Website, Software and IT Contracts

A number of issues will be encountered by a company when setting up and operating a website, and these issues will need to be addressed in the contractual arrangements that are necessary in order to establish the company’s internet presence, whether the website is a fully interactive e-commerce site or comprises only a simple promotional statement about the website owner.

Specific Contracts

Website design and development agreements

The first issue for a company wishing to establish an internet presence is how the website should be designed and constructed. Very few businesses have all the resources or skills that are required to undertake this task internally. Instead, it is commonplace for a company to instruct a web designer to provide these kind of resources. If a company already has some internal design skills, it may only require programming time, in which case this could be obtained by some form of secondment or “people-shop” agreement. If, on the other hand, the company does not possess any of the relevant technical, design or project management skills, a more detailed website design and development agreement will need to be agreed with a company that offers website design services.

The objective of a website design and development agreement is to ensure that the company gets the website that it requires by imposing an obligation on the designer to create the site according to the company’s specifications. The agreement is therefore not significantly different from a general software development agreement for an IT system.

The following key issues should be addressed in a website design and development agreement:

What is to be developed? The contract should set out clearly and in sufficient detail the company’s requirements for the website in terms of a functional and performance specification. It should also set out the company’s requirements in terms of any visible content which the designer is to provide. These should include any legal requirements to which the company is subject and which may need to be taken into account in the design of the site content or its performance (for example, access requirements under disability discrimination legislation and, in connection with the site’s user interface, consent requirements under data protection legislation and/or the requirements of e-commerce and distance selling legislation). A clearly defined site specification can minimise the potential for future disputes between the parties.

The company should also consider how it wishes to project its image and should explain to the designer the nature of its business, branding and target audience, and its reasons for creating the website, so that the designer understands what type of design may suit the company’s needs. A budget needs to be agreed at the outset as costs will vary depending on the complexity of the proposed site, the types of graphics required and so on. The design advantages of graphics should be considered in the light of the extra bandwidth that these will require. If the company’s customers are generally individuals rather than businesses, they may be unable to download graphics or sounds, in which case it may be sensible to keep the design simple and save bandwidth.

A detailed specification for the site also benefits the designer by providing a clear understanding of the company’s requirements, ensuring that those requirements are realistic, and can be met within the timescale and for the fees agreed.

Cookies. A cookie is a small text file that can be implanted on the hard disks of visitors to its site (often without their knowledge). Cookies collect information about internet users, such as their names, addresses, e-mail details, passwords and preferences. It is likely that the company will want to capture information about its users for session management, personalisation and recognition purposes. According to Article 5(3) of the E-Privacy Directive (2002/58/EC as amended by the Citizen’s Right Directive (2009/136/EC)) (which is implemented into UK law by the Privacy and Electronic Communications (EC Directive) Regulations 2003 (SI 2426/2003)) (Regulations), informed consent of the website user must be obtained prior to the installation of a cookie on an opt-in basis, rather than an opt-out basis as previously required under the E-Privacy Directive.

From 25 May 2011, all websites were required to be compliant with these provisions and it is the company’s responsibility to ensure its website adheres to the Regulations. According to Information Commissioner’s Office (ICO) guidance, the company should consider what type of cookies will be used and how the website will use them, assess how intrusive these cookies will be and decide the best solution to obtain consent. Under the new rules it is possible that the user’s browser settings may indicate their consent, however, most browser settings are not yet sophisticated enough to be relied upon by website owners in this way. Other possible options for obtaining consent are:

• pop-ups and similar techniques;
• obtaining consent in the website terms of use;
• settings-led consent obtained when a user make choices about the operation of the website according to its preferences; or
• feature-led consent obtained when a user chooses to use a particular feature of a website.

The company should ensure that information about their policies are prominently available to users. Although cookies which simply collect information about the way the user accesses and uses a site may not be as intrusive in relation to a users’ personal information, consent to the cookie may still be required. Finally, if the company is intending upon displaying content from third parties, in particular, content from advertising networks, it is likely that such advertisers will read and write their cookies into the users’ devices. The ICO has confirmed that website owners will have to play their part in obtaining the consent of users in such cases and advises that they should make sure they are doing everything they can to ensure that users get the right information to make informed decisions. The ICO recognises that this requirement is a great challenge to most e-commerce businesses and will be exploring the ways that compliance can be achieved in this area. Further guidance on this area is expected from the ICO.

