As companies worldwide outsource a large part of their software development work to Indian service providers, a key issue that arises relates to ownership of intellectual property. When a customer hires a vendor to develop intellectual property, he would generally expect to have complete ownership of the intellectual property that is developed.

Most software companies in India are comfortable with this idea—that the customer would own intellectual property developed by them under a software development agreement. Customers must however ensure that they obtain complete ownership over the same under applicable intellectual property laws.

Many U.S. companies follow a similar script when dealing with intellectual property issues in a software development contract. They throw in their standard “works for hire” clause. This is based on a U.S. copyright law concept that if a person makes a work for another, the other person becomes the owner of the works. Accordingly, these contracts often merely state that the contract is a works-for-hire and that the customer would be the owner.

The main reason for this approach is the presumption that the U.S. law would govern all aspects of the software development contract because it is mentioned so in the contract. If this were so, the above approach would largely be acceptable. However, because of the way private international law applies to transactions involving parties from more than one country, the mere mention in a contract that it would be subject to the U.S. law may not conclusively settle the issue.

Under private international law rules, the law governing an issue relating to ownership of property is likely to be the law having the closest nexus to the transaction. There is a reasonable chance that this is likely to be the law where the intellectual property is developed, in other words, India. The fact that the parties have agreed that U.S. law would govern the contract would be a relevant factor in determining the applicable law but certainly not the conclusive factor. Consequently, one would need to consider India’s laws on intellectual property ownership. Under Indian law, the works for hire concept does not apply to a situation where the author of the works is an independent party—it applies only in an employer-employee situation. This means that to begin with, an Indian software company that develops software for a U.S. corporation would be the owner of that software.

One would therefore need to obtain an assignment of the intellectual property in the software, a concept that is perfectly acceptable. However, in drafting the assignment language, certain unique requirements under Indian law need to be taken care of. For example, under Indian law, an assignment of copyright is presumed to be for five years and relate only to the territory of India. However, it is possible to overcome this presumption in the contract by using language such as “worldwide” and “perpetual.”

Further, Indian laws also provide that an assignment will lapse if the assignee does not exercise the rights under the assignment within one year. It is not quite clear as to what is required to be done in order to exercise these rights. Although this can also be overcome, possibly by the use of the word “perpetual”, perhaps, it is better to include specific language in this regard. As Indian companies move up the value chain they are becoming more conscious of intellectual property issues than before. Many international customers seek to obtain rights over the source code as well. Indian companies are not necessarily inclined to grant such rights and this often becomes a contentious negotiation issue.

Further, Indian companies may have pre-existing intellectual property that they could use in the development process. Customers need to be sure that they receive sufficient rights relating to the use, modification and commercial exploitation of the intellectual property.

At the same time, they need to be fair to the vendor’s legitimate objective of not giving away too much without receiving additional consideration. The key lesson from all of this is that one cannot assume that by specifying a U.S. law as the governing law of the contract and throwing in the standard works for hire clause, intellectual property issues relating to ownership would be adequately taken care off. In many situations, Indian laws may be applicable and if so, conditions for assignment under Indian laws must be carefully adhered to.