Importance of the Custom Software Development Agreement in Software Outsourcing

The bespoke software development business is an ever-changing niche and will always remain competitive no matter what. Every business in the league has a stronger competition based on their distinct business offering, talented in-house resources and capability to cater differently to unique business needs. Seeking help from other businesses will empower respective businesses and pave a path towards success. And software agreement is a very important step in that.

Table of Content

  1. What are Software Agreements?
  2. What Software Licensing Agreement Covers?
  3. Essential Clauses that can be Included in Software Agreements
  4. Final Thoughts

The Software development business is an ever-changing niche and will always remain competitive no matter what. Every business in the league has a stronger competition based on their distinct business offering, talented in-house resources and capability to cater differently to unique business needs. Seeking help from other businesses will empower respective businesses and pave a path towards success.

Ever wondered how these connected businesses are helping each other to grow? Well, businesses partner with each other and there is an unsaid pact that both the businesses follow and which is confidential and informative. For most, you must have heard of Software agreements. So, what are they? In this blog we will penetrate through the basics of software agreements and how are they helpful for businesses. Starting with, in bespoke software development there are majorly two types of agreements

1. What are Software Agreements?

In the custom software development industry, businesses are strongly connected with software agreements or Project development agreements. This agreement between two parties- One is the software development service provider company and the second one is the business seeking help in custom software development. This contract is confined to specific rules to provide supporting facilities such as assistance and maintenance during the project lifecycle. The process can be altered on the basis of the chosen technology and teams. This agreement contains details on confidentiality factors, promised scope of work, team composition, what details can be shared and what cannot.

As per the agreement of both parties, the software license agreement can be copied, modified and redistributed to the relevant stakeholders. With no ambiguity, the prices of the software and the licensing fees must be mentioned elaborately. So that businesses can protect themselves from violating the copyright laws by wisely drafting a software license agreement. There are numerous essential parameters that contribute to making the software agreement valid and reliable. While drafting a software agreement there are some essential points and provisions that needed to be taken into account. We have summoned a checklist of information that must be included while creating a Software agreement with a custom software development vendor.

2. What software Licensing Agreement Covers?

Ideally, in a custom software development business a software license contains all the information in a listed format that the parties want to include as part of the contract. This includes all the legal rights pertaining to the authorized use of digital data. So, we can simplify the ambiguity by deciding the factors that can be included in the software licensing agreement. 

  • The Extent of Scope of work
    By and large, the extent of work incorporates everything from specialized framework plans, development tools, strategy, or the frameworks needed to finish their project deadlines. Above all, it is also necessary to provide support during the development and post-development phase with all user manuals and technical documentation included in the agreement. This may also include hosting support, source code repository, hardware support during all phases of custom software development.
  • Training and Support services
    Training on the developed software is desirable and essential to operate the software and explaining its features. Telephonic or electronic support must be provided to help assist and explain the custom software company on the developed software. In case of renewed support, after a year or so, if there are some additional features added, the party can opt from the software development company for additional support.
  • Payment models
    As per the client’s convenience, the scope of the project and payment feasibility are taken into account and the terms and conditions are decided. In the custom software development industry, there are two types of payment models. One is a fixed-cost payment where it does not depend on resources or time spent but it works on a fixed cost-plus contract. The second one is the Monthly payment method where the amount charged is according to hours spent and materials used in a month, the payment is done accordingly.

    The monthly/Hourly charges are mutually agreeable by both parties and are payable 100% in advance within a week from the date of submission. For every month for the required duration or as per mutually agreed terms between Supplier and Customer this payment needs to be performed. The monthly/Hourly fee should be net of all taxes as applicable except income tax. The working hours can vary as per mutual understanding between customer and supplier and the employed resources are available at that time.
  • Involved parties
    This is a vital section where details of both the parties entering into the agreement and the clauses are clearly mentioned. The detailed information about the license, details of the person and the business buying the license. Every detail of their business from address, contact number, email ids and other contact information. Also, it is imperative for businesses to know that the involved party is an individual or enterprise. This information must be shared with both parties for future reference and dispute resolution.
  • Devices usage
    The license coverage also includes the usage of software in a single computer/laptop/mobile or multiple devices of the same business location. This would help businesses track and validate the price paid for the software and the usage of devices. Not many companies will find a sneaky way around and if they do you have this detail to show in against the usage.

