[IT Litigation] Software Development Contract, Know-how for Examination Before Conclusion

Software, web pages, mobile application development contracts frequently lead to legal disputes. In particular, disagreements regarding the delivery of contractual deliverables often result in lawsuits. 

Law firm Veat intends to guide you through the key legal characteristics, issues, and a contract writing guide to prevent legal disputes that may arise in software development contracts.

1. Legal Nature of Software Development Contracts

Generally, software development contracts have the legal nature of a 'contract for work'. That is, in a software development contract, the client (principal) commissions a developer (contractor) to complete specific software, and the developer is obligated to complete and deliver it. 

Regarding contracts for work, the Supreme Court of Korea has stated, ‘In a contract for work, the contractor’s compensation should be paid upon delivery of the completed work, and if delivery is not required, it should be paid without delay after the completion of the work, and the principal may refuse to pay the compensation until the delivery of the completed work or the completion of the work’ (Supreme Court, June 12, 2014, 2014 Da 10014, 2014 Da 10021).

According to this precedent, the client has no obligation to pay compensation until the developer delivers the completed work. Also, the client can claim liquidated damages from the developer or terminate the contract for work if the developer fails to complete the work within the agreed period. 

2. Legal Issues Related to Incomplete Software

The most frequent issue in software development lawsuits is the determination of ‘completion’. 

The Supreme Court of Korea appears to review whether software has been completed by examining ① whether the major parts of the work have been produced as agreed, and ② whether it has the performance commonly required by social convention (Supreme Court, October 13, 2006, 2004 Da 21862).

In principle, the client in a software contract is not obligated to pay compensation until the developer delivers the completed work. However, the Supreme Court of Korea, considering the nature of software and the nature of development contracts, recognizes an exception that ‘if the software is not completely unfinished but can be used after undergoing some supplementary work,’ the developer can claim compensation from the client based on the contractor’s performed work ratio (Supreme Court, June 12, 2014, 2014 Da 10014, 2014 Da 10021).

3. Cases Where Completion is an Issue in Software Development Contracts

Generally, in contracts for work, the responsibility for asserting and proving completion lies with the contractor. Therefore, if a client files a civil lawsuit to claim compensation for a software contract, the developer is obligated to claim that the software, the contract objective, is completed and to prove its level of completion. 

However, if the developer finds it difficult to prove the completion or completion ratio of the software, the developer can request an evaluation of the contract objective to the court, and the court can determine the completion ratio of the contract objective through the evaluation procedure to determine the degree of completion. Compensation to the developer may be adjusted based on the completion ratio determined through the contract objective evaluation procedure (see Supreme Court, October 13, 2006, 2004 Da 21862).

Contract Writing Guide to Prevent Legal Disputes

When entering into a software development contract, it is important to include the content and scope of development, among other key items of the contract, in the contract to minimize potential disputes that may arise during the contract’s performance.

• Specify Development Scope and Functions

The client should specifically describe and reflect in the contract the functions, user interface, algorithms, and other software requirements that are the subject of development.

• Set Development Schedule and Stage-by-Stage Delivery Criteria

To prevent schedule delays or incomplete development, clear stage-by-stage inspection procedures should be established.

• Clarify Testing and Inspection Procedures

Clear and objective inspection criteria should be established for inspection procedures before final delivery.

• Specify Compensation Payment Conditions

Conditions for payment such as contractor’s performed work ratio and the discount condition for incomplete work should be specified in advance to prevent disputes.

• Clarify Ownership and Rights of Results

If the copyright or source code of the software development results are not clearly defined, problems may arise during maintenance or improvement.

Software Contract Legal Partner, Law firm Veat

Law firm Veat has extensive expertise by handling numerous software development contract-related lawsuits and legal consultations in the IT and startup fields, including web page and application development. 

In particular, experts with high understanding of IT, centered on lawyers who majored in engineering, meticulously analyze cases and develop the best response measures.

Law firm Veat supports the drafting of clear contracts by analyzing potential legal risks at the contract stage and providing effective legal response strategies when software development contracts arise.

Furthermore, based on a deep understanding of IT and emerging technologies, we help IT/software companies operate their businesses stably in the changing legal environment of the digital age.

If you need legal advice regarding software outsourcing, lawsuits, or other software contracts, please feel free to contact Law firm Veat.

Thank you.

Law firm Veat