QUICK ANSWER

A software development agreement in India defines how a tech project will be executed, who owns the code, and how risks are shared between the developer and the client. The most common legal risks arise from unclear project scope, poorly defined IP ownership, weak confidentiality and indemnity clauses, and absence of detailed milestones or acceptance criteria. Many disputes also stem from using foreign templates that don’t align with Indian contract law or taxation frameworks.

To avoid these risks, every agreement should clearly outline deliverables, payment structure, code ownership, change management, and liability limits. Clauses on confidentiality, warranties, and dispute resolution must be adapted to Indian law and backed by enforceable mechanisms like arbitration with a defined seat and governing law clause.

In short, a software development agreement is a business safeguard, not just a formality. The more precise it is, the smoother the project runs and the lower your exposure to litigation.

For ready-to-use, lawyer-vetted templates drafted under Indian law, visit SolvLegal.com. I have also shared a short version of this post on Reddit.

INTRODUCTION

India’s software development sector has evolved from being a support service to becoming one of the primary drivers of the country’s digital economy. According to the Ministry of Electronics and Information Technology (MeitY), the digital economy contributed 11.74 percent to India’s national income in 2022–23 and is projected to reach 13.42 percent by 2024–25. This shift reflects how technology and software are now at the core of business operations across industries from fintech and logistics to healthcare and government services.

Complementing this growth, the Department of Commerce has reported that India’s combined exports of goods and services reached USD 682.59 billion between April 2024 and January 2025, with the services segment, particularly IT and software, forming a major share. These figures underline how software development is no longer confined to large tech companies it now powers MSMEs, startups, and even government-backed digital initiatives through outsourced development models and project-based collaborations.

But with that rapid scaling comes a new layer of legal complexity. Every custom-built software, mobile application, or enterprise solution begins with a development agreement. It is the backbone that defines ownership of intellectual property, distribution of liability, scope of work, timelines, and confidentiality. Yet, in practice, many companies still treat this contract as standard paperwork, often relying on recycled templates found online or poorly adapted versions of foreign drafts.

The result is predictable: disputes over code ownership, delayed deliveries, data breaches, and breach of confidentiality are on the rise. Most of these could have been avoided with a clear and well-drafted agreement tailored to Indian law. As technology projects increasingly cross borders and involve remote teams, understanding how to structure a software development agreement in India has become as critical as the code itself.

For corporate lawyers, founders, and in-house counsels, it’s no longer about just inserting boilerplate clauses. It’s about managing risk, defining accountability, and ensuring that what is built and the rights around it are legally protected.

COMMON LEGAL RISKS IN SOFTWARE DEVELOPMENT AGREEMENTS

Software development projects, no matter how well planned, often run into trouble when the contract fails to capture commercial realities. A development agreement should anticipate those risks rather than react to them. The most common issues in India arise around liability, project delays, intellectual property, and undefined scope of work.

1. Insurance and Liability Gaps

A surprisingly large number of service agreements in India skip over insurance coverage. In software projects, liability does not only mean financial loss; it also includes data breaches, cybersecurity failures, and third-party claims. Developers usually prefer to cap their liability to the total contract value, while clients expect full recovery if their platform goes down or data is leaked. Without clarity, the default position under Indian contract law often leaves both parties disputing damages after the breach rather than managing risk before it.

Good practice is to define clear limits of liability, require professional indemnity or cyber insurance where appropriate, and exclude indirect losses explicitly. Many clients also insist on carve-outs for confidentiality and IP breaches, which is commercially reasonable.

2. Timelines and Delays

A software agreement without a well-defined timeline is an open invitation for disputes. Delays usually stem from poor communication, scope expansion, or client-side dependencies that the developer cannot control. If milestones, dependencies, and testing procedures are not documented, the project quickly turns into a blame game.

Indian courts tend to uphold timelines when they are unambiguous and supported by a clear Statement of Work (SOW). The agreement should therefore specify milestone dates, approval processes, and consequences of delay such as liquidated damages or withholding payments. A practical approach is to include a “mutual extension clause” that allows a short grace period if both parties agree in writing, avoiding unnecessary terminations.

3. Code Ownership and Intellectual Property

One of the most litigated areas in software contracts is intellectual property ownership. By default, the creator of code is the owner, unless rights are assigned through a written contract. This often surprises clients who assume that paying for the project means owning the software.

Under the Indian Copyright Act, 1957, ownership must be transferred in writing for it to be legally effective. The development agreement should specify whether the code is being assigned entirely, licensed for limited use, or shared with certain restrictions. For outsourced or hybrid models, IP assignment should also cover derivative works, updates, and integrations. Developers, on the other hand, may retain reusable libraries or frameworks they created independently, provided this is transparently defined.

4. Scope Creep and Undefined Deliverables

Scope creep is the silent killer of most software projects. When the Statement of Work (SOW) or deliverables list is vague, every new feature request becomes a potential conflict. The developer ends up absorbing unbilled work, while the client feels entitled to “small tweaks” that cumulatively delay delivery.

