With the rapid development of the IT industry, judicial practice is being replenished with a number of interesting cases on disputes with software developers. The analysis of such court decisions allows tracing trends in dispute resolution, which, in turn, gives an opportunity to take them into account when building one’s relationship with software developers.
Imagine the following situation: you have concluded a contract and ordered software, but when the deadline for developing the software has expired, you still have not received the software you need so much. Project deadlines are missed. You are thrown in the deep end. What to do? How to deal with it?
The most common disputes in the IT industry are:
- Disputes over NDA (Non-disclosure agreement) and NCA (Non-compete agreement);
- Disputes on intellectual property protection;
- Technology law disputes (tech disputes).
Tech disputes include disputes arising from contracts for the provision of tech-related goods or services (along with disputes concerning software development), as well as from smart contracts and cloud computing contracts.
Now let’s focus on Disputes with software developers in Ukraine, which is a tech dispute.
Where does tech dispute start?
No one expects the beginning of a collaboration to end in conflict. After all, it would be weird to enter into cooperation expecting an adverse end in advance. Unfortunately, however, tech disputes do happen. There are many possible scenarios of a dispute with a software developer. Here are a few that may occur:
- The developer has developed software that contains defects and refuses to fix them;
- The developer did not provide the software or provided it with a delay;
- The developer received an advance payment but did not deliver the software;
- The customer accepted the software but detected defects during the test period.
When such situations occur, a reasonable question arises: what to do? Please note that each of your further actions can create legal consequences. Therefore, it is recommended to involve lawyers already at this stage. So, for example, by accepting the software with a delay, you deprive yourself of the right to complain about the services provided.
How to ensure not to get into a dispute?
Your protection, first and foremost, is the software development agreement.
The conclusion of an agreement precedes almost any cooperation. This stage is crucial because it determines the basis for your further cooperation. Of course, tech disputes might arise despite the existence of a well-defined contractual clause. However, the probability of such disputes is much higher when the parties do not give great importance to the conclusion of the contract or sign a certain template contract, which does not reflect the real relations between the parties.
Consequently, when signing a software development agreement, it is crucial to make sure of the following:
- whether it regulates all the significant aspects of cooperation; and
- whether such regulation complies with your interests.
The better the contract is drafted, the more chances for successful cooperation!
For example, consider having no clauses in your agreement about the automatic download of software or scripts without checking their quality and the impossibility of correcting bugs (technical errors of the developer).
Here is a brief check-list of things you should pay attention to before signing a contract with a software developer:
- the procedure for services acceptance (test period, what shall be deemed as the confirmation of services acceptance);
- the payment procedure (dates, amounts, and currency);
- moment of transfer of intellectual property rights (moment of creation of relevant intellectual property objects or payment for them);
- liability (penalties, limitations of liability);
- applicable legislation.
Therefore, read agreements carefully and negotiate on the terms and conditions of comfortable cooperation!
How to resolve disputes with software developers?
In case the conflict failed to be avoided, and the contract has been violated, proceed with the following steps:
- Write a notification letter
It is a good practice to write a developer a notification letter or claim, explicitly describing the violation of the contractual terms and the intention to terminate the contract due to its violation. Very often, Ukrainian courts pay attention to the attempts to resolve the dispute out of court. That is why such a notification or claim may sound as a reasonable argument in court.
The Supreme Court, in its resolution dated March 25, 2020, on case № 570/1369/17, decided that the customer’s claim for refund of advance payment by the developer is reasonable. One of the arguments in favour of the customer, in this case, was that the customer took measures of pre-trial dispute resolution of the dispute. In fact, the customer sent a notification about the termination of the agreement and the return of the advance payment to him.
- To accept services provided with a delay, or not?
Still, if the developer provides the developed software with a delay, then you will be faced with a decision, whether to accept such software or not. It is vital to acknowledge that by accepting such software, you waive your right to insist on a refund of the advance payment (if any) or refuse to pay for such services.
In other words, if you intend to terminate the contract, you should not accept the software. Otherwise, the acceptance of the software will be your confirmation of the duly provided services by the developer.
- How to return the advance payment?
