In the article, I will talk about the importance of contracts and the pitfalls in their conditions. The parties achieved better conditions in the negotiations or could generally not fulfill their obligations. After all, only thanks to a few points, lawsuits worth tens and hundreds of thousands of dollars were repeatedly won.
Before you start drafting or editing contracts, you should understand the form of cooperation.
There are two main types of cooperation with customers. This is full-time (part-time) work in the state and, in a row, the provision of services as an independent contractor. There are also hybrid forms, for example, an employee is actually in the state but is registered as an individual entrepreneur. In such cases, the employer concludes an agreement with the FOP employee, according to which working conditions are fixed and calculations are made.
It is also not uncommon for a non-resident company to act as a customer. Calculations and conditions can be fixed in the contract with FLP and a private person. And payments will be received to current accounts, personal cards, or through payment systems (PayPal, Payoneer, and so on).
The employee is obliged to follow the internal rules of the company (working hours, dress code, etc.) and job description. Disciplinary action may be in the form of a reprimand or dismissal. Dismissal occurs at will with a two-week notice or by agreement of the parties. Compensation for losses is mainly limited to the average wage, and fines are illegal.
When paying wages, the employer charges 22% of ERUs on top and pays 19.5% to the budget for the employee as a tax agent. For example, at a rate of UAH 20,000, the employer pays UAH 24,400 (20,000 + 22% ERUs), and the employee receives UAH 16,100 (UAH 20,000 – 19.5%).
Any norms that are contrary to labor law may be declared invalid. These include fines, duties outside the job description, work after hours, non-competitive requirements.
Unlike labor relations, such work is aimed at the final result (product, service), there are no vacations labor regulations. The rights and obligations of each of the parties are fixed in the contract.
There is no salary, and calculations can be made in the form of an advance payment, in fact, monthly. Sanctions can be provided for each of the parties in the form of fines, penalties, compensation for losses.
The contract is terminated by agreement of the parties or in accordance with its terms. For example, with the obligation to notify the other party XX days in advance and make all the calculations.
The main limitation of contracts is the inability to violate the rights guaranteed by laws and the Constitution. Such norms may be recognized as worthless or invalid. For example, no one can be obliged not to work in such and such an area after being fired. But it is possible to provide for an obligation not to disclose confidential information and responsibility for its disclosure, use for personal purposes.
Regardless of the form of cooperation (staff, in a row), contracts and agreements are concluded in each of the options. There are hundreds of types of contracts. Let us dwell on the main ones that are more often encountered in the IT-sphere.
Basically, such agreements prescribe the general terms of cooperation: the subject of the agreement, the procedure for providing services, the rights and obligations of the customer/contractor, the transfer of intellectual property, the terms, procedure and amount of payment, NDA, jurisdiction, responsibility.
It is important to sign not a “goat” from the Internet, but a contract that will reflect real agreements. An incorrect contract can work against you. For example, impose additional obligations, contain incorrect conditions for terms, payment and acceptance of services.
A “working NDA”, in addition to the general statements “what cannot be disclosed”, must contain individual conditions for your cooperation. For example, codes and passwords, accounts, website admin, financial and analytical reports, lead and customer data, and so on.
It is important to fix who is the owner, to whom, how and when the rights are transferred, who is responsible for violating the rights of others, the legitimacy of using third-party objects.
NDA, NCA and intellectual property provisions may be separate documents or part of the main contract. I recommend that everyone work out their own “template” and know the main points on it.
Further, I suggest that you familiarize yourself with the main terms of the contracts and what you should definitely pay attention to when signing.
The subject of the contract is an essential condition, it must reflect the essence of the relationship. If this is a contract for the development of the site, it should be written that way. If these are services, it is necessary to determine their type. Try to avoid general phrases, as it will be difficult to understand from them what the parties agreed on.
For example, in the subject of an agreement for the development of a mobile application and the transfer of exclusive property rights, you can specify:
“The Contractor undertakes to create a mobile application “_____” for iOS, Android and transfer exclusive property rights to the mobile application to the Customer, and the Customer undertakes to agree on the terms of reference, accept the work and make payment.”
In the subject of the contract or in separate terms of reference, it should be clarified for what purposes the application is being created, its functions, and the expectations of the parties. For example: “Online store ____ for the purpose of placing the product and its identification (photo, size, description), the ability to make online orders by users and create user accounts.” Also write down the requirements for the application, for example, with which platforms it should be compatible, programming nuances, technical conditions, appearance, support, and so on.
Any rights and obligations in the contract must be balanced. That is, equal for the parties. From practice, most contracts are drawn up exclusively in favor of the customer. You need to be prepared for this, as well as for dozens (if not hundreds) of edits.
