The Hindu Business Line : Before you sign the deal

Software Contracts negotiation requires specific skill sets as it involves commercial, technical and legal issues. Business acumen is of utmost importance in such an exercise, given the various complicated clauses.

Attorneys negotiate the contracts with clients through their business managers. Some times, if the situation requires, the business managers pit the attorneys from the two companies negotiating the contract against each other, for quick closure.

There is another school of thought here: a major bank in Japan feels attorneys of the two companies should never meet as they may influence each other, which may be against the interest of the organisation whose attorney was influenced.

So how do software companies deal with critical clauses and iron out differences? Here are some key aspects to keep in sight.

Non-compete restriction

A non-compete restriction is a very critical, and also tricky, clause in the contract. Non-compete prohibits one company from working with a competing company during the term of the contract and thereafter for a certain period of time (usually 12 months) from the date of termination/completion of the contract.

Non-compete provisions are commonly requested by clients in contracts that aresoftware service-oriented and not software product-oriented. Clients prefer broad non-competes that purport to limit the software company's ability to perform services for an indefinite period for any competitor of the clients. Naturally, the software company would not prefer to accept this clause.

Types of Non-Compete Restrictions

Typically, there are two types of non-compete provisions. The first, by far the more serious, is a company-wide non-compete that restricts the software company from performing services for certain clients or a class of clients.

The second is an employee-level `cooling off' period. The duration of the `cooling off' period is negotiable.

Negotiating Strategy

As with the Most Favoured Client provision, software companies should generally reject all non-compete provisions in the first round of negotiations. They must offer the rationale that their operation is in vertical industry segments and they very often work with companies that compete with one another. Software companies usually sign a confidentiality agreement and are bound by it to maintain confidentiality and provide data security. They should emphasise that their relationship should explicitly be non-exclusive. They should also highlight anti-trust concerns as a rationale for resisting non-compete provisions.

If the client continues to insist on a non-compete, and the same is justified based on the business value being received from the relationship, the approach must be to substantially limit the provision. Following are some ways that can be used to limit a non-compete provision:

This restriction should be limited to the members of the project team, and preferably further limited to just the `key employees' (10 per cent - at most - of the project team).

This restriction should only be for a certain duration. (For instance, the cooling off period could be for six months after employee/s moves out of the project).

Limited to certain agreed list of competitors.

Limited to certain narrow geography (Say, the Asia-Pacific region).

Limited to "substantially similar services" (as measured by type of services, required skill sets, technologies, and applications). The narrower the services are defined, the better for the software company.

Though it may often be difficult to completely get away with this non-compete restriction, it is better to narrow it down as much to specific issues as possible.

Right to Hire

The other important negotiation is the "Right to Hire" clause. Most clients insist on having this in the contracts.

In the interests of protecting the software company's investment in its employees, it should negotiate a non-hire clause with each of its clients. The clients may often disagree to such a clause for various reasons: Practically not possible; legally not possible; and not aligned to corporate or public policy.

But the reason behind this may entirely be different - the clients may want to bring in experienced employees into their rolls who had already worked in the same/similar projects. This saves them a lot of money and time.

Non-solicitation provision

In all instances, a software company must have a firm non-solicitation provision that prevents the clients from directly or indirectly pursuing the software company's employees. It should also negotiate for the non-hire to be in effect during the term of the contract and preferably for up to one year after termination.

The best-case provision is to have a unilateral (i.e. one-way) company-wide non-hire in which none of the employees of the software company are being poached by the clients.

The software company's first alternative is to have a bilateral non-hire on a company-wide basis. Here, neither the software company nor the clients hire each other's employees.

The second alternative is to have the non-hire applicable at the geographic level or business-unit level (i.e. India or the UK or the US as applicable), or some combination thereof - such as a non-hire clause that prevents the clients from hiring from the respective business unit in a particular geography. In each instance, the software company should assess the relative risk to it.

The third alternative is to limit the provision to personnel on the project, thus restricting the client only from hiring the employees on the project rather than from the company generally. There must be a minimum `cooling off' period of six months from the project before the clients can hire the employee. It should also be ensured that the non-solicit provision remains in operation.

A fourth alternative is to restrict hiring but permit exceptions for certain key employees (typically not more than 15 per cent of the project team), provided (i) there is no solicitation of other employees and (ii) that the hired-employees were billable on the project for a minimum period of time (For example: six months or one year), the justification being that the company at least extracted some economic value from the employees being on the project.

The software company can also try to impose a `cooling off' period in this alternative such that the client cannot hire the software company's employees until a period of time has elapsed since the person left the project.

The final alternative is to agree to a non-solicitation, but this is a last resort and is only acceptable in jurisdictions such as California where there is settled law that non-hire provisions are not enforceable.

Other than California, the software company should ask for the relevant laws and precedence so that it may confirm legality of the claim. In such a scenario, the software company should also insist that there be a job rotation of the personnel employed in the project every 18 months to 24 months' duration. This will restrict the exposure of the employees to a particular project for a longer duration and thereby the chances of the clients hiring the employees are restricted.

Fee for hire

Very often, clients will propose provisions that permit the client to hire the software company employee and pay the company a fee for each hire.

These provisions are generally avoided by the software company, as they merely place a bounty on the employees and reduce the issue to pure economics.

In certain circumstances, however, the software company accepts such arrangements, but it should still object to excessive hiring in violation of a non-solicitation obligation.

Assuming the clients agree to a `pay for hire' arrangement, the software company must also insist on providing (i) prior intimation of hiring, (ii) a commitment for maintenance of certain level/amount of business, and (iii) generally receive at least one full year's salary as compensation for each hire.

The author is Legal Counsel for Polaris Software Lab Ltd.

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