3. Essential Clauses that can be Included in Software Agreement

  • Terms of Confidentiality
    Starting from business models, market strategies, production processes, trade secrets, know-how, patents, copyrights, financial information, sales distribution strategies and internet and e-commerce strategies or any such information which may be written, electronic in nature will be referred to collectively in this Agreement as “Confidential Information”. The privacy of information does not include technical data and essential information or manual on custom software development by the Custom software development company. The basic terms and conditions of confidentiality allow:
    • The service provider to showcase his possession prior to the time of the disclosure by the disclosing party, or is currently, or becomes publicly known through no fault of the parties.
    • In any case, if the information is leaked to a third party or source then the disclosing party is subjected to similar restrictions and breach of the Agreement.
    • For cases where there is a written authorization to release software. 
    • If information is available in the public domain, no claims on that data breach will be subjected to disclosing of information.
    • The details that are required to be disclosed under the operation of law, by court order, or governmental regulation, in such cases the receiving Party has to provide prompt written notice to the disclosing Party of such disclosure requirement.
  • Intellectual property rights
    Considering intellectual property rights of projects in custom software development facilities, which can include trademark rights, trade secrets, topography rights, data extraction from database rights, the right to preserve source code, and other types in fair property rights that have a common impact that can occur anywhere in the world. All the rights checked in the agreement will remain the property rights after the execution of the agreement too. If the supplier avails these rights, the custom software company can also include the actual name of the software, the distribution rights and copyright. This is a vital inclusion for both the parties to have clarity on the rights the product owner holds.
  • Limitation of liability
    The provision of this clause in an SLA (Service Level Agreement) specifies the amount and type of loss each party would face in various circumstances and be obliged to other businesses. It is essentially a liability to cover any inability to execute when the development needs are not met. This provision would concentrate on the fact that the licensee would accept the software as it is, will not be allowed to sue for damages for any modified software made, and also does not provide any protection for the damaged software during the use.
  • Non-Exclusive
    Party will get non-exclusive software rights, for cases if in future they want to sell software. This will allow them to make a profit by selling the license of the software to other parties.

    Party will get non-exclusive software rights, for cases if in future they want to sell software. This will allow them to make a profit by selling the license of the software to other parties.
  • Law and Arbitration
    Businesses have started to include this arbitration clause in any contract created nowadays for software creation. Arbitration is usually an out-of-court proceeding in which a neutral third-party entity called an arbitrator considers the parties’ claims and testimony and makes a binding judgment. This is an alternative way of settling disputes by introducing an arbitration clause.
  • Penalty/ Breach of contract
    Including this clause in your agreement will allow the business to revoke the license in case the terms and conditions are not followed. In case you wish a breach of contract should not occur then take the control of the developed software and protect it.
  • Terms of Termination
    In custom software development services, for the case where any of the parties wants to terminate the agreement, this clause will detail the actions they should have taken as per the licensee. Both the parties can include their terms like no one can destroy the software on-site or uninstall it from the device. Including this will exemplify the conditions of termination or revoke the software without repercussions at any given time and for any given reason.
  • Employee Solicitation
    This clause can be set into action if the recipient has significant access to the developers of your company. This clause will force businesses to hire employees for at least 12-24 months. There can be times when the other party might not agree to this and in such cases, this clause can help clients limit their resources. For service providers working offshore, this clause is extremely beneficial.
  • Special Disputes cases and Authorities
    For conflicts between the parties involved in the agreement, if the dispute reaches out to the court, it will be handled by the judiciary location mentioned in the agreement. If the supplier is located offshore then in such cases the judiciary will be a foreign judiciary for the client. Also, it is impossible to impose the agreement when in dispute if the client refuses to attend court.

    For cases where the judiciary location is local then according to the agreement, the business has to pay a hefty amount in traveling offshore numerous times and hiring lawyers at the supplier’s location. Thus, it is always advisable to deal with offshore software development companies that have a registered office in your country. This will keep the judicial office in the same country and can be profitable for businesses in case of any dispute or chaotic business scenario.
  • Injunctive Relief
    Add injunctive relief cause to your business to prevent a business from any potential breaches or agreements. This clause states that if they want the disclosing party to not release information then this can help the other party to obtain the court’s permission and impede them from breaching acts. For cases where the money is involved, injunctive relief is a slow move.

4. Final Thoughts

From this blog, we can now conclude that a software agreement can barricade all the potential disputes that may arise due to data breaches or leaking information during custom software development programs. With this elaborate attempt to make businesses understand the severity of software agreements through our blog and at the same time keeping the essential parameters in mind while initiating any contract will help businesses safeguard their confidential information in the long run.

Itesh Sharma

Itesh Sharma is core member of Sales Department at TatvaSoft. He has got more than 6 years of experience in handling the task related to Customer Management and Project Management. Apart from his profession he also has keen interest in sharing the insight on different methodologies of software development.


  • Leave a message...

    1. Jason

      This article perfectly explains why signing a software development contract is necessary. A well-executed development agreement will provide legal protection for both parties. In the worst case, you will be using this document to save you thousands in legal fees and lost time.

    2. Ruby

      Software development agreements can help to build trust between both the parties. This article tried to explain everything which we need to include in this document, But I think discussion about payment should also be included in this document.