The essence of this section is to determine the interactions of the parties in the process of work. In most cases, the contractor must receive complete and timely information from the customer. This may be the approval of the terms of reference, structure, prototype, design, access, and passwords. The customer, on the other hand, must have access to the result of the work, the right to control the stages of implementation, not accept poor-quality work, and demand compliance with deadlines.
Pay attention to all duties and rights. For example, if the contract obliges you not to involve third parties (performers, partners, companies, outsourcers, and so on), and you would like to subcontract someone, then initially approve this possibility with the customer. In most cases, the clause that “the Contractor is responsible for the actions of third parties involved” helps. Accordingly, then you need to sign a similar agreement with obligations, penalties, and tasks with the involved subcontractors. This checklist is just the beginning. This is usually a multi-page survey or substantive discussion at a meeting. I propose in the comments together to supplement it with situations from your practice or with those without which you definitely won’t accept offers.
If the customer insists on the right to terminate the contract unilaterally, pay attention to the payment for the work, in this case, how and what will be the confirmation of the completion of tasks: “The customer has the right to terminate the Contract unilaterally while notifying the Contractor XX days before the date of termination, pay actually rendered services on the date of termination of the contract.”
Sometimes there is no section of rights and obligations in the contract, and the provisions on this are scattered throughout the document. There is nothing terrible or wrong with this. The main thing is that what is written reflects the essence of your cooperation.
One of the important points of the contract is the terms. What should you pay attention to?
First, for the duration of the contract. If a specific period is not specified (for example, until December 31, 2022), then the contract is concluded for an indefinite period. That in itself raises a number of questions. What is an indefinite period, when will the validity period end, how to terminate the contract, and so on. Therefore, I recommend that you still indicate the duration of the contract. The Agreement can be renewed for each period or an automatic renewal clause can be added: “The Agreement automatically renews its validity for the next calendar year, unless either Party notifies the other Party of the termination of the Agreement XX days before the expiration date.”
Secondly, for the duration of the work. For example: “The Contractor undertakes to complete the work within 20 (twenty) business days, which are calculated from the day …” It is important to correctly reflect from what point the deadlines are calculated and what can affect them. For example:
In addition, there will be no superfluous clause that “the Contractor is not responsible for violation of the deadlines due to the actions or inaction of the Customer, changes in technical conditions and other circumstances that are beyond the control of the Contractor.” Or “The term for the provision of services is automatically increased by the period of delay by the Customer in providing information, documents, approving layouts and performing other actions necessary for the provision of services.”
As a separate paragraph, I recommend prescribing the conditions under which you can change the terms. For example, if technical tasks change due to the fault of the customer or it is impossible to provide services due to force majeure and other “reasoned circumstances”. If the customer does not agree with them, he undertakes to pay for the services actually rendered and the project ends.
You should carefully read the procedure and terms of payment of remuneration. As a rule, remuneration is paid:
Specific terms, amounts, and procedures for payment can be approved by the parties in the contract or an annex to it. Some documents contain conditions under which customers have the right to reduce rewards by the amount of fines. I do not recommend agreeing to these conditions in the contract, because according to the results of payment, you can not wait.
Acceptance of works (services) is associated with the fulfillment of obligations in full. Basically, in order to confirm the fact of the fulfillment of obligations, it is necessary to sign an act of acceptance and transfer of work performed. The form of such an act may be different, as well as the format of signing:
Any of these forms are acceptable, but it is important to reflect in the contract how the parties “close” and accept the work, what is the procedure for submitting claims, and improvements.
With the majority of our IT clients, we have moved away from signing paper documents a long time ago. The priority for today is document exchange services such as Adobe, Paperless or digital signature signing and electronic document exchange.
I recommend that the procedure for signing acts and accepting services “by default” be reflected in the contract. This will help protect against unfounded claims and payment delays. For example: “If the Customer has not sent the signed Certificate or objections to the services rendered within XX days from the date of receipt of the Certificate, the services are considered accepted in full and are subject to payment.”
An important part of contracts in the IT-sphere is the terms on the intellectual property rights to the developed objects (code, design, game, graphic elements, etc.).
Program code, game, images are protected by copyright, and in some jurisdictions by patents; logo, brand – as a trademark; design and appearance – a patent for an industrial design.
When signing a contract, you must understand who will own the rights to the result of the work, whether you will receive any remuneration in the future from the sale of objects by the customer; can you use the created object further. For example, in a portfolio, part of the code, and so on.
Only property rights to the developed objects can be transferred to the customer. These include the right to use, the right to allow, and the right to prohibit others from using the object.
The customer, as a rule, is interested in obtaining all exclusive property rights in order to use the objects independently and at his own discretion in the future. If the rights are to be transferred partially, it is necessary to indicate this in the contract. In this case, it is worth agreeing on specific objects and the scope of rights to them, the duration of such rights and the territory to which they apply.
