By Seyamack Kouretchian

New York Law Journal and E-Commerce Law Weekly

March 27, 2000

Web development and hosting contracts are the cornerstone of today's New Media practice.  With the exponential growth of online commerce, these agreements are the primary devices used to ensure that all of the critical aspects of the online experience, such as a Website's look and feel, navigational organization, access speed, and system integration, are clearly defined and expressed such that the Website owner can help ensure that traffic through its high-profile Website is pleasant, quick, smooth, without interruption, and hopefully profitable.  If negotiated correctly, web development and hosting agreements will provide predictability in the rough surf that makes up the virtual world of the Internet.  If negotiated incorrectly, they can be as dangerous as a jagged iceberg lurking just beneath the surface.

Although New Media practitioners are typically extremely well-versed in these contracts, not all New Media attorneys have developed an appreciation for the subtle dangers that exist.  This is due to the fact that these contracts have, by in large, only recently entered most practitioners vocabulary, let alone their form files.  The lack of understanding and familiarity with web development and hosting agreement is further compounded by the fact that these agreements can very often be technically particular to each client=s needs and, therefore, not subject to a Aone formula solution. 

Despite the fact that these agreements are often technically customized for each client's particular requirements, there are issues that New Media practitioners will always encounter when negotiating web development and hosting agreements. These issues will be separately addressed hereunder in the context of each of the particular agreements, i.e., web development contract and hosting contract.

Web Development Agreement

After a prospective Website owner has defined the design and functional elements that will make up its Website, it will face the task of converting its vision into a working Website. Although several online companies develop their Websites internally by having full-time employees proficient in the coding languages that allow, for example, users to search for their favorite book and, with a click, purchase it from the comfort of their homes, the vast majority of companies doing business online will have to hire third-party web development firms to reduce their vision into an interactive, reliable, storefront or experience that only exists in the virtual world of digital bits and bytes that make up the Internet. 

The Web Development Agreement is the primary, and often only, tool used to define the development, performance, ownership, and service expectations of the Website owner.  For this reason, it is critical to the success of the web development process that the attorney responsible for negotiating the terms of this agreement have a thorough understanding of the short and long-terms expectations of the Website owner.  Proficiency with the technical process, such as software interoperability and hardware baselines, is also extremely useful in ensuring that the stated goals are legally covered in the Web Development Agreement.

The Web Development firm will often present the Website owner with a standardized Web Development Agreement that it uses.  This agreement can take many forms, such as a one page definition of the Ascope of work attached to a twenty page exhibit entitled Standard Terms and Service, or a thirty page contract containing ten pages worth of definitions and disclaimers.  Whatever the form of this agreement, certain issues are always present and familiarity with how these issues are regularly addressed will help ensure that the New Media attorney secures the most favorable terms for its client.

Deliverables/Scope of Work

The Web Development Agreement must set forth, in as much detail as possible, the deliverables and/or scope of work that is to be accomplished by the developer.  This includes, but is clearly not limited to, a description of the functional and design specifications, user interface requirements, operational flowcharts, software descriptions, network accessibility information, interactive elements, information capturing capabilities, browser and platform compatibilities, e-commerce requirements, audio/video format requirements, linking structures, database seeding requirements, HTML standards, screen and file layouts, and general Alook and feel elements. 

It is counsel's obligation to ensure that a detailed description of all deliverables is set forth in the Web Development Agreement.  This is typically best accomplished by working closely with the client's chief technical officer, as well as the client's marketing and sales departments.  It should be noted that a failure to provide as much detail as possible in the description of deliverables can result in confusion during the development process, which will often times translate into delays and increased costs.

Project/Delivery Schedule

After the parties have defined and mutually understand the deliverables/scope of work, they will need to establish a realistic project/delivery schedule.  This schedule should set forth a variety of development milestones that, when reached, will trigger various actions, such as testing and acceptance periods and, thereafter, partial payment sequences.  For example, the parties can agree that phase one of the project, which will be marked by the completion of the coding of all functional components of the Website, should take no more than four weeks.  After the delivery of the phase one deliverables, the Website owner will then, for example, be given one week to test the functional components for defects or errors.  If the deliverables are thereafter accepted, then the Website owner is to tender partial payment to the developer. 

