We sat down with Wilf Friedrich, Information Technology, Commercial and Financial Services Lawyer at Caravel Law, to discuss what business owners need to know when drafting an IT agreement. 

If you’re in the technology business, as an owner, developer, distributor or reseller, then you definitely need to have an IT agreement in place for your customers. 

Whether you’re providing software as a service (SaaS) or under a licensing or other business model, there are a number of critical components that need to be included in your technology contracts to protect you and your business. 

Take a look below at some of the most important things to be aware of when drafting your IT agreements. 

1) Defining the ‘rights to use’

The critical first step when drafting your contract is to understand exactly what rights you are giving your customers. 

Whether you are providing your customer with a copy of the software to install on their system, or providing online access to software that you are hosting, you will want to limit the grant of intellectual property rights and ensure that you retain ownership.

Here are some key questions to consider: 

• Are there limitations on the number of users? 
• Do users have to be employees? 
• Is the customer entitled to grant sub-licences to use your software to others? 
• Is the customer an end user, using the software solely for internal use, or is it allowed to re-sell use of the software to its customers? 
• Is the subscription or license transferable if a customer sells its business? 
• Are there restrictions as to the countries or territories in which the customer may use the software?

It’s essential to be crystal clear about what rights you are giving your customers and then reserve all other rights and intellectual property to yourself to help protect your intellectual property. 

2) Limiting your liability 

An important safeguard for technology companies in an IT contract is the limitation of liability clause, which protects the owner of the IP or the provider of the technology. Depending on its functionality, the software you provide may be essential to a customer’s ability to run its business, and if your software is unavailable for whatever reason, you could be facing substantial claims for damages. 

The contract should explain that you are not liable for downtime caused by circumstances beyond your control, such as power failures or Acts of God. If you are responsible for hosting the software, it should also outline expected downtime caused by regular system maintenance. If you use a third party to host your software, like Amazon Web Services, you should also ensure that your commitments to your customer do not exceed the commitments that your hosting provider makes to you. 

A typical limitation of liability clause will say the software provider is not liable for indirect, consequential, special or punitive damages. The clause will limit liability to direct damages only, generally with a cap that limits the customer’s recovery to an amount that reflects the value of the contract (such as fees paid for the license or for services provided over the previous 12 months). 

3) Covering off confidentiality & privacy 

Another area that’s typically addressed in IT agreements is confidentiality. Giving a customer access to your software will often require giving access to your confidential information, i.e. proprietary data, a copy of code, a copy of documentation that outlines your systems and processes, and you will want your customer’s agreement not to share that information with others. 

If you will have access to your customer’s confidential information, such as when you host their data, they will want a similar agreement from you. If you store or have access to personal information of your customer or its customer or personnel, you will also need to ensure that you meet your obligations under applicable privacy legislation, such as PIPEDA in Canada and GDPR in Europe.

[Read our blog: How a Privacy Officer can help protect your business]

4) Setting termination terms

You’ll also need to consider the circumstances in which either you or your customer should be entitled to terminate the agreement before it reaches the end of its term. Some breaches of the agreement, such as unauthorized use or disclosure of confidential information, may justify immediate termination. Others, such as missed payment, may justify termination if the default has not been cured after a specified grace period.  

IT contracts are essential for protecting your intellectual property and the reputation of your business. Fully understanding your risks and obligations is the first step in ensuring your agreements set the proper expectations and will safeguard your technology in the long term.  

Need help putting together an IT contract for your business? Caravel Law is an alternative legal firm with over 60 qualified and experienced lawyers to help support your legal needs. Get in touch with our team today to find out more.

Also, check out our Business Decisions podcast below, where we interview start-up founders and business leaders about the keys to their success and challenges along the way. Each episode is followed up by one of our lawyers discussing one or more legal issues raised. Enjoy!