A website owner will be liable to enforcement action by the ICO if it does not comply with these requirements, which could include penalties of up to £500,000, although the ICO has acknowledged that it will not be taking enforcement action, at least in the initial phase following implementation, provided that the customer can show it is working towards compliance.

Timetable. The company should seek to ensure that the designer is contractually bound to meet key milestones, in particular the date for launch of the site. Provision should also be sought for review of the quality and speed of progress, giving contractual remedies, such as liquidated damages, to the company where sufficient quality is not being achieved or where the project timetable slips. A clear timetable benefits the designer as well, but the designer should be wary of accepting an obligation to pay liquidated damages.

Payment mechanisms. Payment may be on a fixed-fee or time-and-materials basis (or a combination of both). From the company’s perspective, it will usually be preferable to negotiate a fixed fee for the design work, which will be payable by instalments on successful completion of contractual milestones. As with any other software development contract, a fee calculated on a time-and-materials basis may quickly spiral out of control. For the designer, payment on a time-and-materials basis is often preferable as this eliminates the need to anticipate all the costs of a particular project in advance. In any event, the designer should always request a substantial proportion of the fees to be payable on signature of the agreement to cover its initial costs.

Acceptance tests. The company will want the means to satisfy itself that the website performs on the designated servers in accordance with the company’s functional and performance specification, and can deal with anticipated usage levels. In addition, the company may wish to provide for the conduct of pilot tests to assess user’s reactions to the site. While it is reasonable for the company to require the site to pass certain specified acceptance tests, the designer should give careful consideration to the extent and nature of the tests and should try to retain as much control over the acceptance testing procedure as possible.

Ownership of what is developed. The company will want to ensure that it owns all rights in the design of the web pages and the underlying software or any software relating to aspects of the site which are “unique” to the site. By law, the designer, rather than the company, will be the first owner of the copyright and other intellectual property rights (IPRs) in such materials unless it has executed a written transfer of such rights in favour of the company. The company will therefore require the design and development agreement to provide for the transfer of all IPRs in the site to it or, at the very least, for an exclusive licence of such rights. By ensuring that it owns or has the right to exploit the copyright and related rights in all aspects of the web pages (including the overall design, any specially written text or graphics, and the coded version of the pages), the company can transfer the website to another designer to complete the project where, for example, the current designer is not performing.

The company will also want to specify that a full set of the web pages must be delivered in electronic form, so that it has a fully portable version of the pages in case it is needed. In this way the company will have both ownership of IPRs and physical possession of a copy of the web pages.

Where a complex site using specifically tailored (or “bespoke”) software is being developed for the company, the company should also require the software to be placed in independent storage by an escrow agent on terms that permit its release if, for example, the designer becomes insolvent. This will allow a third party to be engaged to support and continue the development of the site if necessary.

In most cases, there is no reason why the designer should not agree to transfer ownership of the IPRs developed specifically for the company, or to license such rights where the designer is not in a position to grant an outright transfer (such as where third party works are included in the site content). However, the designer should ensure that it does not transfer to the company ownership of any IPRs in any underlying software of the designer not specifically developed for the company but needed to operate the website.

IPRs infringement. It is common for the designer to provide the company with some protection against claims that any content or software produced by the designer in the course of the development of the site infringes the IPRs of third parties. This could arise either because the designer inadvertently uses material it has developed for (and assigned to) other customers, or where it seeks to incorporate third party works in the design (such as photographs, video clips or music) for which no permissions have been obtained. The company should seek such protection in the form of an indemnity to cover any liabilities that might arise.

The issue of IPRs infringement is also relevant to the designer where, as is often the case, the company provides content to the designer for incorporation into the site (such as a description of its business or its trade marks), and where necessary the designer should seek an appropriate indemnity. The designer will not necessarily always assume responsibility for obtaining permissions to use third party material on the site. Sometimes, the company will undertake to obtain these, in which case the contractual indemnities should be drafted accordingly.

Termination. The company should ensure that all consequences of the termination of the agreement are adequately provided for and that any outstanding issues, such as whether the designer is permitted to place a credit on the site, are agreed.

