Web contracts: Beware the pitfalls of a handshake deal

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You get into gray areas in terms of ownership if you farm out the creation and look and feel of your artwork. Internet marketing and technology may be growing more sophisticated, but the legal contracts between Web development firms and the companies that hire them often aren't far beyond the old-fashioned handshake.

"The current state of the art is incredibly sloppy," says Eric Schlachter, an Internet attorney at Cooley Godward LLP, a Palo Alto, Calif.-based law firm.

Mr. Schlachter says that because most contracts originate with Web developers, many of which are small operations without legal counsel, these instruments often don't cover the most important issues that can arise in the relationship between a client and its developer.

"This is an incredibly significant legal relationship," says Mr. Schlachter, who is also adjunct professor of cyberspace law at the Santa Clara University School of Law. "It blows me away how casually these deals are done."


A case in point is Alpha Web, a Chicago Web development firm that expects to bill $1.5 million this year. With seven full-time employees, Alpha Web is large by industry standards.

"Most of my deals are done on a handshake," says Tom Costigan, a partner at Alpha Web. He says that after listening to prospective clients' needs, he writes up a draft agreement, which he has his accountant review.

"I don't even normally have them [clients] sign it," says Mr. Costigan. "If we agree [on the draft], that's what we work on."

While Mr. Costigan prides his firm on this personal, flexible approach, he and his clients could be setting themselves up for trouble, say legal experts.

"I encourage my clients to try to make the contract very detailed, so there is no misunderstanding at a later date about what is being created," says John Delaney, senior associate at New York-based Morrison & Foerster LLP, who primarily represents Web developers.

On the client side, the most important issues deal with making sure they're getting what they paid for, and that their site will be taken care of in the future, say lawyers representing businesses that hire Web developers.

"The No. 1 issue people do not think about is what happens after termination of the relationship," says Mr. Schlacter. "If the relationship [with a Web developer] ends, and you don't have a plan to get your site back and running on someone else's server ASAP, your site is off the market."


He says it's critical for the client to get full delivery of the contents of the Web site on a regular basis -- either on backup disks or another format -- and to get a guarantee that the developer will keep the site running on a server for a specified period after the relationship ends while the site is migrated to another provider's server.

Another big issue is making sure it's clear who owns what. Under copyright law, unless the relationship is an employer-employee one or specified as work-for-hire, the contract must specifically state that the client owns the work created or the developer will own the content of the Web site.

"This is a real trap for the unwary," says Mr. Delaney.

Beyond the more obvious ownership of content issue is the more subtle issue of ownership of or rights to the tools used to create the Web site, say lawyers.

"If you're the customer looking to protect your Web site, you need to own or have rights to use everything that is not only built into the site, but is also used to produce it so you can replicate it, particularly if the developer goes out of business," says Mr. Schlachter.


Because many developers use proprietary software and processes to develop client Web sites and may not want to give up ownership or rights to these without a significant payment, this point is often heavily negotiated, he adds.

For some clients, anything less than 100 percent ownership of a site's content is unacceptable, so to avoid arguing this point they keep content development in-house when possible.

One example is Sanctuary Woods Multimedia, a children's educational software company. Although it hired established consulting firm KPMG Peat Marwick to develop the technology and systems integration for its Web site, it kept all content development in-house.


"Being an intellectual property company, we are highly sensitive to this," says Charlotte Walker, president and chief executive officer of Sanctuary Woods. "You get into gray areas in terms of ownership if you farm out the creation and look and feel of your artwork."

On the developer side, Mr. Delaney says the most important contract issues include setting terms spelling out exactly what work will be done, how the payment plan will be structured, who will own and be responsible for content, and negotiating a future stream of income.

"By far the biggest battleground tends to be warranties and indemnifications," says Mr. Delaney, referring to the section of the contract that deals with who will take responsibility for potential infringements of copyright, trademark and patent rights.

"The customer almost always wants the developer to warrant that the Web site won't infringe on any intellectual property rights," he says. "And the developer wants to put some sort of limitation on his responsibilities."


Developers typically don't have a problem taking responsibility for copyright and trademark infringements because these are easier to control, says Mr. Delaney.

For example, he says, when scanning in a photograph or putting a logo on a site, developers are usually aware that they are dealing with intellectual property.

However, a bigger problem exists with patents because "you can infringe a patent without knowing it exists," he adds.

As more companies file patent claims for technologies and processes used to develop Web sites, such as database integration tools or electronic commerce payment methods, it becomes very difficult to keep track of the rights, says Mr. Delaney.

How the issue is resolved is all over the board, he says, but it usually involves some horse trading. "One side typically gives in and gets something in return that they consider to be valuable," he says.

Points to be won can include royalties paid to the developer on electronic commerce transaction fees, future maintenance fees or a larger upfront payment.

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