Every technology contract includes certain commonly recognized categories of provisions. Whether you are drafting, negotiating, or reviewing these agreements, understanding key terms is essential to navigating their nuances effectively. In this article, we explore five categories of critical terms that form the backbone of technology contracts: Performance and Deliverables, Risk Management and Liability, Ownership and Rights, Confidentiality and Security, and Boilerplate Provisions. This article serves merely as an introduction to these concepts – we will look at each of these categories in more detail later in the article series.
Performance and Deliverables
The parties must clearly define the scope of performance to prevent misunderstandings or disputes. Two key elements here are the scope of services and the Statement of Work (SOW). The scope of services sets out broadly what the vendor is expected to deliver, ensuring there are no ambiguities about responsibilities. The SOW provides more granular details, such as project timelines, particular deliverables, and milestones, making it a critical component for project clarity. The SOW is often an attachment to the body of the agreement and is often amended from time to time to add new services or deliverables or to otherwise modify the arrangement between the parties as circumstances change.
Service Level Agreements (SLAs) are also vital in this category. Despite its name, service level agreement is not a standalone agreement, but a key part of the contract between a vendor and a customer that establishes performance metrics – such as uptime guarantees (what percentage of the time the services will be available), response times, and resolution timelines – that vendors must fulfill. They often include remedies or penalties for non-compliance. For example, if a SaaS offering is unavailable for more than a certain number of minutes in a particular month, the customer may be entitled to a credit for the following month’s service fees. Warranties – promises about how something will perform – further ensure the quality and reliability of services and deliverables, offering additional protection to customers.
Risk Management and Liability
Risk management provisions allocate responsibility and protect parties from unforeseen circumstances. Indemnification clauses are a focal point in this area, as they require one party to compensate the other for specific losses or damages, typically when a third party makes a claim against the customer. Vendors typically push to limit the scope of their indemnification obligations, while customers will want to ensure comprehensive coverage, particularly for issues such as intellectual property infringement and data security incidents.
Limitation of liability clauses are another hotly negotiated term. Vendors often seek to cap their liability at the value of the contract or another fixed amount, while customers aim to carve out exceptions to such a cap for critical types of liability such as that resulting from intellectual property infringement, data breaches, willful misconduct, or gross negligence. The dynamic is one of balancing risk: vendors want to avoid unbounded exposure, while customers seek to ensure they are not left covering damages caused by the vendor’s failures.
Insurance requirements frequently appear in technology contracts. Customers may require vendors to carry specific types of insurance with minimum amounts of coverage, such as cyber liability or professional liability, to provide a safety net in case of major issues.
Ownership and Rights
Ownership of intellectual property and data is a very important issue to be negotiated in a technology contract. Intellectual property rights in materials created during the project may be owned by the vendor, the customer, or jointly, depending on what the contract says (or does not say). Customers often seek to own deliverables outright, especially in situations involving custom software development, while vendors may prefer licensing arrangements that enable that vendor to retain ownership but grant certain rights to the customer.
With the rise of artificial intelligence, data ownership and ownership of deliverables has become even more complex. Contracts should address who owns the data generated by AI systems, as well as any insights or models derived from that data. The question of who owns content generated by AI systems remains open for debate, and parties negotiating technology contracts must do their best to address this uncertainty. Failure to clearly define ownership can lead to disputes and missed opportunities for leveraging valuable resources.
Open source software presents additional challenges. If open source components are used in deliverables, the contract should seek to ensure compliance with licensing obligations so that the customer is not inadvertently exposed to risks, such as required public disclosure of proprietary modifications.
Confidentiality and Security
Protecting sensitive information is a core objective of most technology contracts. Confidentiality clauses establish what information must be kept private and outline restrictions on its use. They are especially critical in industries where proprietary data or trade secrets are at stake.
Data security provisions are increasingly prominent as regulatory and cybersecurity risks grow. Contracts should detail the vendor’s obligations for safeguarding data, including encryption, breach notification procedures, and adherence to applicable laws such as the GDPR or CCPA. Clear terms help ensure both parties understand their roles in protecting sensitive information and complying with evolving standards. Moreover, ensuring data security can be expensive – so it is important to address who will bear these costs.
Boilerplate Provisions
Often given only a passing glance through very important, so-called “boilerplate” provisions – usually in the last section of a contract titled “General” form a key part of a technology contract. For example, force majeure clauses address circumstances beyond the parties’ control, such as natural disasters or cyberattacks, and provide guidance on how obligations are suspended or modified in these scenarios. Other critical boilerplate terms include severability, which ensures that if one part of the contract is found unenforceable, the remainder remains intact; amendment procedures, which dictate how changes to the contract can be made; and notices, which specify how communications between the parties must occur.
E-signatures are commonly used by parties signing a technology contract. A well-drafted contract will likely have provisions designed to help ensure the executed document has the same legal force as one bearing a traditional signature. Finally, the entire agreement clause helps prevent future disputes by clarifying that the written contract represents the full understanding between the parties, superseding prior discussions or informal agreements.
What’s Next?
Now that we have laid the foundation by exploring some categories of key terms in technology contracts, the next article in this series will dive deeper into defining scope and avoiding scope creep. Understanding how to clearly articulate expectations and manage project boundaries is critical to preventing misunderstandings and disputes.
