are the key provisions and pointers to ensure a well-drafted Technology Agreement

1. Definitions and Representations & WarrantiesEvery Technology Agreement necessitates a thorough and comprehensive definition of the ‘Technology’ along with precise representations and warranties concerning the provided Technology and/or services. It is crucial for every lawyer to thoroughly review design documents and manuals to gain insights into the functionality and usage of the technology. This knowledge is instrumental in crafting a meticulously drafted clause, especially in scenarios where the client is a software vendor seeking to accurately identify the software and outline usage limitations of the software for the customer.It is also crucial to consider the disclaimers and advertising claims issued by the software vendor when formulating the ‘representations and warranties’ clauses. Suppose a company advertises multiple claims, such as being the “best in the market”, while simultaneously disclaiming all warranties and liability for the adequacy, completeness, or performance of the software and stipulating that users assume all risks regarding the quality and performance of the service/software. In that case, the courts might not uphold such terms due to principles of ‘unconscionability’ and/or ‘adhesion’. This is because users effectively have no chance to contest these conflicting terms.
2. License to UseEach ‘Software License and Ownership Agreement’ must include a ‘License to Use’ clause that clearly defines the software subject to the license. It’s essential to delineate all components intended for licensing, encompassing documents, user manuals, modules, functionalities, and related products associated with the software.Moreover, these clauses should specify whether the software vendor grants a limited, non-exclusive, and non-transferable license. The limited nature of the license implies that the vendor permits the user or customer to utilize the software for specific and restricted purposes, with no authority to transfer it to others. Similarly, the license’s non-exclusivity allows the vendor to sell the software to other parties. Additionally, the vendor must properly bundle the software with any additional documentation and/or manuals and specify whether modules and/or functionalities are licensed separately or with the software.
3. Intellectual Property RightsThe purpose of this clause is to safeguard the intellectual property rights of both parties involved. It is imperative for every technology agreement to include an ‘Intellectual Property Rights’ clause, explicitly stating that ownership of the intellectual property (the “IP”) remains with the respective party unless otherwise specified in the agreement. This clause should also prohibit the other party from modifying, reverse engineering, reproducing, or copying any part of the IP directly or indirectly through a third party.Moreover, in the context of a ‘Software Development Agreement,’ a provision should be incorporated to clarify that the company will acquire ownership of the IP related to the software upon the completion of the development work by the developer.
4. Data Security & ConfidentialityWhen a service provider handles a company’s data, it bears the responsibility for safeguarding and securing that information. Consequently, any company engaging in a technology agreement should ensure the inclusion of a clause requiring the implementation of robust security measures by the service provider. These measures should align with industry standards applicable to the company’s data, which will be processed and/or retained by the service provider.
5. Term & TerminationThe language within every ‘Software License and Ownership Agreement’ should be as precise as possible. If a user obtains a trial version of the software, the license will have a limited duration. Conversely, the license will typically be perpetual or indefinite if the user purchases a paid version. For paid versions, the term ends either at the conclusion of the specified period or annually, depending on the subscription model. Additionally, users have the option to renew the term if desired.Regarding termination, the agreement stipulates that it will be terminated if either party breaches its terms. Examples of breaches include exceeding the agreed-upon number of installations, sublicensing, or transferring the software against specific prohibitions. Moreover, termination for convenience may also occur. In any of these scenarios, the user must cease using, delete, and/or return the software.??????????????
6. Jurisdiction & Governing LawTechnology contracts often involve parties located in different jurisdictions, leading to potential confusion regarding jurisdiction and governing law due to the diverse locations where causes of action may arise. Thus, specifying the jurisdiction and governing law is crucial when entering into a technology contract, particularly when dealing with parties situated in different jurisdictions. This helps clarify which legal system will govern the contract and any disputes arising from it. By stipulating an exclusive jurisdiction and governing law within the agreement, parties can mitigate potential confusion and ensure a smoother resolution process in case of disagreements.

