Allens Accelerate

Depending on the nature of the arrangement, a standard customer contract will deal with the ownership and licencing arrangements for the following types of IP:

• Pre-Existing IP: Pre-Existing IP is IP that is owned by either party prior to, or created independently from, the customer contract. It is common for both parties to continue to own and use their Pre-Existing IP and provide the other party with a limited licence to use that Pre-Existing IP (usually within certain parameters – e.g., for an agreed purpose, or a period of time that will expire at the same time as the agreement); and
• Generated IP: Generated IP refers to IP that is created by one party under the agreement, or IP that the parties co-create as part of their arrangement. It is common for a startup to own all Generated IP and grant the customer a limited licence to use the product/materials for the term of (and in compliance with) the customer contract. This point is often negotiated, with some customers insisting that they should own the rights to Generated IP. What the parties end up agreeing will largely depend on the nature of the contract and the bargaining power of each party.
  
  If a startup is developing a product/materials for a specific customer, the customer may require that a startup assign (i.e., the transfer the rights to and benefits of) the IP rights in the Generated IP to the customer. Startups need to be careful when assigning Generated IP to customers and avoid assigning IP that the startup will want to use for other customers.   

Parties can manage and allocate risk under a customer contract in a variety of ways:

• Warranties: Warranties are contractual statements of fact that are intended to give both parties certainty that such facts are true. For example, a party may warrant that it has 'obtained all necessary consents and authorisations and provided all disclosures required by law (including Australian Privacy Laws) in order to provide the service'. If a warranty is breached (i.e., the statement is not true), the party providing the warranty may be required to pay monetary damages to the other party for the loss suffered as a result of the breach.
• Indemnities: Think of an indemnity as like a safety net. It is a promise provided by one party (the indemnifying party) to cover the losses sustained by the other party (the indemnified party) due to the occurrence of specific events. For example, an indemnity may cover losses resulting from personal injury or IP infringement claims made by third parties. Unlike damages, which arise as a result of a breach of contract, indemnities will cover losses even if a contract has not been breached. As a result, a party will not be required to prove that a breach has occurred, or that such breach has caused the loss in question. A party may also still be entitled to claim an indemnity even if it has failed to take steps to mitigate the loss.
• Liability caps: A liability cap (often referred to as a 'Limitation of Liability') is a monetary cap on claims that either party can bring against the other party for breach of the agreement. This cap can be expressed as a fixed amount, as a percentage of the total fees paid or payable by the customer to the startup, or as the greater or lesser of both. You should carefully consider liability caps in your customer contracts to ensure they are fit for purpose (an appropriate cap may differ from contract to contract), and there are no unacceptable carve outs from the cap.

A contract should specify when it will expire (i.e., the contract term), and in what circumstances either party may be entitled to terminate before the end of the contract term.

• Contract term: A contract term does not need to be a fixed date and in some cases could be perpetual (rolling until terminated). It is relatively common for a contract to be agreed for an initial fixed term and then become subject to an automatic, rolling, or elected, extension period.
• Termination: Contracts can be terminated 'for convenience' (i.e., one party chooses to terminate, without needing a specific reason) or 'for cause' (i.e., termination for a specified reason). A contract may be terminated 'for cause' if, for example, a party breaches the agreement and that breach cannot/will not be remedied, or if a party becomes insolvent.
• Consequences of termination: Please note that some contracts will include consequences for termination, particularly where a party terminates for convenience. These consequences can involve the payment of any outstanding fees. However, when drafting fee-based consequences for termination, it is best to avoid including fees that go beyond the actual losses you have suffered from the termination (e.g., missed profits or preparation costs) as they may be interpreted as 'penalties', which are unenforceable under Australian law.

If the customer arrangement involves the collection, use or disclosure of data (which may or may not include personal information), the agreement should outline each party's rights to access, use, reproduce and analyse the data both during and after the term of the agreement. It is also important to make sure that the contract requires the parties to comply with Australian privacy laws when dealing with personal information, and addresses factors such as where data is being stored and what security measures are in place to protect the data.

Customers will likely require contractual protections relating to your use and disclosure of their confidential information. However, consider whether these obligations should be mutual. Confidentiality protections can also be important for your startup, to protect your commercially sensitive information and maintain your competitive advantage.

A contract will also typically set out the agreed processes for resolving disagreements in the future. This can be particularly helpful for smaller contracts, where the parties will want to attempt to resolve the dispute through negotiation, mediation or arbitration, before a party can commence court proceedings.