The safest route is to attach a detailed SOW that breaks down every feature, integration, and output. Change management procedures should require both parties to agree on additional time or cost before new work begins. A good contract will even specify how testing, acceptance, and feedback cycles are to be handled so that performance obligations are objectively measurable.

5. Confidentiality and Data Protection

Software projects often involve access to sensitive business data, user information, or proprietary algorithms. Breach of confidentiality can lead to regulatory exposure under the Information Technology Act, 2000, and rules relating to data protection. The agreement should have a detailed confidentiality clause covering data handling, storage, transfer, and return after project completion.

Where personal data is involved, both the client and developer should comply with the Digital Personal Data Protection Act, 2023, which imposes obligations on entities that process personal data in India. Confidentiality clauses should also survive termination for at least two to three years, ensuring continuity of obligations after the project ends.

6. Termination and Incomplete Handovers

In software development, termination rarely ends neatly. The developer might stop work after non-payment, or the client may terminate for delay. Without defined procedures for handover and escrow, valuable code and documentation often remain inaccessible.

A sound termination clause should outline notice periods, payment settlements, and the process for delivering code, credentials, and project materials. Including a transitional support obligation for a short period after termination can help the client onboard a new developer smoothly. Escrow arrangements are also worth considering for high-value or long-term projects.

7. Jurisdiction and Dispute Resolution

Jurisdiction clauses are often ignored until the relationship breaks down. In cross-border development projects, it is common to see Indian developers submitting to foreign courts or arbitration without realising the enforcement challenges. The governing law, jurisdiction, and seat of arbitration should be chosen deliberately and not left as boilerplate text.

For purely domestic projects, Indian law and local arbitration work best. For international collaborations, it helps to align dispute resolution with enforceability for example, choosing Singapore or London as arbitration seats for clients with foreign investments. The key is clarity and mutual enforceability, not convenience.

HOW TO AVOID THESE RISKS

Drafting a software development agreement requires more than adding a few standard clauses. It is about anticipating business risks and aligning them with legal protections.

1. Define a Clear Scope of Work (SOW)

Start by ensuring every feature, integration, and deliverable is documented. Avoid generic statements like “the developer will provide software as per client requirements.” The SOW should mention timelines, dependencies, third-party tools, and acceptance criteria. This prevents most disputes before they start.

2. Link Payments to Milestones

Instead of fixed lump-sum payments, tie compensation to deliverables. This encourages timely performance and gives the client control without micromanaging the developer. Include a short review period for each milestone to avoid ambiguity about acceptance.

3. Clarify Intellectual Property Ownership

State whether the client will own the entire code, a specific build, or a limited-use license. If reusable modules or libraries are excluded from assignment, mention them specifically. Always execute a written IP assignment upon completion to ensure ownership is enforceable under Indian law.

4. Include Indemnities and Limitations of Liability

Define indemnity obligations for data breaches, IP infringement, or third-party claims. Cap liability reasonably typically up to the contract value but carve out exceptions for confidentiality or wilful misconduct. This balance protects both parties.

5. Set Insurance and Performance Obligations

For medium and large projects, requiring the developer to maintain professional indemnity or cyber insurance is increasingly common. It provides financial cover in case of data loss or breach. Clearly state the minimum coverage amount and the obligation to furnish proof of policy renewal.

6. Establish a Change Management Process

Scope changes are inevitable in tech projects. A clear process for change requests ensures cost and timeline adjustments are documented before implementation. Both parties should sign off on each change, which keeps billing transparent and protects against disputes.

7. Add a Dispute Resolution Clause

Disputes are less about who is right and more about where and how they are resolved. Clearly define governing law, jurisdiction, and mode of resolution. Arbitration remains the preferred route for commercial contracts in India under the Arbitration and Conciliation Act, 1996. For smaller projects, mediation before arbitration often works better to preserve relationships.

HOW THE SUPREME COURT HAS SHAPED SOFTWARE DEVELOPMENT AGREEMENTS IN INDIA

Indian courts have been instrumental in defining how software transactions are interpreted under contract, IP, and tax laws. The following Supreme Court judgments continue to guide how software development agreements (SDAs) are drafted, especially around ownership, taxation, and licensing.

1. Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC)

The Supreme Court held that payments made by Indian companies to foreign software suppliers for the use of off-the-shelf software do not qualify as “royalty” under Section 9(1)(vi) of the Income Tax Act. Since there was no transfer of copyright, these payments were not taxable as royalty income.

Why this matters for an SDA: This case highlights the critical difference between the use of software and ownership of intellectual property. When drafting SDAs, it is essential to clearly state whether the client is receiving a limited license to use the software or a full assignment of ownership. This directly impacts how the payment is structured, disclosed, and taxed.

2. Tata Consultancy Services Ltd. v. State of Andhra Pradesh (2004) 271 ITR 401 (SC)

The Court ruled that software supplied on a physical medium such as a CD or disk is considered “goods” under sales tax law, as it can be bought, sold, stored, and transferred.