In establishing the project/delivery schedule, it is important that, in addition to establishing a realistic milestone schedule, the testing and acceptance procedures be detailed and that the time periods for any subsequent defect correction have a built in correlative payment reduction component.  In other words, if certain functional aspects do not test properly and the Website owner provides written notification to the developer of the defect, then the developer shall have, for example, only one week to correct the defect or, if no such correction is accomplished, the Website owner is entitled to an incremental reduction in total development costs.

Intellectual Property Ownership

The creation of a Website will often involve the creation of a variety of intellectual property rights.  From purely ornamental design elements to the structure, sequence and organization of database systems, user interfaces, and screen icons, the rights that are created can ultimately prove extremely valuable.  For this reason, the ownership of these rights must be clearly established in the Website Development Agreement.  Although nearly all developers will submit contract language that exclusively grants them ownership rights to their creations, the Website owner will often succeed in securing ownership of all of these rights through persistent negotiation.  In fact, under 17 U.S.C. Section 101 (Copyright Act of 1976), the creations can be designated "works for hire" in the Website Development Agreement.  Of course, this may turn out to be the stickiest point of all and can often result in a situation where the Website owner acquires rights to all customized creations, while the developer receives a license to use certain scripts and/or tools that it creates and that are likely to be recycled by the Website developers on future projects.

In addition to the creation of new intellectual property rights, the development of a Website will also involve the use of third-party intellectual property rights.  If, for example, an interface solution involves coding that has already been developed by the developer, then the developer will often grant a perpetual license to the Website owner to use this code.  In these circumstances, counsel for the Website owner should seek to secure the broadest possible scope of the license grant.  In particular, the Website owner should seek a license grant that will not create restrictions in how, where, and by whom the licensed rights can be used.  Licenses to software updates released during a specific period of time should also be sought.

On a related note, a Website owner that is obtaining a license to use particular software should secure from the licensor thereof a source code escrow, thereby enabling the Website owner to access the source code (human-readable coding language of software) under certain pre-defined circumstances, such as bankruptcy of the licensor or the licensor's failure to perform.  Source code escrows will help ensure that a Website owner will be able to maintain, error correct, and/or modify the software under circumstances where the licensor is itself unable.

Domain Name Registration

An often-times overlooked aspect of the Website Development Agreement is the domain name registration.  Where the developer will be registering the domain name, the Website owner should insist that it be identified as the owner of the domain name.  In addition, the Website owner should be designated as the administrative, technical, and billing contacts.

Confidentiality

The Website development process will typically involve an exchange of confidential information between the Website owner and the developer.  From business and marketing plans to functional specifications, the parties should agree to maintain the confidential nature of the other's confidential information.  This provision should define confidential information and set forth the obligations of the receiving party to not disclose or otherwise use the conveyed confidential information.

Disclaimers and Limits of Liability

Developers will often demand extreme liability disclaimers and/or limits.  For example, a developer can seek to disclaim liability for its misuse or failure to protect credit card or other user information provided by the Website owner.  A developer can also seek to limit its total liability under all circumstances (whether in tort or in contract) to the amount it is paid under the Website Development Agreement for any damage that results from its negligent and/or intentional acts and/or omissions. 

Such disclaimers are oftentimes overly broad and should therefore be carefully scrutinized by counsel to ensure that they do not expose the Website owner to unfair risk of loss.  For example, disclaimers or liability limits for intentional conduct should almost never be accepted.  In addition, broad disclaimers regarding permanent data loss should also almost never be accepted.

Warranties

Both parties should be required to warrant that the content utilized, including the software, links, meta-tags, frames, and business models, does not infringe the copyrights, trademarks, and/or patents of any third-party.  In this regard, the developer should specifically warrant that it has secured all necessary third-party licenses in third-party products that are incorporated into the site. 

In light of recent patents for business models (such as for Priceline.com's reverse-auction business model), this warranty provision should be carefully scrutinized.  In fact, where appropriate, the advice of patent counsel should be sought to ensure that third-party patent rights are not infringed.