V.?NEGOTIATING WARRANTY & INDEMNITY PROVISIONS

Negotiating warranty and indemnity provisions in technology contracts involves balancing the interests of both parties while mitigating potential risks. Indian law, while being comprehensive, leaves room for significant negotiation to tailor warranties to specific risks and needs of the contracting parties. Some common issues encountered during negotiation include:

1. Scope of Warranties:Parties may have differing expectations regarding the scope of warranties, with suppliers seeking to limit their liability to specific parameters. At the same time, customers may push for broader assurances covering all aspects of the technology’s performance and functionality, particularly in scenarios involving third-party infringements or data security breaches.Do not provide unnecessary warranties, and ensure each warranty intended to be included in the contract is relevant and appropriate in the context of the contract. For example, for a software licensing agreement, the inclusion of a software warranty is reasonable, but including a services warranty without services being covered under the licensing agreement may be inappropriate and irrelevant. Ensure your warranties are accurate and correct, as false information means an invitation to liability.
2. Duration of Warranties:Determining the duration of warranties is crucial, as parties must agree on the period during which the warranties will remain in effect. Suppliers may seek to limit the duration to a specified timeframe, while customers may request longer-term assurances to cover the entire lifecycle of the technology.
3. Remedies for Breach:Defining remedies for breach of warranty is essential to address situations where the technology fails to meet the agreed-upon standards. Parties may negotiate remedies such as repair, replacement, or refund, depending on the severity of the breach and its impact on the customer’s operations.The party taking economic risk or liability has to be careful with risk allocation and mitigation, as any negligence in this aspect could prove costly. The party receiving economic remedy or benefit is required to ensure such monetary remedy or benefit is proportionate to legal and financial risks undertaken by such party.
4. Indemnity Provisions:In addition to warranties, technology contracts often include indemnity provisions to allocate risks between the parties in case of third-party claims arising from the use of the technology. Indemnities further complicate such negotiations, especially concerning various data protection laws. Negotiating these provisions involves determining the scope of indemnification, the triggers for indemnity obligations, and any limitations on liability.Do not agree to blanket indemnity obligations; always agree to provide indemnity only in case of the occurrence of specific acts or events, and you should limit such acts or events to the extent you are good enough to take them legally and financially. In simple, never carry any indemnity obligations you do not anticipate being capable of honoring.

Negotiating these provisions requires careful consideration of the scope, duration, remedies, and indemnities involved, balancing the interests of both parties while mitigating potential risks. Various courts in India have further shaped the understanding and enforcement of warranty provisions in technology contracts while emphasizing the importance of clear terms and mutual understanding.

Thus, it is imperative for the lawyers to understand the critical aspects of warranty provisions, address common issues during negotiation and frame explicit terms and conditions regarding warranties so that the parties can establish clear and enforceable commitments that promote trust and transparency in their technology relationships.

VI.?USUAL DISPUTES ARISING OUT OF TECHNOLOGY CONTRACTS

Disputes arising under technology contracts can vary depending on the specific terms and conditions of the agreement, as well as the nature of the technology involved. However, some common types of disputes that may occur include:

1. Performance Issues: Disputes may arise if one party fails to meet the performance standards or deliverables specified in the contract. This could include delays in project completion, substandard quality of work, or failure to meet agreed-upon specifications.
2. Intellectual Property Rights: Disputes over ownership, licensing, or infringement of intellectual property rights, such as copyrights, trademarks, or patents, may occur. This could involve allegations of unauthorized use or reproduction of software, technology, or other intellectual property.
3. Data Security & Privacy: Issues related to data security breaches, unauthorized access, or misuse of confidential information may lead to disputes. Parties may disagree on the adequacy of security measures, compliance with data protection regulations, or liability for data breaches.
4. Payment & Billing Disputes: Disputes may arise regarding payment obligations, billing errors, or disputes over fees and charges. This could include disagreements over-invoicing, payment delays, or disputes over the scope of work covered by the contract.
5. Termination & Breach of Contract: Disputes may occur if one party breaches the terms of the contract or if there is disagreement over the validity or grounds for termination of the agreement. This could involve allegations of non-performance, breach of confidentiality, or failure to comply with contractual obligations.

The appropriate method for resolving such disputes under technology contracts depends on various factors, including the nature and complexity of the dispute, the preferences of the parties, and the terms of the contract. In some cases, parties may choose to combine different dispute resolution methods or engage in alternative dispute resolution mechanisms to achieve a satisfactory resolution.

