Introduction to Contract Drafting
Contract drafting forms the foundation for successful projects in software development and is crucial for a stable and trustworthy relationship between the involved parties. A clearly structured contract ensures that the requirements, objectives, and responsibilities of all parties are transparently regulated from the outset. This not only facilitates the implementation of a software project but also minimizes the risk of misunderstandings and costly disputes.
In practice, drafting a contract is a complex process that requires close cooperation among various departments within a company. Besides the legal department, sales, project management, and finance are often involved in the drafting process. This ensures that the contract meets both the legal framework conditions and the economic and technical requirements of the project.
Important Contents and Components of a Software Development Contract
When drafting the contract content, it is important to precisely define all essential terms and conditions. These include the description of the software to be developed, software quality requirements, cost structure, the implementation schedule, as well as regulations on collaboration and communication between the parties. Many companies rely on tried and tested standard clauses, which are adapted to the individual needs of the respective project.
Traditional vs. Agile Contract Drafting in Software Development
Two fundamental methods of contract drafting have established themselves in software development: the traditional method, based on clearly defined phases and fixed specifications, and the agile method, which allows more flexibility and adaptability during the development process. The choice of the appropriate method depends on the complexity of the project, the company’s requirements, and the desired collaboration. Modern tools and contract management software can additionally support the contract drafting process and increase efficiency.
A well-designed contract is a crucial success factor for software development. It helps ensure software quality, keeps costs under control, and strengthens cooperation between the parties. For software developers and companies, it is therefore essential to understand the fundamentals of contract drafting and apply them in practice to establish the basis for smooth and successful software project implementation.
OLG Frankfurt on Classification as a Contract for Work or Contract for Services
Whether a contract for the development of software is classified as a contract for work or a contract for services is legally highly significant. Only under a contract for work does the developer owe the success. Compliance with the relevant legal provisions plays a central role in contract drafting to meet statutory requirements and create a legally secure basis for cooperation. The OLG Frankfurt provided more clarity on the legal classification of software contracts with its ruling dated December 19, 2024 (Case No. 10 U 201/22).
In software development, either a contract for work or a contract for services is usually concluded between the parties. A key difference is that under a contract for work, the contractor owes the success, for example, a functional program or a specific interface that meets defined requirements. This model is often preferred by clients, as in case of defects, the payment can be fully or partially reclaimed. Under a contract for services, on the other hand, the contractor only owes the performance of work and is paid regardless of the outcome, according to the law firm MTR Legal Rechtsanwälte, which also advises on IT law.
Legal Dispute Ends up before OLG Frankfurt
The OLG Frankfurt has now issued a widely noted ruling on the legal classification of software contracts. The case involved a contract between a freelance IT project manager and a personnel consulting firm. The project manager was to develop two software interfaces. Invoicing was based on working hours with a fixed agreed term. A specific success or functional guarantee was not contractually stipulated.
After the collaboration ended, the project manager demanded payment for the hours worked. The personnel consulting firm refused payment, arguing that the promised software was either not delivered at all or was unusable. It also demanded repayment of payments already made.
Problems frequently arise in the implementation and interpretation of software contracts, for example when assessing whether the agreed services were properly rendered or which requirements must be imposed on the software.
The legal dispute ultimately ended up before the OLG Frankfurt. The Higher Regional Court ruled that a contract for services existed and that the IT project manager was entitled to the agreed remuneration.
Agreements Support Classification as Contract for Services
Unlike many IT projects, the Higher Regional Court assumed that here no success was owed, but merely the performance of work to the best of one’s knowledge and belief. The task of the contracting parties is therefore, in particular, to clearly define the type of contract as well as the respective responsibilities and tasks within the framework of contract drafting. This is typical for a service contract. This is supported by numerous contractual indications: for example, remuneration was made purely on an hourly basis, a fixed price for the finished product was not agreed upon. Also, the terms “services” and “consulting services” appeared multiple times in the contract. An acceptance typical for a contract for work was not provided for. In addition, the contract provided for mutual cancellation periods, which is rather untypical for a contract for work, as in such contracts the client usually has the right to terminate at any time.
The court further emphasized that the development of interfaces is typically associated with many technical uncertainties, such as dependency on third-party software, unknown data structures, or changing technical standards. In such cases, it is economically and legally more sensible to agree only on performance rather than a specific success.
No entitlement to repayment
The Higher Regional Court made clear that in a service contract there is no entitlement to a refund of remuneration solely because the result does not meet the client’s expectations. Such a claim is only possible in the event of concrete breaches of duty, for example, if the service provider worked grossly negligently or violated contractual requirements. A mere “failure to succeed” as such does not give rise to liability.
The ruling shows that clients in software projects should precisely define their goals and the expected results. Frequently, questions arise beforehand regarding the appropriate type of contract as well as the respective rights and obligations, which should be clarified before the project’s start. Those who want a finished product should therefore conclude a contract for work with a clear description of services, acceptance conditions, and defect regulations. Those who are only seeking expertise, advice, or support in the process may be better advised with a service contract. On the part of contractors, classification as a service contract provides greater security, since they are not liable for the project’s success but only responsible for the proper execution of their work.
Precise contract drafting in software contracts
The Higher Regional Court of Frankfurt brings more clarity to practice with its decision and simultaneously makes clear how important precise contract drafting is in the IT sector. Using ambiguous formulations or unclear service descriptions risks costly legal disputes. Particularly in agile or uncertain project environments such as interface development, a service contract can often be the more appropriate and less risky solution. Equally crucial for project success is the careful selection of the suitable type of contract and contractual arrangement to conduct the contracting process efficiently and in a legally secure manner.
MTR Legal Lawyers advise on software contracts and other topics of IT law.
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