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Technology- & IT-Law

Software development contract: Contract for the development of software in Germany

A software development contract regulates the relationships and obligations between a client who wishes to have software developed and a software developer or a software development company.

The core of such a contract is to precisely define the specifications and requirements of the software to be developed in order to ensure that the end product meets the client’s expectations. In practice, however, it is precisely this part that is shied away from, firstly because it does not seem practicable, as requirements are always subject to change anyway, and secondly because people shy away from the work involved.

Challenges in the software development contract

One of the biggest challenges for companies wishing to have software developed lies in the precise formulation of project requirements. Ambiguities in the specification can lead to misunderstandings that not only delay the project, but can also significantly increase costs. Companies must also ensure that the contract contains appropriate provisions regarding schedules, milestones, test procedures and acceptance criteria. Another challenge is ensuring compliance with data protection and security standards, which are particularly critical in the software industry.

Clients must also ensure that the rights to the software created are clearly regulated. This includes both the ownership rights to the software itself and the rights of use. Striking a balance between ensuring flexibility in project development and complying with contractual obligations is a constant challenge that must be mastered through careful contract drafting.

Modern forms of software development and use

Software development is changing, the times when a single developer developed great software on his computer – if they ever existed – are coming to an end. Today, development is modern and nothing works without a team, AI and interlinking of requirements/development. You will find more details on this below. This also raises new questions, such as whether fine-tuning an LLM is software development at all and what legal significance this may have.

About this in the German-language blog: Legal particularities of Software as a Service (SaaS) contracts – especially AIaaS

Basic contractual arrangements for the creation of software

Software development contracts are complex legal documents that pose particular challenges, especially due to the individual nature of software development. These contracts differ significantly from standard software purchase agreements, as they take into account the specific needs of the customer and often contain detailed specifications and expectations:

1. important elements of a software development agreement

First of all, a clear definition of the main and ancillary performance obligations is essential. The main performance obligations describe in detail what the developer has to deliver, including all functions and technical specifications of the software. The agreement should also include provisions on change requests and the adaptation of services to changing requirements during the course of the project.

The granting of usage rights is another critical point: it must be clarified which rights the customer receives to the developed software, including exclusive or non-exclusive usage rights. The contractual provision must also cover future usage options and the rights to modified or extended software. This also raises the question of how to deal with the source code, for example whether an escrow agreement is concluded.

2. obligations to cooperate and data protection

Another key element is the client’s obligation to cooperate. This includes the provision of information, access or materials required for the development of the software. If the customer fails to fulfill these obligations, this can result in considerable delays and may affect liability in the event of non-fulfillment.

Data protection agreements also play a role, especially if personal data is processed or stored. These must comply with the provisions of the GDPR and often require specific security measures and protocols.

3. warranty and liability

Warranty claims must also be defined. It must be clear which criteria the software must fulfill and how defects are dealt with. This includes regulations on the rectification of defects, subsequent improvements and possible claims for damages.

4. Termination of contract and dispute resolution

Regulations on the termination of the contract are important for both parties. This includes the conditions under which termination is possible, as well as the handling of the termination, including the handover of the services provided to date and the final settlement. Dispute resolution mechanisms can help to avoid lengthy and costly legal disputes.

5. Applicable law and place of jurisdiction

Finally, the contract should contain a clear provision on the applicable law and the place of jurisdiction. This gives both parties certainty as to the legal system under which the contract will be interpreted and where possible disputes are to be negotiated.

By taking these aspects into account when drafting contracts, many of the common problems that arise in software development projects can be minimized or avoided altogether. This ensures that the end product meets expectations and both parties minimize their legal risks.

Legal classification

In the case of software development contracts, the legal classification as a service or work contract is central, which has a significant impact on the execution of the contract and the associated obligations. The distinction is often not clear in practice and can vary depending on the contract design. Related to this in the German-language blog: The SaaS contract

Contract for work

A contract for work and services exists if the success of the service is owed, i.e. the software developer undertakes to create a functioning software product that meets the customer’s specific requirements. Typical for contracts for work and services is the acceptance of the software by the customer, during which it is checked whether the software meets the agreed specifications.

In Germany, the law on contracts for work and services is regulated in the German Civil Code (BGB). It contains regulations on liability for defects, which state that the contractor is liable for defects for a certain period of time after acceptance. In the case of a contract for work and services, the client is entitled to comprehensive warranty rights if the software does not comply with the contractual agreements.

Service contract

A service contract is used when the service provider undertakes to provide a service, but without the guarantee of a specific outcome. The focus here is on the activity itself, not the end product. In the case of software development projects under a service contract, the developer would therefore not be responsible for the end product, but merely for making his working time and expertise available.

