White SW Computer Law
Intellectual Property, Information Technology & Telecommunications Lawyers
Melbourne Office - PO Box 452, COLLINS STREET WEST Victoria 8007 Australia
Sydney Office - GPO Box 2506, SYDNEY New South Wales 2001 Australia
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Email: wcl@computerlaw.com.au Internet: http://www.computerlaw.com.au

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The United States of America is a common law country, as is Australia. Hence some considerations apply with respect contracts as they do in Australia. However, there are some peculiarities of which software developers should be aware. Please note that this is not an exhaustive list and is no substitute for obtaining legal advice for your particular circumstances.

Pricing Issues

The first mistake that is often made by the developer with negotiating contracts is to agree on the price before the terms are agreed. Conversely from a customer's perspective, price should be agreed as soon as possible with the view to then including more onerous terms and conditions (which will either involve additional risk or additional cost for the developer).

If price has been agreed, the developer will need to argue each time additional obligations or risk are introduced as to why that increases the price. This can be a tedious and unhelpful task. Accordingly, it is easier if all the customer's requirements are set out and then the price is provided. Tendering is a separate art in itself to which different rules may apply.

Litigation Costs

The next thing to note about the USA is that litigation is very expensive (as it is in Australia ' although it is comparatively more expensive in the USA). Further, with the exception of statute granted costs, there is ordinarily no entitlement to legal costs for the successful party without express agreement. This different to Australia in which ordinarily the unsuccessful party pays the other party's costs, based on a Scale of Costs used by the Courts. In practice, this amount is often less than 50% of the actual costs incurred but it does help. Therefore, USA based clients will seek the following clauses:

  1. A broad based indemnity which includes an entitlement to costs and other things such as intellectual property indemnity.
  2. Some sort of alternative dispute resolution clause.

Indemnity Clauses

There is an important difference, which arises in contracts and that is the difference between an ordinary breach of a contract and breach of an indemnity (which is a special kind of obligation).

For an ordinary breach of contract there are three important limiting factors:

For breach of a contract, action must be commenced within the Statute of Limitation period. In Australia, this is usually 6 years from the loss or damage arising. This does not apply for an indemnity which is a continuing obligation for the duration of the contract.

Liability for a breach of contract is confined to usual contractual remedies. In relation to an assessment of any damages payable for a breach of a warranty, a person who breaches a warranty is only responsible for loss and damage which is foreseeable and arises due to the breach. This is not the case with indemnities. Indemnities can therefore extend into unexpected circumstances where a mere warranty will not.

Indemnities are also normally drafted much more widely to cover third parties and circumstances beyond the ordinary breach circumstances. In some circumstances they apply even when there is no breach of contract by the party required to pay at all! The triggering event may well be the act of a third party. A well known instance of this is guarantees in which one party indemnifies another party for the act, default or breach of a third party.

The increasing level of patent litigation in the USA and Australia means that any software developer who takes on unlimited liability with respect to patent infringement is bold. This risk is in most cases not an insurable risk.

ADR Clauses

The options with respect to alternative dispute resolution clauses include:

  • mediation;
  • expert determination; and
  • arbitration.

Mediation is the appointment of a third party to attempt to resolve the matter by meeting with the parties together and alone to come up with a workable solution. It is consent based and hence considered by many to be quite useful.

Expert determination is where an expert is appointed with instructions and requested to make a decision. The expert's decision is final and binding and may preclude subsequent litigation or arbitration.

Arbitration is a more of a Court-like process where the parties ventilate and obtain a decision for their dispute in private. An arbitration decision obtained in the USA is enforceable here whereas a judgment of a US Court is not. Therefore if you wish to commence action, an arbitration clause specifying where the location of the arbitration is to occur is very useful.

Other Issues

Other useful clauses are escrow and limitation of liability provisions but that is beyond the scope of today's discussion. The protection of copyright in the USA is also a little bit different and worthy of another discussion.


Contract law in Australia and the USA is very similar and it is easy to think that one contract will suit transactions in both countries. Unfortunately, if you do not custom your contracts for each country you do business in, you may find out when the contract is put to the test in a dispute that it provides little or no protection in important areas that commonly arise during a dispute.



© White SW Computer Law 2005

This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.

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