Many of our startup company clients look overseas for their software development needs. Hiring overseas programmers and engineering teams can allow your lean startup to reap tremendous benefits and get your site or app to market and in front of paying customers that much quicker. As with anything done in a foreign land, however, it is not without its risks. In order to remove or at least reduce these concerns, here we take a look at some essential provisions that your startup’s offshore development agreement should have.
No Substitute for Due Diligence
No, this is not a contract provision per se but one of the most important things you and your fellow co-founders can do when seeking to hire that foreign developer has nothing to do with contract drafting. Instead, it involves properly vetting the vendor thoroughly from the get-go.
Is the foreign developer even qualified to do what it is you’re asking? Do they have references and a portfolio of projects you can check out? As with any other significant undertaking for your new business, particularly with a business partner that may be out of practical and economical reach of U.S. courts, it is important to do your due diligence.
Although the projected savings for your company over a U.S. developer might be enough for you, failing to do your homework on your developer so could mean paying a big chunk of precious capital on a website or application that doesn’t function as planned, is outmoded, or might even send your company back to square one.
1) What Are You Paying For?
In other words, what is it that your company is buying specifically? A website? A native mobile app? Will things run on your server or theirs? All of this should be thought through carefully and put to writing (and preferably in excruciatingly fine detail) what you are hiring the offshore developer for.
The offshore developer should supply you with a written proposal or statement of work (or scope of work), i.e., “SOW”. However, don’t get your electronic signature ready just yet. Your work has only begun.
In a recent situation with a client who was looking for help in the review and negotiation of an offshore development agreement, they sent over the actual agreement but neglected to include the proposal or SOW that the agreement was presumably centered around. While this was an oversight on the part of the client, it raised a number of important checkbox items for the business owner looking overseas.
Get with your technical team or advisor so that the SOW reflects every conceivable project component that you are hiring offshore for. The SOW should also include some type of schedule or timetable of completion of each of these specific tasks or deliverables.
Even if you’ve worked out or negotiated the proposal or SOW to the point where it’s absolutely perfect, it’s enforceability as a standalone contract could be debatable. And as a business owner, you don’t want debate, particularly with an overseas vendor you’re paying a lot of money to. Therefore, make sure the final agreement specifically and clearly references the most recent version (if there was more than one change) of SOW and incorporates that version into the development agreement by name.
2) Acceptance Testing (and Modifications)
In another situation I had last month, a different startup was concerned that the proposed offshore agreement seemed to imply that, if the software did not fully perform up to specifications (See #1 above!), their only remedy was to cancel the contract.
Whatever the savings, you should never agree to a development agreement that imposes a wait-and-see on your business for the final software product to be delivered (only to later learn that one or more elements or functions do not work like you need them to). It is essential that you have clearly defined rights to test (and accept) the software as the development timeline progresses and/or milestones are hit
Before you cut your deal with that offshore developer, be certain the development agreement contains a clear mechanism for testing and acceptance of the various deliverables throughout the project timeline. This provision should include timeframes for when testing must be done by and acceptance criteria, as well as what will happen if the test is a failure or is unacceptable to you.
Next, software development is far from a perfectly linear process. Design modifications and feature changes are almost inevitable. For this reason, you must make sure that your offshore development agreement clarifies or at least addresses the process for changes to the project or its elements, including how changes must be brought up, under what timeframes, as well as who will bear the additional costs (if any) of such changes.
3) Who Owns The Project (completed and uncompleted)?
As with most onshore development agreements, your offshore developer agreement will likely include language for, and be based upon, an independent contractor arrangement. While the independent contractor format has a number of benefits (of which most startup founders are very aware!), in the world of intellectual property law, it carries some extra baggage.
Under United States’ copyright laws, if the thing being contracted for is done through an independent contractor (as opposed to employer-employee) relationship, then in order for that thing to be considered a “work made for hire”, it needs to be specifically ordered or commissioned in a written agreement addressing ownership of that thing as a work made for hire.
However, even if you do both of these things, the requirements don’t quite stop there. This is because, under the Copyright Act, the work-made-for-hire doctrine only applies to non-employees if the work commissioned falls under one of nine enumerated categories specifically spelled out in 17 U.S.C. §101, none of which include software code. Until Congress does something about this very glaring hole in the work-for-hire doctrine, this is problematic if you are engaging an offshore developer to produce a customized software application for you as a contractor.
For these reasons, our firm typically includes certain “catch all” language to account for the possibility that the software commissioned may not, for whatever reason, be considered a work made for hire. We almost always include an additional backstop in the form of a very broad and immediate assignment of all of the IP rights to the work product developed under the agreement.
Lastly, there are inevitably situations where the offshore developer is using their existing code, modules, plugins, etc. to to accomplish the software project goals. In such cases, it is not unreasonable for them to want to keep whatever IP or know-how the developer brought to the table with them as their property. If this is the case, I usually make sure my hiring client receives an irrevocable, worldwide, royalty-free, paid up, etc. license to any particular elements necessary to operate and maintain that software they paid for, into perpetuity.
4) Legal Compliance
Admittedly, this point may be more relevant or come up more if your company operates in certain tightly regulated industries such as healthcare, financial services, or even education. Still, regardless of your company’s industry, it is still important to stress in the offshore development agreement that the product you are ordering comply with applicable laws.
Given that your proposed developer is in another country, unless they have demonstrated expertise in producing project for your given industry, you and your team may need to provide the developer with specific guidance and detailed specifications (again, See #1 above!) as to what it is your company needs exactly in order for the finished product to be compliant with federal and state laws and regulations.
5) Warranties (or lack thereof)
Next, there are more than a few offshore development agreements I’ve seen where the vendor basically disclaims all warranties as to the final product.
As I explained to one client recently, while this is not necessarily all that unusual (I should know–I put in the same language when representing my developer clients) ,it really shouldn’t be that big of lift to get your offshore developer, at a minimum, to commit to having the product or application they are developing for you meet or exceed current industry standards.
This is especially true in situations where your startup’s anticipated clientele are not necessarily consumers but larger, sophisticated organizations who will be expecting that your application will meet exacting security and privacy requirements that follow industry standards.
6) Termination or Cancellation
Your offshore development agreement should clearly state under what circumstances and how your startup company can end the contract with the vendor.
Sometimes things just don’t work out. Is a termination for “cause” or “no cause” spelled out? In such a case, what is the minimum notice period required? Are there instances where the termination can occur in less time? Perhaps just as important, what happens to the deliverables or their components that have been developed so far?
To this last point, I always recommend clients require that, in case of an early termination of the development agreement (adding also, “for whatever reason or no reason”) that the work product developed up to point of termination gets transferred by a certain (usually short) period of time to over to the client.
This should obviously include any source code, documentation, notes, flowcharts, etc., etc., as well as specify the format such material should be transferred in. The offshore developer may balk at this out of concern over getting paid; however, there are ways that this can be addressed and negotiated to keep things fair for everyone.
Keep in mind that the above list is not meant to be exhaustive or the only things that you need to be on the lookout for. Every software development deal and agreement that accompanies it is different and must be examined and planned for on their own (and with consideration to business objectives). While you probably have a pretty good idea of what is in your offshore development agreement, you may not be as sure about what should be in there that is not. If your startup company is interviewing or about to hire an offshore development team and is looking for guidance on the software development agreement you’ve been handed, feel free to contact our office for a no-obligation quote using the contact form to the right of this page.
Photo “Engineers Designing App” by ThisIsEngineering courtesy of Pexels (image cropped)
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Software & Technology practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.