IT Contract Review: A Checklist

In the business practice of virtually all modern industries, the custom of recording cooperation agreements in written form has become established. This is often not merely the wish of the parties, but also a requirement of law or regulatory authorities. At the same time, the most widespread format for formalizing relationships in practice is the conclusion of an agreement in the format of a separate document, sometimes with annexes. But who should draft its text, and how?

In practice, when agreeing to work on a project, one of the parties provides their contract template for approval. The other party may either accept the proposed version or suggest amendments or additions, which may be aimed at aligning it with the actual terms of cooperation, the capabilities of such a party, softening certain conditions, and so on. It is precisely at such moments that the need to review an IT contract arises.

In this article we propose to examine the key points to pay attention to when reviewing a contract proposed by a counterparty — an IT company.

Where to Begin, or the Fundamentals

We verify that the previously agreed key terms of the future cooperation are reflected and reflected in full.

For effective analysis of a counterparty’s draft agreement, one must first have information about the actual arrangements for the future cooperation. Thus, during partnership negotiations, even before the contract is concluded, the parties often agree on, in particular:

• the direct subject matter of the agreement: what specific services will be provided (work performed / results created);
• service delivery timelines: whether continuous cooperation is envisaged until the moment of termination / expiry of the agreement, or whether the project is to be completed within specific timeframes;
• the format of interaction — T&M, outsourcing/outstaffing, fixed price, and so on;
• financial terms — for example, hourly billing for the actual services provided, a fixed price for the entire project, per quarter, per month, and so on;
• the procedure for settlements and the preparation / exchange of primary documents.

This list is of course approximate, but in general these are the key questions that are decisive for the parties when deciding whether to start work — both for the client and for the contractor. These are the points to keep in mind when reviewing the contract, paying attention to how they are addressed in the text and whether they are provided for at all.

If at this stage you notice problems with how certain pre-agreed terms are reflected, we recommend recording these gaps so that you can return to discussing them with the counterparty and internally with your team or management. Their criticality and the possibility of adding them to the contract text should be determined. Below we propose to examine other, less obvious points to pay attention to when analyzing the terms of a proposed draft agreement.

Indicators of an Employment Relationship

We analyze the presence of provisions that may carry risks of reclassification of the parties’ relationship.

From our practice in reviewing draft agreements — particularly when it comes to cooperation between a Ukrainian IT company and clients from the US or European countries — we regularly encounter misunderstandings regarding the presence of indicators of an employment relationship in the contract. This situation arises because foreign clients, drawing on the practice of their own jurisdictions, often formulate contract terms that, in the context of Ukrainian labor legislation, may be regarded as high-risk and potentially lead to the relationship being recognized as employment.

The fact is that in many Western jurisdictions this issue is regulated fairly clearly. In the US, for example, it is often sufficient to integrate a clear “independent contractor” disclaimer into the contract text. At the same time, in the Netherlands, for the purpose of confirming independent status there is even a dedicated instrument — the Model Agreement (Model Overeenkomst), the use of which significantly minimizes the risk of the relationship being recognized as employment.

However, in Ukraine, for example, judicial and regulatory practice remains less clear-cut and more ambiguous. There is a whole range of vague, imprecisely defined indicators by which a court or regulatory authority may determine the existence of an employment relationship, which could potentially have extremely unpleasant financial and legal consequences for the company. Therefore, if the correct classification of the relationship is a relevant issue in your jurisdiction, all formulations in the draft agreement should be reviewed particularly carefully to avoid any ambiguity and to propose their exclusion or reformulation to the counterparty.

We wrote in detail about such risky wordings in software development agreements in this article.

Compliance with the Legislation of Your Jurisdiction

We identify provisions or formulations that may carry risks for the company in the context of the legislation or practice of the country of registration.

The legislation of modern states — including Ukraine and popular IT jurisdictions — has its own legislative requirements both for agreements between companies in general and for specific types thereof — for example, for the provision of services, software development, or the transfer of intellectual property rights. Of course, it is not necessary for the agreement to fully mirror the legislation of the country of registration, but there are often key points whose non-compliance may carry significant risks for its validity and have negative tax or legal consequences for the company.