A developer should warrant that the site will operate free from any substantial defects for a specific period of time, such as 90 days after final delivery.  In such cases, the developer should be required to warrant that any resulting error correction work around will not result in a substantial deviation from the Website owner's originally stated goals. 

Finally, the developer should be required to warrant that it has utilized the best industry practices in developing the site.  In this regard, the developer should warrant that it has utilized the most current industry procedures to ensure security from hackers and, among other things, the optimal loading-time of Web pages.  

Web Hosting Agreements

After a Website owner has completed the development of its Website, it is prepared to open up its virtual storefront in the intangible world that is the Internet.  To gain access, the Website owner will search for a suitable hosting facility that can, most importantly,  provide reliabile, secure, uninterrupted, high speed, and redundant access to the Internet.  The process of finding a suitable hosting facility will require an understanding of how hosting facilities are operated and the type of services that they will be relied upon to provide.

Not all hosting facilities are created equal.  For example, some hosting facilities may be relying merely upon one primary peering relationship.  Peers are essentially the backbone carriers of the Internet.  They are the high bandwidth cables that criss-cross the nation through strategic points in order to provide Internet connectivity. 

Although some peers are public (such as MAE-West, USC, and MAE-East), some peers are private and are owned and/or maintained by companies such as AT&T, MCI, UUNET, and many others.  Hosting facilities that maintain numerous public and private peering relationships are best suited for high traffic Websites.  Through such peering redundancy, the Internet connectivity and user traffic flow is more optimally managed such that downtime caused by Internet traffic or failed or disrupted backbones is reduced.  

After a certain amount of due diligence is completed and the Website owner has, with the assistance of counsel, located a suitable hosting facility, the parties will begin the process of determining the Website owner's particular service requirements.  If, for example, the Website owner is merely seeking access to the Internet and will itself be monitoring the performance of its server equipment and/or manipulating the content contained thereon, then the parties will be entering into a Colocation Agreement.  Establishing a proper collocation relationship can and typically does involve a variety of issues, such as backdoor direct remote access connections from the Website owner=s corporate facility to its collocated servers, special provisions regarding the Acages@ where the servers are located, provisions for satellite feeds directly into the servers, and technical maintenance and support issues.

However, in a typical hosting relationship, the hosting facility will provide the servers and Internet connection, as well as some software, whereas, in a collocation relationship the hosting facility will provide only Internet connectivity and a few other monitoring services.  Regardless of whether the hosting relationship is colocation or pure hosting, their are certain issues that counsel should always be prepared to address. 

Service Guarantees

Service guarantees provided by the hosting facilities are quite common with the larger hosting facilities.  Typically, these hosting facilities will guarantee that a hosted site will not be down and/or offline for a certain amount of time (such as 14 minutes) per month.  If such downtime is the result of traffic anomalies, failure to properly manage the servers, a connectivity disruption, and/or ineffective traffic load balancing, then the Website owner should be entitled to a reduction in the monthly hosting costs.

In addition to downtime guarantees, the hosting facility should provide guarantees regarding server response time and throughput capacity.  Slow response time and insufficient throughput capacity will result in decreased server speed and, thereby, translate into extended waiting periods for Web pages to load up on users= screens.  To prevent such occurrences, hosting facilities should guarantee that certain server response time and throughput capacity will be maintained at all times.

Bandwidth and Hardware Requirements

The Website owner will require that the hosting facility provide it with a certain amount of dedicated bandwidth at all times.  Bandwidth is the amount of data that can be transmitted in a fixed amount of time, i.e., the proverbial width of the pipe through which information will be required to travel through.  Such bandwidth should be fully dedicated, switched, and redundant through all Internet access points. 

The hosting facility should also be obligated to provide such additional or burstable bandwidth as may be required from time-to-time.  Although the Website owner will be required to pay for the use of such additional or burstable bandwidth, it will ensure that sudden bursts in user traffic are accommodated such that the site is still accessible. 

