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Pitfalls of software development contracts

Initiatives

Katalin Horváth – Partner, Head of TMT, Sár and Partners Attorneys at Law – elaborates on the possible pitfalls of software development contracts.

Katalin Horváth, Partner, Head of TMT, Sár and Partners  Attorneys at Law

How can you ensure that the software you have paid for is really yours?

Every company uses software and many firms need customized software developed individually according to their special needs. If your company belongs to this group, you certainly had to deal with software development agreements. Developers usually provide you with their contract template, but are you sure that those templates protect your rights and interests? Software development contracts – especially templates – can be full of pitfalls with potentially serious legal and business consequences. We note the most common pitfalls in order to help you avoid unexpected surprises:

Written agreement is crucial.  According to the Hungarian Copyright Act, software development agreements must be put in writing, but court practice shows that this doesn’t include contract via e-mail. However, the Hungarian Supreme Court passed one or two judgments where they accept oral or implicit contracts too. In order to avoid uncertainty, it is advised to conclude a written agreement. What if you have an oral agreement? The rights won’t be transferred to you! 

What is to be covered by the agreement? First of all you need to state what the agreement is for: the software to be developed. Then you need a clear order. The most important part is the list of rights you would like to obtain including a clear statement that the rights owner transfers or licenses the rights. And of course you should not forget the fee and deadlines. If the most important element, the list of rights, is missing, then the agreement is just a simple order, not a rights transfer or license agreement at all.

Do you have a professional specification?

You have to set out your expectations regarding the software very carefully. It can be a long list of bullet points, so put it into a separate specification. The court practice says that you, the customer, is responsible for preparing the specification. If you are not familiar with IT, the best solution is to order the specification from the software developer.

What would you like to obtain: license or rights transfer?

The next step is to decide what you would prefer: a restricted – usually cheaper – license or a full rights transfer? You can choose either. Rights transfer is almost always for perpetuity, ensures unlimited rights of use and it is complete. Contrarily, a license can be granted with restrictions, for a fixed term or limited territory, and some rights can be excluded.

Warranty and chain of title – are you sure the developer can provide them?

Customers usually don’t check whether the developing company has lawful and proper rights transfer agreements with its private person developers. They should, as the lack of chain of title could mean they can’t obtain the copyright of the software because the developing company is able to transfer only those rights that it obtained from the developers. The solution is to put a warranty clause into the contract: the developer warrants that the software is free of any claims of any third parties and that it has all rights of the software.

Pitfalls in the copyright law – are you sure you obtained all rights?

If you would like to be sure that you acquire all rights, you need to reckon with the pitfalls in the Hungarian copyright act. It is highly advised to add the following rights into the list of rights granted:

- adaptation, modification right – only if it is explicitly stipulated
- import right – only if it is explicitly stipulated 
- exclusivity – only if it is explicitly stipulated 
- right for making copies on computer – only if it is explicitly stipulated 
- territory – without territory definition the license will be restricted within the territory of Hungary 
- duration of the license – if the contract does not speak about the duration of the licence, it is for restricted term source code – only if it is expressly granted. 

Copyright law usually protects authors’ interests not yours. Finally, during the contracting process, you should always keep in mind the main interpretation rule of the Hungarian copyright act: if the content of your software development agreement cannot be defined exactly, the interpretation that favours the software developer shall apply! And that is the point where you should consider turning to a copyright lawyer.

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