Contract Negotiation Crucial Before Website Development

2 April 2007

It's a nightmare scenario. You're in charge of your company's major Web site redesign project and the site is horrendous. Even your mother hates it. As you consider where to mail your resume, you might want to consider what you'd do differently next time.

Tech projects fail for many complex reasons. I've litigated those fiascoes.

One recurring theme is communication failure, which easily occurs when you have techies, business people, bean counters, and lawyers in one room pretending to speak the same language.

Techies understand what they can build. Business people know what they want for their customers. Bean counters want it to be close to free, and the lawyers -- what exactly is it that we do and why are we in the room anyway?

I've asked that question many times when I've lectured. The answers I get make it clear that people love lawyers.

One of the common answers is "so that we can write a contract that will let you sue the other side if they don't do what they said they would do." While that's true, it's like saying you build a jet so that you can play with the ejection seat.

The lawyer is there to foster communication. You write a contract to prevent litigation.

Using a Web site development agreement as an example, you must insure that your agreement clearly defines who will do what, when, how, how much it will cost and who will own whatever it is that you create. Few form contracts come close to meeting this standard.

One area that often raises red flags is the issue of who owns the intellectual property in the completed Web site. The buyer's perspective is "we paid for it, we own it." The seller's view is that there are reusable things built into your site that the buyer can't own.

This is a problematic area where each side is partially right. As a buyer, you shouldn't expect to own everything.

It's rarely framed as a price issue, but the negotiation is often facilitated if it is. A smart developer doesn't say, "You can't own the copyright." Rather, she says, you can own it, but since I can't reuse it, you'll have to pay me more.

Buyers of Web development services should consider what they really need to own versus what they need a license to use. They may need to own the look and any secret sauce that gives them a distinct advantage over their competitors.

By the way, the general rule is that to the extent your agreement is silent on who owns the intellectual property, the developer owns it. That's counter-intuitive, since the buyer paid for it, but it's a mistake people easily make in tech contracting.

Another area to focus on is the "standard"' limitation of liability. Most Web site development agreements have a clause which, when reduced to its essence, says, "No matter what we do and no matter how bad it is, we owe you very little money and you owe us your first-born."

These types of clauses have become the norm, but that doesn't mean that there isn't room for negotiation.

For example, if the clause limits you to a refund of what you paid, you might ask that the limit of liability be increased to the total you will pay during the entire life of the contract.

Imagine making a small first payment of $100,000 on a much larger contract, watching your developer screw-up the project, losing business due to the screw-ups, and then finding out that all you get for "damages" is a refund. It's not right and you should push for more.

You should also ask to exclude liability to third parties. If you don't and you're sued because the developer created a Web site that infringed somebody's copyright, you may have no recourse against your developer.

Last, but not least, is that the limitations of liability should be reciprocal. What's good for them is good for you. Why should the developer have a limit of liability and not you? The answer is that you should have one too.

Mark Grossman's "TechLaw" column appears in numerous publications. Mark Grossman has extensive experience as a speaker as well. If you would like him to speak before your group or corporate meeting, please call (305) 443-8180 for information.

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