It is important to remember that non-property rights cannot be transferred. This is inextricably linked with the individual developer and forever remains with him. These rights include the right to be recognized as the author, the right to prevent any encroachment on the object that could harm the honor or reputation of the author. Paragraphs that restrict the recognition/attribution of the author are invalid.
To transfer intellectual property rights, it is desirable to sign transfer-acceptance certificates. In the act of acceptance and transfer of intellectual property objects, it is important to display the method of transfer, the place where the transferred objects are located (physical media, on the server via a link, in the cloud, sending by e-mail, etc.), and fix what rights and objects are being transferred. The form of acts and the procedure for signing are agreed upon by the parties.
If the work is long-term or on an ongoing basis, an “automatic” transfer and acceptance of the results is practiced. For example: “All created intellectual property objects and exclusive property rights to them, including (but not exclusively) regarding adapted, modified, modified objects, are automatically transferred to the Customer.”
Despite the terms of the agreement on the automatic transfer of rights, I recommend fixing the transferred objects on the server, mail, or other convenient parties in a way that would later be able to identify the results of the work. It will not be superfluous in a certain period (once a month, quarter, year, at the end of the project) to sign a separate certificate with the identification of the period of work and the result.
I advise you to carefully review the list of information that is considered confidential. It may include databases, program codes, technologies, customers, partners, work procedures, amounts, and so on. Often absolutely all information about the contract and cooperation is confidential.
In addition, you should familiarize yourself with the ways that will be considered the disclosure or use of such information. Sometimes customers forbid mentioning in their portfolio about work on a specific project, the name of the project, or in general about working with the customer.
If there are such restrictions, I recommend that you approve exceptions with the Customer. As an option, provide for the possibility of using information about the cooperation itself and its result (website, application, program, games, etc.) without the consent of the customer for advertising and information purposes.
Important: publicly known information and information that was obtained before the collaboration should not be the subject of an NDA.
If one of the parties is a non-resident of Ukraine, the contract should select the court to consider the dispute and the law (for example, the substantive law of Ukraine or the law of Germany).
Please note that international arbitration and litigation in a foreign jurisdiction can cost tens or even hundreds of thousands of dollars. In many cases, these costs are a deterrent that prevents the developer from defending their rights in court. I recommend adding a clause about the resolution of disputes in the commercial arbitration of Ukraine or general courts, for example:
“All disputes, controversies, or claims arising out of or in connection with this Agreement, in particular its interpretation, execution, violation, termination, or invalidity, shall be resolved in the Commercial Court of the city of Kyiv in accordance with the substantive law of Ukraine.”
Fines serve to “motivate” the fulfillment of obligations. For example, in relation to the customer – for timely payment, in relation to the contractor – for violations of deadlines and poor-quality results.
There are no clear criteria for the size and type of fines. The main thing is that they are proportionate. Also, under the law, there can be several types of liability for the same violation.
For ease of calculation, it is better to indicate fines in a fixed amount or set% of the fixed amount (for example, the amount of payment, services under the contract, etc.). For developers, I recommend limiting the amount of penalties to the amount of the contract, services, or a specific amount. To avoid cases when fines exceed the potential earnings themselves: “The parties have agreed that the Contractor’s liability under the contract (fines, guarantees, compensation for losses, etc.) cannot exceed UAH 100,000.00.”
We mean that each of the parties will fulfill the terms of cooperation. For example, the code provided by the customer for revision is his property, the images used by the designer are legally acquired under a license, and the software created by the developer is not transferred to someone else.
Such “expectations” I recommend to prescribe in the guarantees section. Where, on the one hand, what should be, and on the other hand, a fine or liability for such violations. In some cases, for significant violations, the full termination of the contract, the return of the amounts paid, and compensation for losses are provided. Since the contract itself and the result of the work lose their value. Some examples of items are below:
“The Developer transfers exclusive property rights to the intellectual property object – “Mobile Application XX” to the Customer upon signing the Act. The Developer guarantees that the created object does not violate the rights of third parties, contains only legally obtained objects (codes, images, and other objects), the object is not transferred for use or disposal to third parties, and the Developer will not use the created object or part of it without a written customer’s permission. This clause is valid for the duration of the property rights to the intellectual property object – “Mobile Application XX”. For violations of these conditions, the Developer is obliged to _____.
And also: “The Customer guarantees that the objects (images, code) provided to the Contractor for work are the property of the Customer and/or lawfully received. The Contractor is not obliged to conduct any verification of the legality of possession of such objects and is not responsible for violation of the rights of third parties when using such objects.
The list of warranties is not exhaustive. It must be formed based on the specifics of a particular job. In some contracts, the warranty section is 3–5 or more pages long. If you understand that in fact you will not be able to fulfill any obligation or this is the responsibility of others, you should remove such conditions from the contract.
