Mobile Application Development Agreements: Things to Consider

Mobile application development agreements require the involvement of a number of parties. The customer (who the app is to be developed for), the software/app supplier, the Appstore provider, the end-user and the payment services provider (not always provided by a third party). There are often significant differences in sizes and bargaining power between parties to mobile application development agreements. In practice, it is not in the long term interest of the more powerful party to insist on a one-sided contract, as this tends to lead to disputes. In this blog we set out some legal issues to consider.

Contractual components

A mobile application development project will include a number of contractual components. Including:

• The customer (who the app is to be developed for) and the software/app supplier – the mobile application development agreement (which this blog addresses).
• Distribution  between the Appstore provider and the customer or software/app supplier – Apple’s,  Google’s  and  Microsoft’s agreements are publicly available on their websites. This will normally mandate minimum end user licence and other terms designed to protect the AP as software distributor.
• Agreement with a payment services provider (if any).
• End user licence agreement.

Mobile application development – acceptance testing

The mobile application development agreement must make clear the point at which the customer accepts the software. This is because after acceptance the customer has no general legal right to reject the software and get its money back if it is defective, and can only sue for damages. The supplier should seek to obtain a legally binding acceptance as early as possible, while the customer will try to delay the point in time at which it must accept the software until it has had time to fully test the software in normal use. Normally a compromise is reached through acceptance testing provisions.

Intellectual property rights

Software is protected by intellectual property rights (IPRs), namely copyright and, in some cases, patents as well. Each party should carry out due diligence before entering into the mobile application development agreement. They should find out what the IPR position is and what licences are necessary for the project to go ahead. The Supplier should also seek to establish what it needs to provide the services, particularly in terms of licences from the Customer, third-party licences (including open-source software: read our blog) and its own software.

In order to use pre-existing software, the customer needs a licence from the owner of the rights in the software (or from someone who has been granted rights to sub-license the software by the owner). Copyright is infringed by a number of acts, including the unauthorised copying of the copyright work. Since the act of loading software into a computer involves copying it into the computer’s memory, a licence is required. If there is a patent, the use of software that is covered by any valid claim of that patent will also be patent infringement unless it is made under a licence.

Mobile application development – ownership of IPRs

The issue of ownership of the rights in any newly developed software is usually difficult to resolve. Unless specified to the contrary in the mobile application development agreement, the default statutory position is that the supplier will own these. The customer often takes the position that, having paid for the software to be developed, it wants to own the rights in it. However, software is very rarely written from scratch. It is usually constructed using existing modules that the software developer has developed in previous projects and that it will want to use again for other customers. This means that the Supplier should not agree to transfer ownership of all rights. There are a number of approaches to giving each party what it needs:

• If the Customer’s main concern is that it does not want software that it has paid for to be sold to a competitor, the Supplier could offer an exclusive licence to use the program as a whole, but only a non-exclusive licence to use the standard modules embedded in the program. If the Supplier then wanted to re-use all or a significant part of the program at a later date, it could offer the Customer a reduction in the original price, or a payment for each further copy sold in return for agreement to allow the program to be resold.
• If the Customer wants to be able to maintain the software itself it could be given a copy of the source code and a licence that covers maintenance.
• In the unusual case where the Customer wants to commercially exploit the software itself, it could be given wide rights to sub-license. The Customer should seek to have these rights free from restrictions, although the Supplier should seek to exert some control over such sub-licensing.

IPR indemnity

The customer will want to ensure that it is contractually protected by the mobile application development agreement if the supplier is not entitled to the necessary IPRs. This protection is necessary in case the IPRs in all or part of the software actually belong to someone else, and the licensor has not given the supplier the right to grant sub-licences. This may happen where the software was written by the supplier but where it has transferred the IPRs in the software to a previous customer. It can also be relevant if, in writing the software, an employee of the supplier copied code from a pre-existing program belonging to a third party, or where part of the developed code falls within the scope of third-party claims. In those situations, use of the software by the customer would constitute a breach of the third-party IPRs in the software and would expose the customer to the risk of an infringement action.

It is usual, therefore, for the supplier to provide some protection for the customer against claims that the software infringes any third-party IPRs, commonly in the form of a contractual indemnity. This may be subject to a capped amount and should exclude infringement caused by the customer’s own activities.

Mobile application development – warranties

Software development agreements typically include warranties relating to the supplier’s rights to license the software. The customer will usually seek warranties as to the performance of the software, to ensure that there are legal remedies available to it if there are serious problems with the software’s performance. The supplier should not in general offer such warranties, and, if they are required as part of the negotiated agreement, they should be tied strictly to demonstrable performance standards which should be contained in an agreed technical specification on the operating system relating to the mobile devices used. This is not necessarily bad for the customer as it results in standards of performance that can readily be measured, and failure to meet those standards will be much easier to prove in a dispute.

Escrow agreement

The Customer may ask for a source code escrow arrangement, particularly when software has been specially developed or modified. This is a means of ensuring that the customer will be able to continue to support the software, either itself or through a third-party maintainer, if the supplier fails to do so adequately or at all. While this situation may arise due to insolvency, the customer may insist that this is not the only trigger for release of the source code, as suppliers who are in financial trouble tend to provide inadequate maintenance long before they become officially insolvent.

Mobile application development – data protection

Where personal data will be processed under this agreement, the parties will need to consider the impact of any applicable data protection legislation and, where appropriate, suitable data protection clauses will need to be inserted or, alternatively, as part of a data protection schedule to be annexed to the agreement. The clauses which are appropriate to include, in each case, will depend upon the relationship of the parties, the context of the processing, and the capacity in which each party processes the personal data.

Here to help

Mobile application development offer businesses the opportunity to be at their customer’s fingertips as often as possible. It is important to keep in mind that, as with the development and marketing of all software, third parties will be relied upon for its creation and delivery. Intellectual property rights in all aspects of application software need to be analysed carefully. Data protection should also be explored if processing personal data through the app (see our recent blog on software-as-a-service data protection issues for some key point: SaaS Providers: Data Protection).

EM Law specialised in technology law. Get in touch if you need advice on software escrow arrangements or other technology law matters.