What is a Contract?

A contract is an agreement between two or more persons creating rights & duties and which is enforceable by law. A contract is a promise or set of promises that are legally enforceable and if violated allow the injured party access to legal remedies. It is an agreement between persons which obliges each party to do or not to do a certain thing.

We can also say that contract is an agreement between two or more parties for the doing or not doing of something specified. Contracts serve the following purpose:

Set out the agreement between the parties
Set out the aims of the parties
Provide for matter arising while the contract is running
Ways of terminating the contract and the consequences

According to Hilary Pearson “While optimists make the best deal makers, pessimists make the best contract writers”. If the contracts are too harsh or unfair causing any issue between parties to be unresolved, it is the responsibility of contract laws to contemplate according to the rules. There are almost never disputes over contracts which run perfectly i.e. marriage and ship carrying a cargo.

Characteristics of a Contract

A contract should have following characteristics;

Clear & Logical
Complete & Consistent
No ambiguity
Free of doubts regarding the rights and duties of concerned parties

We can say that a contract should be clear, concise and consistent. There should be no ambiguity and the parties to the agreement should be left in no doubt as to their rights and duties. Ambiguity and doubts can lead to performance which is viewed as unsatisfactory. This can lead to disagreement and the expenditure of time, effort and therefore money, in resolving the matter. In order to avoid disputes and future difficulties it is better to draft a document which sets out the terms on which both parties is to work i.e.

Methods of payments
Appropriate ways to terminate the contract-notice required

Types of Contract

There are four types of contractual arrangement which are widely used in connection with the provision of software services.

Contract hire
Time and materials
Consultancy
Fixed price

CONTRACTS FOR THE SUPPLY OF CUSTOM-BUILT SOFTWARE AT A FIXED PRICE

Software suppliers try to use what are known as standard form contracts, which are used or intended to be used many times over. Such a contract might consist of:

Short introductory section
Set of standard terms and conditions
Set of appendices or annexes

Introductory Section

The introductory section states that it is an agreement between the parties whose names and registered addresses are given. It is dated and signed by the authorized representatives of the parties. It often begins with a set of definitions of terms used in the course of the agreement, set out either in alphabetical order, like a dictionary, or in the order in which they appear in the rest of the contract.

Standard Terms and Conditions

A contract’s terms and conditions section state the following;

What is to be produced?
What is to be delivered?
Ownership of Rights
Confidentiality
Payment Terms
Calculating Payments for Delays and Changes
Penalty Clauses
Obligations of the Client

What is to be produced?

Contract must state what is to be produced. In this regard two level references are normally used.

What is to be delivered?

Producing software is not simply handing over the text of program. Some other possibilities are;

Source code
Command files for building the executable code from the source and installing it.
Documentation of the design and code.
Different manuals
Test data and test results

Ownership of Rights

Contract should state what legal rights are being passed by the software house to the client under the contract.

Confidentiality

Confidentiality is the protection of personal information. Confidentiality means keeping a client's information between you and the client and not telling others including co-workers, friends, family and etc. It should be highly considered while writing a contract.

Payment Terms

Standard terms and conditions will specify the payment conditions like payment shall become due within thirty days of the date of issue of an invoice. If payment is delayed by more than thirty days from due date the company shall have the right to terminate the contract or to apply a surcharge at an interest rate of 2 or any per cent.

Calculating Payments for Delays and Changes

The contract should make provision for payments to compensate the wasted efforts. It must specify the process by which these extra payments are to be calculated.

Penalty Clauses

Delays caused by suppliers are handled by penalty clauses.

Obligations of the Client

When work is being carried out for a specific client the client will have to fulfill certain obligations if the contract is to be completed successfully.

Some other sections of a contract

Standards and Methods of Working

Progress meetings
Project managers
Acceptance procedure
Warranty and maintenance
Indemnity
Termination of the contract
Arbitration
Inflation
Applicable law

Contract Hire

Contract hire agreements are very much simpler than fixed price contracts. Reason is the much less involvement and responsibility of supplier. The supplier agrees to provide the services of one or more staff to work for the client. The staff works under the direction of the client. Supplier’s responsibility is limited to provide suitable competent people and replacing them if they become unavailable or said unsuitable by the client. Payment is on the basis of a fixed rate for each man day worked. Issues such as delay payments acceptance tests and many others simply do not arise.

Times and Materials

It is somewhere between a contract hire agreement and a fixed price contract. The supplier agrees to undertake the development of the software in much the same way as in a fixed price contract but payment is made on the basis of the costs incurred, with labor charged in the same way as for contract hire. The supplier is not committed to completing the work for a fixed price, although a maximum payment may be fixed beyond which the project may be reviewed

Consultancy Contracts

Use of consultants is now widespread in both private and public body. Consultancy projects are usually undertaken for a fixed price but the form of contract is very much simpler. Consultants are typically used to assess some aspect of an organization and to make proposals for improvements. The end product of a consultancy project is therefore usually a report or other document.

Liability for defective software

There are laws present to ensure the quality of products and goods delivered to a customer. The quality of goods include their;

State and condition
Fitness for all required purposes
Freedom from minor defects
Safety
durability

A major difficulty in the case of software is that whether it comes under the category of goods or not only statement available for the software is “It must be written with reasonable skill and care”. To overcome this difficulty, guarantee clauses are often drafted in the contracts.