The legislation provides for the possibility of signing and exchanging documents in electronic form. I propose to use this and move away from “paper carriers”. To implement the electronic exchange of documents, I recommend prescribing the procedure in the contract. It should be fixed how documents are signed (electronic signature, scanned copies, facsimiles, etc.) and how the parties can exchange documents (e-mail, instant messengers, special software). Important: if there is a link to email, phone, account, you need to fix these details in the contract.
The following paragraph can be used as an example: “Electronic documents and their copies are equal to the originals, do not require signing (approval) on tangible media and in paper form. To sign documents, the Parties may use an electronic digital signature, prints of signatures and seals, facsimiles. One of the proper types of exchange of documents, information is sending them to the other Party in accordance with the details of the contract (e-mail or Viber, WhatsApp, Telegram, connected with the phone number of the parties), using Paperless and Adobe services on corporate (___) accounts. Electronic messages and copies of documents are considered received on the next business day at 09:00. 00. min. according to Kyiv time.”
The contract must not be contrary to the law, otherwise, the contact is invalid (or worthless). At the same time, the parties are free to conclude an agreement, choose a counterparty and determine its terms. The principle of freedom of contract applies.
As a result, it is necessary to divide relations into those that can and should be agreed upon, and those that are guaranteed by law. It is impossible to worsen the position of the party.
For example, you cannot reduce guaranteed vacation from 24 to 10 days, prohibit you from working for a competing company or start your own business. Instead, it is possible to prohibit the dissemination of confidential information and establish fines for its disclosure, to determine specific terms and rights, duties for work.
It is worth noting that, depending on the applicable law, the terms of the contract may be recognized as valid even if they are contrary to law.
For example, US jurisprudence is that contractual restrictions on the prohibition of reverse engineering take precedence over the law. An example is the case of Bowers v. Baystate Technologies (320 F.3d 1317, Fed. Cir. 2003). Although reverse engineering is not prohibited by law, violations of Bowers’ Designer’s Toolkit copyright and license terms cost Baystate $5,270,142. Since the company used reverse engineering to create their Draft-Pak program.
The legality of the NDA is provided for by the Civil and Criminal Codes of Ukraine. I advise you to take your obligations under the NDA seriously.
This year alone, Code & Care LLC filed a lawsuit with the Kharkiv Regional Commercial Court against the contractor for the software development contract, in which it asks to recover damages in the amount of $19,496 from the defendant. The basis of the claim is the defendant’s failure to comply with the terms of the contract, which establishes the prohibition of disclosure of confidential information (NDA).
According to Code & Care LLC, while working, the defendant received all confidential information about the internal processes of the organization and activities of Code & Care LLC, and then became a co-founder of a company called Dewais and used confidential information for his own purposes in Dewais.
In foreign jurisdictions, NDA is a typical and common document. For example, in 2017, litigation between Oculus and ZeniMax ended. Oculus has been accused of violating the NDA and stealing trade secrets. The price of the claim is 4 billion US dollars. ZeniMax stated that John Carmack (a former employee of the company) used computer code to create the Oculus Rift glasses while working at Oculus. The claim was partially satisfied, the total amount of payments is 500 million US dollars.
The provisions may be something like this: “The Contractor undertakes not to engage in activities that are similar or related to the activities of the Customer, independently or jointly with other persons not to open companies with similar or related activities. By similar or related activities, the parties understand: _____. These conditions are valid for the term of the contract and for 3 years from the date of termination of the contract.”
Ukrainian courts generally invalidate NCAs. After all, such conditions restrict the right to free choice of labor and entrepreneurial activities.
Although there are exceptions. For example, in case no. 761/15245/18, the company asked the court to recover funds in the total amount of EUR 17,437.87. The basis was a non-competition agreement, according to which the defendants had to pay the plaintiff funds in the amount of 16,971 euros. The clause itself in the contract was as follows: “The Claimant will not conduct personally, will not organize and establish, personally or through relatives/acquaintances, a business that consists in the wholesale supply of lamps and/or furniture to customers from a third party customer base and similar types of customers in the territory Ukraine”.
The plaintiff indicated that he fulfilled all the clauses of the agreement, which determined his obligations. However, contrary to the agreement, the defendants voluntarily refused to fulfill the obligation. The court partially granted the employee’s claims and awarded in his favor 8,718 euros from each employer. The appeal upheld the decision.
Today, NCA is widely used in the IT field. Many countries (Germany, Netherlands, UK, USA) recognize such agreements. When working with non-resident customers, you need to keep this in mind.
Contracts should reflect your arrangements and how you work in writing. If something is not true, I recommend making changes – this is your right.
In situations where each of the parties is not ready to concede in terms, all the risks of working under such a contract should be assessed. As a result, sign documents or completely refuse such obligations, proposals.
And of course, before accepting an offer, I recommend paying attention to the following conditions:
The material was prepared for dou.ua