In addition to bandwidth requirements, the parties should agree upon the Website owner=s hardware requirements.  From the amount of storage space, processing power, and platform compatability that is required, to, when appropriate, the type of ports and switching and routing components that are needed, the Website Hosting Agreement should detail the Website owner=s hardware and middleware requirements.  Although this equipment is typically leased by the Website owner, hosting facilities can sell and/or offer to provide leases with purchase options to the Website owner.

Maintenance and Customer Support

Typically, hosting facilities will provide certain maintenance and customer support services.  Such maintenance and support services can include continued monitoring of the Website and the Internet in order to ensure proper load balancing and traffic routing, as well as a server=s operational status.  In order to provide for predictability in times of trouble, the parties can agree to an escalation process whereby certain pre-defined steps are taken to correct server and/or traffic anomalies.  The escalation process should always include immediate notification of the Website owner of the trouble identified by the hosting facility, as well as a tracking system that tracks the status and correction process taken for each error, and guarantees that only certified technicians will be used to correct any software-based server errors.

If the hosting facility will be providing user support, then the Web Hosting Agreement must also address the allocation of responsibility for the user inquiries, as well as the manner in which user responsibilities are handled.  For example, standards for timeliness of response to user inquiries and professionalism in handling user inquiries should be addressed to ensure that the Website owner=s reputation is not damaged by the rude or ambivalent behavior of a hosting facility=s customer support representative.

Finally, the hosting facility should be required to maintain and regularly (daily, weekly, and monthly) deliver to the Website owner server logs.  Such logs should contain information that is useful to the Website owner, such as traffic information, bandwidth information, error information, user information, network statistics (packet loss or latency and total uptime), server statistics, and any required protocol information. 

User Data/Content

Website hosting facilities will typically require that a Website owner represent and warrant that the site will not be used for any unlawful or inappropriate purposes.  Such unlawful or inappropriate purposes include, but may not be limited to, the infringement of any third-party intellectual property rights, the intentional disruption of other network users, the dissemination of obscene or libelous material, and/or the dissemination of spam.  Since the Website owner is typically responsible for the content that exists on its site, it will be asked to indemnify and hold the hosting facility harmless from and against any and all claims and/or damages that are created by its conduct.

The Website Hosting Agreement should additionally set forth the Website owner=s right to user data that is collected by the hosting facility.  This information, which is often times set forth in the server logs, is typically considered proprietary to the Website owner, as it can detail information that is critical to the continued success of the site.  Although some hosts will demand shared rights in the user data that it collects, a Website owner that does not insist upon exclusive ownership of these rights can be exposing itself to serious trouble.  After all, unless the Website owner maintains sole ownership of its user data, the hosting facility can, among other things, market the collected user data to the Website owner=s competitors.  This ownership right should be coupled with a non-disclosure provision.  The repercussions of having such user data subject to sharing with competitors is obvious and should be avoided whenever possible.

Termination Responsibilities

Most Website Hosting Agreements do not set forth the hosting facilities= post-termination responsibilities.  If not clearly addressed, this can expose the Website owner to extreme delay and/or hostage-like tactics that can forever ruin its reputation.  

To minimize any post-termination transition concerns, the Website Hosting Agreement should obligate the hosting facility to turn over the Website to its owner within a set number of days or hours after termination, regardless of whether the owner is itself in breach of the Website Hosting Agreement.  To prevent any chance of delay in this transition, it is advisable that the Website owner require that the hosting facility provide it with daily back-ups of the entire site.  Clearly, if the owner is itself in possession of a back-up copy of the entire site, then the chances of any post-termination delays are greatly minimized.  Of course, to completely diminish any transition delays, the Website owner should also first ensure that it is listed as the technical, billing, and administrative contact for its domain name registration. 

Conclusion

Website hosting and development contracts are critical to the success of a Website.  They define all of the operational and functional elements that make up a Website and provide predictability and allocation of responsibility for errors and downtime.  It is incumbent upon New Media attorneys to ensure that all technical and legal issues and contingencies are addressed such that the online experience is seamless, smooth, and error-free, thereby maximizing the potential for profitability and success.

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