[IT Litigation] What are the payment settlement criteria for software maintenance and development service contracts?

Software maintenance and development outsourcing contracts are commonly entered into in the IT industry, but disputes frequently arise when personnel designated to be deployed fail to meet the agreed number of working days or fail to comply with the contract terms. In particular, the specific facts related to the settlement criteria for outsourcing contract payments, such as whether the compensation for software maintenance contracts is calculated based on a 'functional point score system' or a 'calculation method based on the number and duration of deployed personnel (so-called M/M)', can significantly alter the nature of the dispute.

The ruling in the case of Software Maintenance Outsourcing Compensation Refund (Seoul High Court, February 6, 1995. 2. 6. 선고 2013나2028481 판결) (hereinafter “this case”) is a useful example to refer to regarding the calculation of compensation in software outsourcing contracts. This column will examine the key issues and preventative measures for software maintenance and development outsourcing contracts based on the contents of this ruling.

▶ Calculation Method for Outsourcing Contract Payment
The calculation method for outsourcing contract payment is broadly divided into two categories in software outsourcing contracts.
1. Functional Point Score System: This method calculates costs by measuring the size of software development using functional point scores and multiplying them by a unit price.
2. Calculation Method Based on the Number and Duration of Deployed Personnel (so-called M/M method): This method calculates compensation based on the number of deployed personnel and the duration of the work.
The functional point score system is useful for determining maintenance costs based on the functional value of the developed software, but disputes may arise due to differences in interpretation of the definition or evaluation criteria for functions. The calculation method based on the number and duration of deployed personnel may result in disputes due to a lack of agreement between the parties regarding the number and duration of deployed personnel during the process of determining the contract amount. The key issue in this case was whether payments should be settled based on the actual number of working days in a software outsourcing contract entered into based on the calculation method based on the number and duration of deployed personnel.

▶ Background of the Case: Demand for Compensation Refund Due to Insufficient Working Days
The IT company (Plaintiff) entered into an outsourcing contract to receive services for a specified period through a software maintenance contract. The contract amount was determined based on a deployed man-hour system, and compensation was paid monthly after reviewing the services provided. However, the Plaintiff subsequently claimed that some of the personnel deployed by the Defendant worked less than the average number of working days for software technicians (based on the standard set by the Korea Software Industry Association) and demanded a refund of the outsourcing compensation for the shortfall in working days.

▶ Court's Ruling:
The Court rejected the Plaintiff's claim for refund, finding that the contract in this case was calculated based on a deployed man-hour system at the time of contract conclusion, and there was no agreement included to subsequently settle payments based on actual working days.
Furthermore, the Court found that there was no provision in the contract to reduce or refund compensation if the number of working days was insufficient, and that software outsourcing work is a specialized work of great importance to the quality and continuity of results, and that adjusting compensation based solely on the number of working days would be inappropriate.
Furthermore, the Court found that there was no basis for retroactively claiming a refund because the Defendant has received compensation through monthly review confirmation and the Plaintiff has not raised the issue of working days at the time.
Finally, the Court found that the input man-hour system used for calculating contract amounts is used as a tool for calculating contract amounts, but not for settling payments in the process of providing services or subsequent settlements according to the concluded contract.

▶ Precautions When Entering into Software Maintenance and Development Outsourcing Contracts
This case ruling provided specific implications for both IT companies and software development firms regarding the importance of clearly defining contract conditions and reflecting them in the contract.

1. Specific Stipulation of Contract Conditions: The contract should specifically stipulate the number of deployed personnel, working days, scope of work, calculation method for compensation (functional point score system or deployed man-hour system), and whether subsequent settlement is possible to minimize the possibility of disputes.
2. Consideration of the Nature of Software Outsourcing Work: Software maintenance is not merely about working hours, but about maintaining system stability and quality, so contract conditions should be set taking this characteristic into account.
3. Addition of Penalty and Compensation Clauses: Include penalty or damages clauses that will be applied if the contract conditions are not met to clearly define responsibility. This makes it possible to respond quickly and clearly even in unforeseen situations.
4. Importance of Record Keeping and Communication: It is necessary to keep records of all communications and work results throughout the contract implementation process and regularly confirm consultations between the parties. This record is a powerful tool to prevent disputes.

Software maintenance and development outsourcing contracts require technical understanding and legal knowledge, so we recommend that the contract content should be defined based on the review of an IT specialized attorney with high IT understanding from the contract drafting stage, and if a dispute arises, you should respond quickly.

Law firm Veat provides differentiated legal services centering on IT specialized attorneys certified by the Korea Bar Association and attorneys from technical backgrounds, simultaneously understanding 'IT/Technology' and 'Law'. If you need help with drafting software maintenance and development outsourcing contracts and responding legally to related disputes, please feel free to contact Law firm Veat.

Thank you.

Law firm Veat