In addition to the previously mentioned points, various forms of EULAs, including click-wrap and boilerplate agreements, face legal hurdles due to their non-negotiable nature. Consequently, they may display significant favoritism toward one party, potentially resulting in instances where users consent without complete comprehension or informed decision-making. An essential factor in assessing the enforceability of click-wrap agreements is the presence of unjust or unreasonable terms.

Several courts in India, including the Income Tax Appellate Tribunal, – Mumbai[2], have held that contracts containing such terms may be deemed unenforceable despite meeting all the necessary requirements for a legally valid contract. Thus, it is crucial for the lawyer to carefully consider the following legal aspects when drafting such agreements in order to ensure transparency and adhere to relevant laws and regulations:

1. Accessibility & Noticeability:Agreements must be easily accessible and conspicuous before the user avails the service/ software for the agreement process to be enforceable. ?Click-wrap contracts can be challenging to locate and may lack conspicuousness during the agreement process.Courts often scrutinize agreements, particularly browse-wrap agreements, where terms are hidden as hyperlinks at the bottom of a webpage. In “Nguyen v Barnes & Noble, Inc.”[3] and “In re Zappos.com Inc., Customer Data Security Breach Litigation”[4], courts found agreements unenforceable due to inadequate notice and opportunity for users to agree.
2. Being Balanced & not One-Sided:Agreements must coincide with the reasonable expectations of the user, and any unusual limitation and/or deviation must be highlighted and brought to the attention of the user.The doctrine of ‘unconscionability’ may also be used to argue against the enforceability of contractual terms that involve “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favourable to the other party.”The factors generally considered by courts under this doctrine are (i) oppression (inequality of bargaining power resulting in no real negotiation and an absence of meaningful choice); (ii) surprise (the extent to which the supposedly agreed-upon terms are hidden by the party seeking to enforce them); and (iii) terms are ‘substantially unreasonable’ at the time the contract was made.Cases like “A & M Produce Co. v. FMC Corp.”[5] illustrate the doctrine of ‘unconscionability’.
3. Interface Design & Distinction:Design and presentation of agreements impact enforceability; poor design may lead to agreements being deemed unenforceable. The design and presentation of click-wrap agreements on user interfaces play a crucial role in their enforceability.Poorly distinguished agreements, such as those lacking visual distinction or accessibility during sign-in or checkout processes, may fail to garner user consent.Cases like “Colgate v. Juul Labs, Inc.”[6] and “Berkson v. Gogo”[7] illustrate the significance of interface design in enforcing agreements.
4. Explicit Consent Requirement:Users must explicitly consent to terms for agreements to be enforceable; a lack of clear opportunity for agreement can invalidate agreements. Users must expressly consent to click-wrap agreements’ terms for them to be enforceable.Courts have invalidated agreements where users did not have a clear opportunity to demonstrate their consent, such as in “Nicosia v. Amazon”[8].
5. Documentation & Audit Trail:Detailed records of user consent are necessary to mitigate legal risks, including notifying users of any modifications to the agreement. Failure to maintain detailed records of user consent poses significant legal risks. Simply requiring users to click “I Agree” may not suffice without evidence of consent.Cases like “Nager v. Tesla Motors, Inc.”[9] highlight the importance of maintaining comprehensive records of individual acceptances and notifying users of any modifications to the agreement to avoid legal challenges.
6. Accessibility for Users with Disabilities:If the end-user resides in the U.S.A., compliance with the Americans with Disabilities Act (the “ADA”) is essential for digital content, including click-wrap agreements, to avoid legal challenges.The ADA requires businesses to ensure that digital content, including click-wrap agreements, is accessible to individuals with disabilities. Failure to comply with accessibility standards may result in legal challenges and liability.In “Robles v. Domino’s Pizza, LLC”[10], the court held that websites must be accessible to individuals with disabilities, highlighting the need for businesses to adopt inclusive design practices in their online agreements.
7. Lack of Transparency in Terms:Transparency and clarity in contractual terms are crucial for validity; obscured or hidden terms may render contracts unenforceable.Courts have emphasized the importance of transparency and clarity in contractual terms to ensure the validity of agreements. In “Williams v. Walker-Thomas Furniture Co.”[11], the court held that contracts with obscure or hidden terms may be deemed unconscionable and unenforceable.