One of the cooperation models is cooperation under the condition of advance payment by the customer to the software developer.
With advanced payment made, there are cases when the developer refuses to provide the software or claims the things to turn out to be much more complicated than he expected. He believes the customer is obliged to pay more. In such a case, the customer has the right to demand a refund of the advance payment, especially if the contract defines a clear statement of work.
The first step should be to send the developer demand for a refund of the advance payment. If this method proved ineffective, the next step is filing a lawsuit in court.
Thus, the Supreme Commercial Court of Ukraine, in case № 911/3480/16, decided that the customer has the right to return the advance payment because the software developer did not provide the software in time, and therefore – did not fulfill his obligations under the agreement.
- What if defects are detected during a test period?
Quite often, the contract provides for a test period during which the customer tests the software for defects, and only after its completion, the payment is made. If the customer discovers defects, an act of fixing such defects is drawn up.
In such a case, the developer shall fix the defects identified by the customer, which means that the software is not accepted by the customer and returned to the developer for improvement.
And if no bugs are identified, a testing report is drawn up.
It is crucial to understand that signing such a testing report certifies acceptance of the software and, therefore, the services provided by the developer. Consequently, you should not sign it by skipping the testing stage. This is due to the fact that if defects are discovered after the test period is over or the testing report is signed, the customer almost loses the grounds to demand fixing such defects.
Thus, in its decision of December 16, 2020, in case 916/2740/19, the Supreme Court drew attention to the fact that the parties had signed reports of conformity of services and only at the appeal stage the customer raised the issue of defects in the software. Thus, by accepting the services immediately or by signing testing reports, you confirm the absence of defects in the software developed by the developer.
- Where to apply?
Disputes with software developers in Ukraine are settled through the Commercial Court procedure.
Thus, after accepting the methods of pre-trial dispute resolution (e.g. negotiation), you should apply to the local Commercial Courts of Ukraine.
Pay attention to the legislation that applies to the agreement and in which courts the disputes under the agreement shall be resolved. The court may refuse to consider the case if the agreement stipulates that the dispute is to be resolved under the law of another country.
5 tips to get ready for the tech dispute resolution
In addition to all of the above, the following is also crucial:
- To check the arbitration clause in the contract with the software developer
Very often, in contracts with software developers, there is an arbitration clause stipulating in which court the dispute shall be resolved.
Below you can find an example of such a clause:
“Any dispute, controversy or claim arising out of or relating to this contract, including the conclusion, interpretation, execution, breach, termination or invalidity thereof, shall be settled by the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry in accordance with its Rules.”
The parties may also indicate the substantive law to govern their contract, to determine the number of arbitrators (one or three), the venue and language of the arbitral proceedings.
- To have competent local lawyers
This point is also vital because no matter how much effort you or a lawyer from your jurisdiction makes to understand the law of another country, there is a risk of not taking into account local nuances that may affect the course of a trial or other proceeding.
- To have a realistic understanding of the situation
In other words, to make a realistic assessment of the situation. Sort out the facts. Was there an advance payment? Was the deadline missed?
From a legal point of view, it is worth reviewing all written agreements, including correspondence in social networks (if any). But first of all, you should refer to the contract concluded with the software developer.
- To understand the emotional state of your opponent
You might have information about the reasons that prompted the developer not to provide you with the software on time. On this basis, you can predict his subsequent actions and build the best strategy for dispute resolution accordingly.
- To determine the primary purpose of the dispute resolution
After a realistic assessment of the situation, it is crucial to outline the main goal of the tech dispute resolution. For example, you still want the developer to transfer the software, refund the prepayment, or maybe the priority is to preserve a good relationship with him. Based on this, the legal methods that can help achieve the goal should be defined.
A tech dispute is a problem for both parties. It is great to reach a win-win resolution, but it is also essential to protect your interests.
Disputes with software developers in Ukraine sometimes happen. But we know the solution. Be aware of agreements you sign with your developers. Keep in mind to check all key provisions. If a dispute with a software developer arises, send him a relevant notification and be ready to protect your interests in court. With the latter, we would gladly assist you with our broad expertise.