Key Takeaways

  • A product development agreement outlines legal duties, intellectual property rights, payment, and deliverables between parties.
  • Key clauses include confidentiality (NNN), dispute resolution, warranties, termination rights, and ownership of results.
  • Including clear milestones, prototypes, and deliverable standards helps manage expectations and reduces disputes.
  • Governing law, manufacturing rights, and contingency for project failure are important to address.
  • A well-drafted agreement protects both client and developer, balancing risk and reward.

A product development agreement contract protects you and your work, as well as helps you obtain the final product you may want. For example, if you are paying someone to develop software, you will want to draft a software development agreement to make sure you get the edition you want. Additionally, the agreement helps the designer by addressing and resolving disputes and aiding you in getting paid. If your agreement is well written, it can:

  • Establish both parties legal duties
  • Describe the rights and obligations of all involved parties
  • Help improve communication by establishing expectations

Work Phases: When Will Work Be Completed?

One part of a product development agreement that is a frequent area of dispute is the timeline in which work will be completed. To avoid these issues, make sure a schedule with listed benchmarks is agreed upon at the beginning of the relationship. For best results, you will want to break down the project into stages or phases.

You should state in the agreement what is considered an acceptable product at the end of each milestone period and what amount will be paid at each stage. This will allow both parties to monitor progress and address any issues as they occur.

There are advantages for parties on both sides of the agreement. For the client getting the product, the work phases will reduce the risk of the client ending up with a final product they are not satisfied with. There are also advantages to the party developing the product. By creating the agreement with milestones, you avoid possible claims of unsatisfactory work or nonperformance. Additionally, you will know about any changes the customer wants before the product is completed. You will also receive payment at the milestones, which reduces your risk of not being paid.

Deliverables and Success Criteria

A robust product development agreement should specify not just timelines, but deliverables at each stage. It is critical to define what constitutes “completion” for each milestone. For example, a clause might state that five fully functional prototypes and all associated design documentation must be provided, meeting predefined success criteria such as operational testing or compliance with industry standards.

Without clear deliverable standards, disputes can arise over whether obligations have been fulfilled. Including acceptance testing protocols, review periods, and approval processes within the agreement can prevent such disputes and ensure mutual understanding of “success.”

Software Specifications: Importance of Details

When creating a software product, the specifications are akin to the blueprints a builder would use. It is essential to draft as complete specifications as possible. This will reduce the risks of misunderstandings and lessen the risk of:

  • Nonpayment
  • Client dissatisfaction
  • Possible litigation

Specifications can be written in many different ways. One way to create one is by drafting what is referred to as a functional specification, which explains the process to the client without using highly technical language. Along with this, the developer may provide the client with a prototype to demonstrate the product.

Confidentiality and Intellectual Property Protections

Beyond specifying what will be built, the agreement must protect confidential information and intellectual property (IP). A key inclusion is a Non-Disclosure, Non-Use, and Non-Circumvention (NNN) clause, ensuring that confidential ideas, designs, and proprietary information cannot be exploited by the developer even if the project fails or the parties part ways.

Additionally, the agreement should confirm who retains ownership of IP developed during the project. In some cases, “work for hire” language is used to automatically assign rights to the client. If the developer retains any rights, licensing terms, royalty agreements, or future use restrictions must be clearly stated.

Payment Arrangements

Your agreement should clearly define the payment arrangements that both parties are agreeing to. In the example of a custom software design, there are two ways they can be paid:

  • Time and materials: This type of payment arrangement is often referred to as an hourly rate. In this type, the developer will bill for the time they spent working on the software, as well as all the actual costs that went into the creation process. This is often the option chosen by developers, as it assures them payment even if the job takes longer than anticipated.
  • Fixed price: In a fixed-price arrangement, the developer is paid in one lump sum. This type of payment arrangement is usually favorable to a client, as they will know how much they will have to pay no matter how long the project actually takes. However, even with a fixed-price payment method, many clients will pay additional money to the developer if the project requires extra work to ensure it is not completed hastily.

Dispute Resolution and Governing Law

Given the complexities of product development, disagreements can emerge. To manage this risk, a product development agreement should establish a dispute resolution mechanism and specify the governing law.

Common methods include requiring mediation or arbitration before litigation. Arbitration clauses can provide a faster, more private resolution compared to court proceedings. Additionally, identifying the jurisdiction whose laws will apply (especially in cross-border projects) prevents costly forum disputes.

Including a governing law clause ensures both parties know which country’s or state’s laws control the interpretation and enforcement of the agreement.

Transfer of Copyright Ownership

Another essential section of a software development agreement is establishing who will own the intellectual property once the work has been created. It is this section that often causes may problems between clients and developers and can sometimes even be a deal-breaker.

Typically, a developer will retain the copyright to the software they create unless they are considered an employee of the company or the work is part of a larger project. If the client agreement includes ownership, they will need to have a transfer of ownership from the developer.

Warranties, Liability, and Termination Provisions

It’s important to set expectations for product quality and responsibility. Many product development agreements disclaim warranties of merchantability and fitness for a particular purpose, protecting the developer from claims if the product doesn’t meet unforeseen client uses.

Liability limitations should be included, capping damages or excluding certain claims. For example, the agreement might exclude liability for indirect or consequential damages, focusing on direct losses only.

Finally, a termination clause should define how and under what conditions the agreement can be ended. Termination might occur due to breach, insolvency, or failure to meet milestones. The agreement should state how payments or IP rights are handled upon termination—for instance, whether the developer retains rights to unfinished work or must assign partial results to the client.

Frequently Asked Questions

  1. What is a product development agreement?
    A product development agreement is a contract defining roles, rights, and obligations between a client and developer to create a product, covering IP, payments, and deliverables.
  2. Why include an NNN clause in a product development agreement?
    An NNN clause protects confidential information and prevents the developer from using or disclosing ideas even if the partnership ends.
  3. How are disputes handled in a product development agreement?
    Disputes are typically resolved through mediation, arbitration, or specified legal jurisdictions, as outlined in the agreement’s dispute resolution clause.
  4. Who owns the intellectual property created under a product development agreement?
    Ownership depends on the contract; it may assign rights to the client via “work for hire” language or retain some rights for the developer with licensing terms.
  5. What happens if a product development agreement is terminated early?
    The agreement should specify how payments, IP rights, and incomplete work are handled upon termination, protecting both parties’ interests.

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