By Seyamack Kouretchian Special Counsel to The Gulotta Law Group, PLLC
New York Law Journal
Monday, March 27, 2000

WEB DEVELOPMENT and hosting contracts are the cornerstone of today's new media practice. With the exponential growth of on-line commerce, these agreements are the primary devices used to ensure that all of the critical aspects of the on-line experience, such as a Web site's "look and feel," navigational organization, access speed and system integration, are clearly defined and expressed. In this way the site owner can help ensure that traffic through its high-profile Web site 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 such attorneys have developed an appreciation for the subtle dangers that exist. This is due to the fact that these contracts have, by and large, only recently entered most practitioners' vocabulary, let alone their form files. The lack of understanding of, 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 "one formula" solution.

Despite this last point, however, there are issues that will always be encountered when negotiating Web development and hosting agreements. These issues will be separately addressed below.

After a prospective Web site owner has defined the design and functional elements that will make up its site, it faces the task of converting its vision into a working Web site. Although several on-line companies develop their Web sites 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 on-line will have to hire third-party Web development firms to reduce their visions to an interactive, reliable storefront or experience existing only in the virtual world of digital bits and bytes that is 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 Web site 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 Web site 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 Web site owner with a standardized Web development agreement that it uses. This agreement can take many forms, such as a one-page definition of the "scope of work" attached to a 20-page exhibit entitled "Standard Terms and Service," or a 30-page contract containing 10 pages' worth of definitions and disclaimers. Whatever the form, certain issues are always present, and familiarity with how they are regularly addressed will help ensure that the attorney secures the most favorable terms for the 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 "look and feel" elements.

It is counsel's obligation to ensure that a detailed description of all deliverables is set forth in the 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. A failure to provide as much detail as possible in the description of deliverables can result in confusion during the development process, which will oftentimes 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 Web site, should take no more than four weeks. After the delivery of the phase one deliverables, the site owner will then, as another example, be given one week to test the functional components for defects or errors. If the deliverables are thereafter accepted, then the site owner is to tender partial payment to the developer.

In establishing the project/delivery schedule, it is important that, in addition to fixing 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 Web site 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 Web site owner is entitled to an incremental reduction in total development costs.

Intellectual Property Ownership. The creation of a Web site will often also 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, their ownership must be clearly established in the Web development agreement.

Although nearly all developers will submit contract language that exclusively grants them ownership rights to their creations, the Web site owner will often succeed in securing ownership of all of these rights through persistent negotiation. In fact, under 17 U.S.C. §101 (Copyright Act of 1976), the creations can be designated "works for hire" in the Web development agreement. Of course, this may turn out to be the stickiest point of all and can often result in a situation where the Web site 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 it on future projects.

In addition to the creation of new intellectual property rights, the development of a Web site 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 Web site developer, then it will often grant a perpetual license to the Web site owner to use this code. In these circumstances, counsel for the owner should seek to secure the broadest possible scope of the license grant. In particular, the 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 Web site owner that is obtaining a license to use particular software should secure from the licensor a source code escrow, thereby enabling the site owner to access the source code (human-readable coding language of software) under certain pre-defined circumstances, such as bankruptcy of the licensor or its failure to perform. Source code escrows will help ensure that a Web site owner will be able to maintain, error correct and/or modify the software under circumstances where the licensor is itself unable to do so.

Domain Name Registration. An oftentimes overlooked aspect of the Web development agreement is the domain name registration. Where the developer will be registering the domain name, the site owner should insist that it be identified as the owner of the domain name. In addition, the Web site owner should be designated as the administrative, technical and billing contacts.

Confidentiality. The Web site development process will typically involve an exchange of confidential information between the Web site 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 of, or failure to protect, credit card or other user information provided by the Web site 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 development agreement for any damage that results from its negligent and/or intentional acts and/or omissions.

Such disclaimers are often overly broad and should therefore be carefully scrutinized by counsel to ensure that they do not expose the Web site owner to unfair risk of loss. Disclaimers or liability limits for intentional conduct, as well as broad disclaimers regarding permanent data loss, should 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), 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 Web site 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.

After a Web site owner has completed the development of its site, it is prepared to open up its virtual storefront. To do so, the owner will search for a suitable hosting facility that can, most importantly, provide reliable, secure, uninterrupted, high-speed and redundant access to the Internet. The process of finding a suitable hosting facility requires an understanding of how such facilities are operated and the type of services that they will be relied upon to provide.

Not all hosting facilities are created equal. Some may be relying merely upon one primary peering relationship. Peers, essentially the backbone carriers of the Internet, 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), others 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 Web sites. 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 Web site owner has, with the assistance of counsel, located a suitable hosting facility, the parties will begin the process of determining the site owner's particular service requirements. If, for example, the 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 on it, then the parties will be entering into a Collocation Agreement. Establishing a proper collocation relationship can and typically does involve a variety of issues, such as backdoor direct remote access connections from the Web site owner's corporate facility to its collocated servers, special provisions regarding the "cages" where the servers are located, provisions for satellite feeds directly into the servers, and technical maintenance and support.

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 collocation or pure hosting, their are certain issues that counsel should always be prepared to address.

Service Guarantees. Service guarantees are quite common with the larger hosting facilities. Typically, these 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 Web site 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, which translates 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 Web site 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. 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 Web site owner will be required to pay for the use of additional or burstable bandwidth, it will ensure accommodation of sudden bursts in user traffic so that the site will remain accessible.

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

Maintenance and Customer Support. Typically, hosting facilities will provide certain maintenance and customer support services, which can include continued monitoring of the Web site 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: (i) immediate notification to the site owner of the trouble identified by the hosting facility, (ii) a tracking system that tracks the status and correction process taken for each error, and (iii) 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 hosting agreement must also address the allocation of responsibility for 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 those inquiries, should be addressed to ensure that the Web site 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 server logs to the site owner. These logs should contain information that is useful to the owner, such as traffic, bandwidth, error and user information, network statistics (packet loss or latency and total uptime), server statistics, and any required protocol information.

User Data/Content. Web site hosting facilities will typically require that a Web site 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 site 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 hosting agreement should additionally set forth the Web site owner's right to user data that are collected by the hosting facility. This information, which is oftentimes set forth in the server logs, is typically considered proprietary to the Web site owner, as it can detail data that are critical to the continued success of the site.

Although some hosts will demand shared rights in the user data that they collect, a site owner that does not insist upon exclusive ownership can be exposing itself to serious trouble. After all, unless the site owner maintains sole ownership of its user data, the hosting facility can, among other things, market the collected user data to the site 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 hosting agreements do not set forth the hosting facilities' post-termination responsibilities. If not clearly addressed, this can expose the Web site owner to extreme delay and/or hostage-like tactics that can forever ruin its reputation.

To minimize any post-termination transition concerns, the hosting agreement should obligate the hosting facility to turn over the Web site to its owner within a set number of days or hours after termination, regardless of whether the owner is itself in breach of the hosting agreement. To prevent any chance of delay in this transition, it is advisable that the site owner require the hosting facility to 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 site owner should also first ensure that it is listed as the technical, billing and administrative contact for its domain name registration.

Web site hosting and development contracts are critical to the success of a Web site. They define all of the operational and functional elements that make up a site 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 on-line experience is seamless, smooth and error-free, thereby maximizing the potential for profitability and success.