VII.?THE FUTURE: BLOCKCHAIN TECHNOLOGY FOR SMART CONTRACTS

Blockchain is a decentralized, distributed ledger technology that records transactions across multiple computers in a way that ensures the integrity and immutability of the data. In essence, it is a chain of blocks, where each block contains a list of transactions. These transactions are validated and added to the blockchain through a consensus mechanism, such as proof of work or proof of stake. Key features of blockchain technology include:

1. Decentralization: Unlike traditional centralized systems, blockchain operates on a decentralized network of computers (nodes), eliminating the need for a central authority or intermediary to validate transactions
2. Immutability: Once a transaction is recorded on the blockchain, it cannot be altered or deleted. Each block in the chain contains a cryptographic hash of the previous block, creating a secure and tamper-proof record of transactions.
3. Transparency: Blockchain transactions are transparent and visible to all participants in the network. This transparency enhances trust and accountability among users.
4. Security: The cryptographic algorithms and consensus mechanisms used in blockchain ensure the security and integrity of transactions. As a result, blockchain is resistant to hacking and fraud.
5. Smart Contracts: Blockchain technology supports smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. Smart contracts automatically execute and enforce contract terms when predefined conditions are met.

Blockchain technology has a wide range of applications across industries, including finance, supply chain management, healthcare, real estate, and more. It has the potential to streamline processes, reduce costs, increase transparency, and enhance security in various sectors.

In recent years, blockchain technology has emerged as a disruptive force with the potential to revolutionize various industries, including legal agreements and contracts. Agreements under blockchain technology, including smart contracts, are anticipated to have a significant impact and promising future. With its decentralized and immutable nature, blockchain offers, inter alia, the following advantages that can transform the way agreements are formed, executed, and enforced:

1. Enhanced Transparency & TrustBlockchain’s transparent and tamper-proof ledger can provide unparalleled transparency and trust in agreements. Smart contracts and self-executing agreements coded on the blockchain enable parties to automate contract execution and ensure compliance with predefined terms without the need for intermediaries.
2. Efficiency & Cost SavingsBlockchain-based agreements have the potential to streamline processes, reduce administrative overhead, and eliminate the need for intermediaries, leading to significant cost savings. Smart contracts can automate routine tasks, such as payments, and reduce the risk of errors or disputes.
3. Improved Security and ComplianceThe cryptographic security features of blockchain technology make agreements more secure and resistant to tampering or fraud. Additionally, blockchain can facilitate compliance with regulatory requirements by providing a transparent and auditable record of transactions.
4. Expansion of Use CasesWhile blockchain technology initially gained traction in the financial sector with cryptocurrencies, its applications have expanded to various industries, including supply chain management, healthcare, real estate, and intellectual property. Agreements under blockchain technology can facilitate secure and efficient transactions in these sectors.
5. Legal & Regulatory ChallengesDespite the potential benefits, the widespread adoption of blockchain-based agreements faces legal and regulatory challenges. Uncertainties surrounding jurisdiction, enforceability, privacy, and intellectual property rights require careful consideration and regulatory clarity to realize the full potential of blockchain technology.

In conclusion, agreements under blockchain technology hold significant promise for the future of contracting and legal transactions. With their potential to enhance transparency, efficiency, security, and trust, blockchain-based agreements have the potential to transform the way agreements are formed and executed across industries. However, addressing legal and regulatory challenges and fostering widespread adoption will be crucial for realizing the full potential of blockchain technology in agreements.

[1] SaaS vs SaaP: What are the Differences Between Them? https://canadian.agency/saas-vs-saap/

[2] Judgement dated 10 February 2017 in ITA No.7823/Mum/2010 (for Assessment Year: 2007-08)

[3] 763 F.3d 1171 (9th Cir. 2014)

[4] WL 4466660 (D. Nev. Sept. 27, 2012)

[5] 135 Cal. App. 3d 473, 186 Cal. Rptr. 114 (1982)

[6] 402 F. Supp. 3d 728, 764 (N.D. Cal. 2019)

[7] 97 F. Supp. 3d 359 (E.D.N.Y. 2015)

[8] 84 F. Supp. 3d 142 (2015)

[9] Case No. 19-2382-JAR, 8 (D. Kan. Sep. 3, 2019)

[10] LLC 913 F.3d 898 (2019)

[11] 350 F.2d 445 (D.C. Cir. 1965)