There are quite a few such points, and we propose to pay attention in particular to the following provisions, in respect of which special conditions or restrictions established at the level of law frequently arise:

• The impermissibility or restriction of the use of the penalty (fine) category (e.g., the US, the UK).
• Restrictions in the context of non-competition clauses (NCA) (the US, most EU countries). Incidentally, Legal IT Group lawyers wrote about the nuances of drafting NCAs in this article.
• The impossibility of full assignment of intellectual property rights (e.g., the Czech Republic).
• The requirement for agreement on the essential terms of the contract, without which the contract may be deemed unconcluded.
• Particularities regarding the format of signing (use of facsimile, electronic signature).
• The mandatory or conditionally mandatory nature of primary accompanying documents (e.g., service acceptance certificates in Ukraine).
• Restrictions on the duration of the agreement.

IT companies should be familiar with the key provisions of contract law in their own jurisdiction so that when reviewing a proposed draft agreement they can identify and reformulate / add / remove certain provisions as needed.

Penalties and Other Burdensome Provisions

We analyze the liability clauses, determine their acceptability, and identify possible ways to soften them.

From practice it can be stated that counterparties, in order to protect their own interests, very often set out in detail the liability provisions for the other party, including penalties, late payment charges, or compensation for certain violations. It is therefore critically important to identify and carefully analyze such provisions when reviewing a draft contract. It is important to understand not only the existence of a penalty or its amount, but also what specific violation it is provided for, and whether this is clearly defined in the contract text.

The liability section is key, but penalties and other compensatory or punitive measures may often be “embedded” in less obvious contract provisions:

Contract section / provision ↓ — Example grounds for party liability ↓

• Financial terms — Violation of payment deadlines, invoice issuance, and so on
• Service delivery procedure — Violation of service delivery timelines, approval of technical specifications, reporting, provision of materials
• Termination procedure — Failure to give timely notice of unilateral termination, unilateral termination “without cause”
• Non-disclosure (NDA) — Disclosure of confidential information, violation of the procedure for handling it, failure to return materials after the agreement expires
• Non-competition, non-solicitation (NCA, NSA) — Violation of prohibitions on competitive activity, solicitation of team members
• Intellectual property — Use of materials that infringe third-party rights, use of artificial intelligence, independent use of service results

And this list can go on. As we can see, in practice there are countless provisions in respect of which companies seek to protect themselves by establishing financial liability for the other party. When analyzing a counterparty’s draft agreement, we recommend approaching this matter responsibly in order to clearly determine which such clauses are acceptable for you, which should be softened, and which should be excluded entirely.

Duration and Termination Procedure

We determine the duration of cooperation under the contract, the possibility of its extension or termination, and the procedure.

In the IT industry, the question of how long work on a project will last is key for business. If a company eventually finds it unprofitable to continue providing or receiving certain services, it must clearly understand its options for exiting the cooperation. Contracts in this regard are quite varied, as counterparties — quite naturally — try to provide for the most favorable conditions for themselves: for example, a long-term contract with the option of quick exit for themselves and a more complicated or extended exit for the counterparty.

It is therefore essential to establish what the actual duration of the proposed agreement is, how unexpected the counterparty’s exit from it may be, and how the company itself can bring the relationship to an end if something goes wrong. These questions are often addressed in a separate section of the agreement, but it is also necessary to check whether possibilities for unilateral termination — immediate or with minimal notice — are concealed in other parts of the agreement. An unexpected termination of the relationship can have significant negative consequences for the business.

In this context it is also important to understand what accompanying rights and obligations arise upon expiry or termination of the agreement: return of materials / equipment / confidential information media, mutual settlements, transfer of results, and so on.

Conclusions

Contract review with an IT company is not merely a formal step, but an important measure that ensures the legitimacy of future cooperation, minimizes legal and financial risks, and builds trust in the relationship with the counterparty. For effective execution it requires careful preparation and analysis, starting with the clear identification and full reflection of the previously agreed key terms.

Of course, depending on the business model, working practices, or industry specifics, the checklist may contain many other details and nuances. Contract review is meticulous work that is best entrusted to professionals. It is an expert in IT contracts who is best placed to analyze the contract text, identify critical points, and develop ways to minimize or entirely eliminate them. If you wish to receive professional assistance in reviewing a draft agreement with a counterparty, contact Legal IT Group. We will help with reviewing the contract text, identify critical points, and propose amendments as needed.