Policing content. Where the designer is also hosting the website, and particularly if the site has message board or chat-room facilities, it will be necessary to apportion responsibility between the company and the designer for ensuring that content posted by visitors does not contain material which is illegal.

Maintenance and support. It is important to consider how the site will be maintained and updated after it has been launched. The designer may be engaged to do this, in which case it will be necessary to ensure that it is provided with fresh content so that the site remains up to date.

Website content licences

During the process of designing and developing a website, it will be necessary to consider what different types of content will be needed for the site, such as text, photographs, audiovisual material or software. The more interesting and dynamic the content, the better the prospects of attracting visitors to the site.

The website owner may be in the fortunate position of owning all the rights in the relevant content, but the more complex the design of the site, the more likely it is that third party rights will be involved. In some situations, certain content (such as software applications) may be owned by the website designer, in which case the website owner will want to provide for the transfer or licensing of the necessary rights to it under the website design and development agreement. Where the rights of other third parties are involved, the website owner will need a licence to use the relevant content for the purposes of the website in order to avoid infringing those parties’ IPRs.

Unlike website design or hosting agreements, which provide for the performance of certain services, an agreement for the provision of website content is a licence of IPRs and as such is quite different in nature.

Website hosting agreements

Once work on the design and development of the website has been completed, the site will need to be run on (or “hosted” by) a server that is physically connected to the internet. The server is a computer which publishes the website and allows internet users to browse through its contents. The type of server required will depend on the size and complexity of the website and the number of anticipated users. Owners of large, high-volume websites may decide to carry out this hosting function using dedicated servers owned by the companies themselves, and making their own arrangements for the necessary connectivity and security systems. For many website owners, however, it will be preferable to enter into an agreement with a third party service provider to host the website. In those cases, the website may be hosted on the host’s own server, or on a server owned by the website owner which is dedicated to the website owner’s site but located at the host’s premises. The host will provide the link for all traffic between the internet and the web server. The capacity (or bandwidth) of the link will depend on what network services the host itself has access to, the number of other websites that it hosts and the number of users that connect to the host.

The following key issues should be addressed in a website hosting agreement:

• Scope of services.
• Server.
• Response times.
• Uptime requirements.
• Timetable.
• Acceptance tests.
• Liability for website content.
• Hosting fees.
• Termination.
• Data collected.

Other contracts that will need to be considered are:

• Website terms and conditions
• Website linking licences

The Contracting Process

When setting up a website, it is not unusual for a customer to find itself at a distinct disadvantage in the contracting process. The supplier is not only more experienced in the process involved in developing the website, providing the content or providing the hosting services, but will also have its own set of standard terms and conditions. These are often imbalanced and can be difficult to amend. Despite the supplier’s greater experience and the fact that it is more often dealing on these terms, experience shows that such terms are often ill-adapted to the specific issues encountered in particular transactions.

In practice, a customer’s ability to redress this imbalance is often severely limited. It can be as expensive and time-consuming to try to customise the supplier’s standard terms as it is to prepare a more “deal-specific” agreement. The customer then has the task of persuading the supplier that it should depart from its familiar and preferential terms. The customer will only be able to do this is if it can quickly prepare and submit a draft of its own agreement.

If the customer is able to persuade the supplier to negotiate on the basis of the customer’s own agreement, there are advantages from the customer’s perspective in drafting the agreements in a way that is balanced and addresses the supplier’s as well as the website owner’s interests, particularly where, as is the case in many of these arrangements, the parties need to have a continuing relationship. Too often, a customer will make the mistake of proposing an agreement which is as imbalanced in the customer favour as the supplier’s terms were in its favour. This may be a good strategy if the customer is in a better negotiating position than the supplier, but in most circumstances the consequence of proposing an agreement in such terms is simply an increase in the overheads of the negotiation process.

If the supplier absolutely refuses to contract other than on its own terms, and the customer has no realistic alternative sources of supply, the customer will of course have no option other than to review these terms carefully with a view to redressing the imbalance.

As mentioned above, website terms and conditions and linking licences are usually drafted as standard agreements for publication on a website, with no intention that they should be negotiated. However, there may be circumstances, such as in an unusual linking arrangement, where the standard terms will not be appropriate and new terms will have to be negotiated. In those cases, the customer should consider the comments set out above.