Your company wants to develop a prototype directly with or even specifically for a business partner. Or your company has already developed a new machine or written new software and now wants to test one or more prototypes together with business partners or deliver them to potential customers as test objects.
Depending on which phase your company is in regarding a prototype, different legal aspects have to be considered. In this blog post we will highlight the phase of developing a prototype.
Typical contract types for the development of prototypes with a business partner
As soon as a prototype is developed not only within your company ("in-house"), the legal relationships with the persons and companies involved must be precisely defined. Contracts for the development of prototypes are usually to be qualified as contracts for work or orders. In certain cases a mixture exists. Within the framework of a so-called contract for work and services, the creation of a concrete object is owed. The object (legally the "work") must have the contractually agreed or usually expected characteristics. In the case of a contract, on the other hand, only careful action but not concrete success is owed.
Frequently, "research and development contracts" (short "R&D") are concluded for the development of prototypes. The content of such R&D contracts can vary greatly, which is why a close examination of such contracts is essential.
There are two main points that are decisive for you as a company: a) the performance obligations of you and your business partner and b) the assignment of the rights to the prototype or the underlying intellectual property rights ("IP").
Definition of the performance obligations
Before signing a contract, ask yourself whether you or your business partner really need to deliver concrete success or in which areas only careful action is due. Depending on the situation, it is crucial that your business partner (e.g. a supplier of a software component of your prototype) has to deliver a concrete object. This must be recorded in the contract. If, on the other hand, you are working together with a research partner, it might be useful to agree on only careful action and e.g. intermediate goals. However, it is not advisable to agree on a concrete "end product" in research activities.
It is not uncommon in practice for a developing company to find that it is "obvious" that a project is only in the "development phase" and therefore it cannot be clear whether a machine or software will then work as planned. However, if the contract is designed as a contract for work and services, this does not correspond to this idea, which can lead to considerable liability risks for the developing company.
Assignment of the Intellectual Property Rights ("IP")
In the long term, the clear allocation of the intellectual property rights ("IP") associated with the prototype is extremely important for prototype development contracts. In particular, patents for manufacturing processes and products, software copyrights and secret know-how (e.g. about processes) must be clearly assigned and secured.
The use of the corresponding intellectual property rights can be defined by (reciprocal) licenses. Often, however, it is advisable to define the license terms only after the development has been completed, because only then will the properties and intended use of the product or software be known in detail.