Service contracts are typically used for consulting services or ongoing support without a specific guarantee of success. Remuneration is often paid on an hourly or daily rate basis, depending on the time worked.

Hybrid forms

In practice, there are often forms of contract that contain elements of both contracts for work and service contracts. Particularly in the case of agile software development methods, where flexibility in project design and continuous adjustments are common, it can be difficult to classify a contract purely as a contract for work or a contract for services. Such contracts can contain special clauses that enable dynamic adjustment of performance expectations and the scope of services during the project term.

The choice of contract type depends heavily on the specific circumstances of the project and the needs of the contracting parties. Careful contract drafting is crucial in order to clearly define rights and obligations and avoid subsequent conflicts. In cases of uncertainty, it is often advisable to seek legal advice to determine the most suitable type of contract for the project in question.

Waterfall vs. agile

Waterfall

  • Structure and flexibility
    • This approach is highly structured and sequential, which is reflected in a very detailed contract in which all requirements and specifications are defined from the outset.
    • Changes to the requirements are formalized and can only be made through a clearly defined change process.
  • Compensation and terms of payment
    • Oft wird eine Festpreisvergütung vereinbart, die nach erfolgreicher Abnahme der Software fällig wird.
    • This means that the financial risk lies more with the developer if the project becomes more extensive than originally planned.
  • Acceptance and transfer of rights
    • Acceptance takes place according to a fixed schedule, and the essential rights to the software are only transferred to the client upon acceptance.
  • Project organization and obligations to cooperate
    • The client has fixed obligations to cooperate that must be fulfilled at certain times, which makes the collaboration structured but less dynamic.

Agile

  • Structure and flexibility
    • In the agile model, the focus is on flexibility and iterative development. The contract is therefore less specific in the initial definition of the end product and allows for ongoing adjustments and clarifications as the project progresses.
    • Requirements and solutions are developed through collaboration between self-organized teams and their customers.
  • Compensation and terms of payment
    • Remuneration is often effort-based and geared towards the services actually provided, which is in line with the iterative nature of the agile methodology.
    • The contract may stipulate a maximum remuneration amount; any costs in excess of this must be agreed separately.
  • Acceptance and transfer of rights
    • Increments (partial products) are regularly reviewed and released, which enables continuous evaluation and adaptation. Formal acceptance of the entire development result marks the transfer of rights.
    • The rights to the development result are usually non-exclusive, which restricts the client’s exploitation compared to the stricter waterfall model.
  • Project organization and obligations to cooperate
    • The client’s involvement is an integral and continuous part of the process, and he is actively involved in regular meetings and sprints.

Modern software development

DevOps was yesterday … the increasing use of AI technologies in software development, no-code and low-code platforms in software development brings numerous benefits, including accelerated development times and reduced costs. However, these technologies also raise complex copyright issues that companies and developers need to consider in order to avoid legal risks.

Copyright problems with AI-generated code

The use of AI to generate code poses a challenge to the traditional understanding of copyright. AI systems such as OpenAI’s Codex or GitHub Copilot generate code that is often based on existing code fragments. This raises the question of whether and how such code can be protected by copyright. Since AI as such cannot perform “personal intellectual creation”, it does not fall under the conventional categories of copyright law, which presuppose human creation.

Another problem is the possible infringement of existing copyrights by AI-generated code. If an AI uses code fragments that are protected by copyright, these could be used without appropriate licensing and therefore unlawfully. In addition, when using large amounts of data to train AI models, there is a risk that copyrighted data will be used without appropriate authorization.

Copyright problems with no-code/low-code platforms

With no-code and low-code platforms, it is often unclear who owns the generated code. These platforms use extensive libraries of predefined modules, which raises the question of who owns the code created with them. In addition, the easy accessibility of these platforms can lead to the development of shadow IT, where unauthorized software applications are created outside of a company’s official IT infrastructure, which poses security risks and can jeopardize compliance with company policies.

The flexibility of no-code and low-code platforms can also cause integration problems in existing systems, especially if adaptations or extensions are required that go beyond the intended functions of the platforms.

The use of software development platforms therefore ultimately requires clear contractual agreements that regulate usage, ownership and liability issues. In addition, compliance with industry standards and legal requirements, particularly in the area of data protection and data security, is critical. These aspects are crucial to minimize legal risks and ensure compliance.

Dealing with the use of AI technologies, no-code and low-code platforms

The integration of AI, no-code and low-code into software development offers great opportunities, but also requires careful consideration of the copyright issues involved. Companies need to ensure that they understand the legal implications of these technologies and take appropriate measures to protect themselves from copyright infringement and other legal risks. Strategic planning and the involvement of legal experts can help to take full advantage of these technologies while ensuring compliance and minimizing the risk of litigation.

German Lawyer Jens Ferner (Criminal Defense & IT-Law)
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