[IT Litigation] 7 Contract Conditions to Reduce Disputes When Drafting Software Service Contracts

Software is utilized for various purposes, including internal system construction, customer service automation, and development of data analysis tools. Consequently, the demand for software service contracts outsourced to external development companies has rapidly increased. However, despite the frequent execution of these contracts, disputes often arise. This is because, when contract conditions are unclear or vaguely stated, various issues such as development delays, defects, and intellectual property rights attribution can lead to disputes.

Unlike typical product sales, software service contracts vary in development scope and deliverables for each project, and there is significant uncertainty in the development process. Therefore, to prevent disputes and ensure the successful completion of projects, it is essential to clearly define contract conditions. In particular, when development schedules are delayed, responsibility, compensation for defects in deliverables, ownership of development results, and the scope of maintenance must be specifically agreed upon in advance to avoid subsequent legal disputes. It is crucial to detail these aspects in the contract.

Contract conditions that must be included in software service contracts

Software development contracts should at least include the following items in detail.

1. Scope of Work Definition

If the scope of work is not specifically defined in a software service contract, disputes may arise when additional development requests occur. Therefore, the contract should explicitly state the software’s functionality and requirements to be developed, and should avoid broad expressions such as “website construction” or “ERP system development.” Instead, it should be specified by screen and function unit, along with the technical stack and development methods. It is also advisable to define the submission method for intermediate deliverables and step-by-step results.

2. Development Schedule and Delay Responsibility

Because development schedules are often delayed, it is important to clarify the development period and responsibility for delays. The project schedule (start date, milestones, expected completion date) should be specified, and the content of responsibility (penalty, etc.) when a schedule delay occurs, the scope within which a delay may be recognized, and regulations to hold responsibility for delays due to development delays should be defined.

3. Deliverable Inspection and Delivery Method

If the inspection criteria for deliverables are not clear, disputes may arise regarding the quality of the results provided by the development company. The form (source code, technical documentation, etc.), delivery method, and inspection procedure for deliverables should be specified, the inspection deadline and completion criteria should be set, and the obligation and method for revision should be defined if the inspection fails.

4. Defect Liability Period and Maintenance Scope

After software development is completed, bug fixes and maintenance may be required for a certain period. Therefore, contract conditions for defect liability and maintenance must be clearly stated in the contract. The scope, method, and period of defect liability should be defined, the scope and cost calculation criteria for maintenance should be determined, and procedures for responding to emergency maintenance should be established.

5. Intellectual Property Rights Attribution

Intellectual property rights attribution is an important factor in software service contracts. When a contract is concluded, the ownership of the software’s source code and copyright must be clarified. The owner of the copyright of the development results should be specified, the provision of source code and usage restrictions should be determined, and the application of open-source licenses should be confirmed.

6. Confidentiality Obligation

Because sensitive information may be shared during the software development process, a confidentiality clause should be included to prevent information leaks. The confidentiality obligation of the parties to the contract should be specified, the scope and protection period for confidential information should be set, and regulations for compensation in case of breach of confidentiality obligations should be established.

7. Contract Termination or Cancellation Clause

If the conditions for termination and cancellation of the contract are not clarified, disputes may be difficult to resolve. The reasons and procedures for contract termination should be specified, the regulations for costs and penalties arising from termination should be determined, and the obligations of both parties after termination should be organized.

Applicable Law for Software Service Contracts

Software service contracts are not simple service contracts, but complex contracts that can be interpreted in various ways from a legal perspective. The Supreme Court, while explaining the nature of a manufacturing supply contract, found that it was a mixture of a commissioned work aspect and a sales aspect (Supreme Court Decision of June 28, 1996, 94da42976).

In particular, in the case of software development tailored to a specific customer’s request, there is a high probability that the development results will be a substitute for only that customer, which means that it has the nature of a commissioned work contract. In this case, the provisions of the Civil Code regarding commissioned work shall apply, which may lead to differences in interpretation regarding defect liability, responsibility for non-performance, and conditions for contract cancellation.

Law firm Veat, certified by the Korea Bar Association, includes partner attorneys Baek Seung-cheol and An Il-woon, as well as attorneys from engineering backgrounds, and provides specialized legal services in IT and software fields. They have experience advising numerous startups, development companies, and platform companies. They provide in-depth understanding of legal issues throughout the IT industry, such as software service contracts, license agreements, open-source compliance, Personal Information Protection Act, and Information and Communications Network Act, and provide practical solutions. From defining the scope of work during the development stage to responding to disputes after delivery, protecting against technology leakage and intellectual property rights, they provide customized advice on complex issues where technology and law intersect, minimizing business risks for clients.

If you require legal advice regarding IT and software, please do not hesitate to contact Law firm Veat.

Thank you.

Law firm Veat