Why this matters for an SDA: This decision affects how software deliverables are classified for taxation. If software is provided on a physical medium or has independent utility, it may be treated as goods rather than a service. The classification determines applicable GST, warranty obligations, and compliance under the Sale of Goods Act, 1930.

3. Commissioner of Service Tax, Delhi v. Quick Heal Technologies Ltd. (2022) 448 ELT 161 (SC)

The Supreme Court held that the supply of packaged antivirus software, including the license key and updates, constituted a sale of goods, not a service. The end user received full control over the product, making it a deemed sale.

Why this matters for an SDA: Many SDAs include ongoing support or maintenance. This judgment clarifies that when the end-user is given control over the software, the transaction leans towards a sale rather than a service. The structure of your payment terms and support clauses must reflect this distinction to ensure correct tax treatment.

BRINGING IT ALL TOGETHER

A software development agreement is not just a commercial formality. It’s the framework that defines who owns the code, who bears the risk, and how value is protected on both sides. In India’s fast-moving tech ecosystem, where outsourcing and product development often blur, even one vague clause can turn into a costly dispute over intellectual property, delayed delivery, or payment default.

The best protection lies in clarity. Spell out the scope of work in measurable terms, define ownership of source code and deliverables, and set out realistic timelines and approval milestones. Build in clauses for limitation of liability, indemnity, confidentiality, and dispute resolution that reflect Indian legal realities, not borrowed boilerplate. The strength of a contract is not in its length but in how clearly it distributes responsibility.

As India’s digital economy grows under initiatives like Digital India and Startup India, the number of software contracts will only rise. Those who draft with foresight will save time, money, and reputation. A software development agreement is, in essence, your first act of risk management.

For lawyers and founders alike, the goal should be to translate commercial understanding into enforceable legal structure. Every clause should serve a business purpose. That is what separates a protective contract from a perfunctory one.

At SolvLegal, we believe every contract should make innovation safer, not harder. Because when the law and technology speak the same language, growth follows naturally.

CONCLUSION

A software development agreement is not just a commercial formality. It’s the framework that defines who owns the code, who bears the risk, and how value is protected on both sides. In India’s fast-moving tech ecosystem, where outsourcing and product development often blur, even one vague clause can turn into a costly dispute over intellectual property, delayed delivery, or payment default.

The best protection lies in clarity. Spell out the scope of work in measurable terms, define ownership of source code and deliverables, and set out realistic timelines and approval milestones. Build in clauses for limitation of liability, indemnity, confidentiality, and dispute resolution that reflect Indian legal realities, not borrowed boilerplate. The strength of a contract is not in its length but in how clearly it distributes responsibility.

As India’s digital economy grows under initiatives like Digital India and Startup India, the number of software contracts will only rise. Those who draft with foresight will save time, money, and reputation. A software development agreement is, in essence, your first act of risk management.

At SolvLegal, we believe every contract should make innovation safer, not harder. Because when the law and technology speak the same language, growth follows naturally.

FREQUENTLY ASKED QUESTIONS

1. Does a client automatically own the software once it’s delivered?

No. Ownership depends on what the contract says. Unless the agreement includes an express assignment of intellectual property, the developer retains ownership while the client only gets a licence to use it.

2. Should a software development agreement include tax clauses?

Yes. These determine whether the transaction is treated as a sale or service and help both parties handle GST and withholding tax correctly. The Engineering Analysis and Quick Heal rulings underline how vital this clarity is.

3. Can software be treated as “goods” in India?

Yes, if it is delivered on a tangible medium or has independent utility, as held in Tata Consultancy Services v. State of Andhra Pradesh (2004). For cloud or SaaS-based projects, it is generally classified as a service.

4. How can developers protect their pre-existing code?

By including a clear clause stating that all background IP, source code, and frameworks developed before the project remain the developer’s property, with only limited rights given to the client for the final output.

5. What’s the safest dispute resolution mechanism for SDAs?

Arbitration with a defined seat in India, a governing law clause, and a clear procedure for escalation. It reduces uncertainty and ensures the matter stays within the Indian legal framework.

RELATED LINKS

1. Difference Between Trademark, Copyright and Patent (Explained Easily)

2. Term Sheets & Shareholders’ Agreements 2025: Legal Clauses Indian Founders Often Overlook

ABOUT THE AUTHOR

Aman Patel is a corporate lawyer focusing on company law, commercial agreements, and compliance strategy. He advises on contract drafting, business structuring, and legal due diligence for growing companies. A graduate of Symbiosis Law School, Hyderabad (B.A. LL.B.), he contributes his practical experience to SolvLegal’s legal resources for professionals and businesses.

DISCLAIMER

The information provided in this article is for general educational purposes and does not constitute a legal advice. Readers are encouraged to seek professional counsel before acting on any information herein. SolvLegal and the author disclaim any liability arising from reliance on this content. Connect with SolvLegal on LinkedIn.