August 4, 2021

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Everything you need to know about Proof of Concept agreement

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This article is written by Nirali Shah who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Table of Contents

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Proof of Concept (‘PoC’) can also be called as ‘Proof of Principle’, it can be explained as a realization of a particular method/ idea in direction to demonstrate or determine its feasibility or determination or demonstration in principle with the aim of verifying that the concept or theory of the particular agenda has some practical potential.

A Proof of Concept is an exercise in which focus is on determining whether an idea/ agenda can be turned into a practicality/ reality. For example, in Software Development, PoC would examine whether an idea is practically feasible from a technology viewpoint. A PoC is usually small, crisp study and incomplete.

In simple words, PoC is a plan to see if a product, idea or design can be transformed into reality. 

Although this generic definition can vary according to the product, industry and other factors, PoC can help check the feasibility of a concept before it is put into production. It does not include factors such as market for a product, best production processes etc.

An important aspect to keep in mind is that PoC does not focus on deliverables but on the feasibility of a project. The intention of a proof of concept is not to explore market demand for the idea, it is also not intended to determine the most efficient production techniques. Rather, its focus is to test whether the idea is practical in nature — giving the involved personnel in the proof-of-concept exercise an opportunity to explore the idea’s potential to be developed or built.

A few aspects that should be kept in mind while drafting a Proof of Concept agreement and they are:

  • Duration of the said agreement.
  • Clearly stated criteria for acceptance and success pf the product or service.
  • On what basis the Proof of Concept shall be evaluated.
  • How to move forward if the Proof of Concept proves to be successful or unsuccessful.

Since various sectors use PoC agreements, there are some standard clauses that are imperative to the agreement. These clauses can be found in almost every PoC agreement.  

Because of its immense importance, PoC is an integral part of a product’s development. It can help in identifying problems and thus save valuable resources. A product passed through PoC has a better chance of being successful. This is because thorough testing is done in PoC and thus reduces business exposure to risk. 

This is even more important in today’s competitive business world. Some of the advantages of PoC are:

  • Saving businesses time and resources
  • Determining the feasibility of the market
  • Identifying technical issues and providing solutions
  • Improving the product
  • Providing an alternative through market research
  • If you want to add new technology to your product;
  • Trying to improve an existing technology;
  • Using a third party solution for your project.

Definitions

This clause includes the definitions of all the various terms belonging to the purpose, parties, intention of the agreement. This clause is required to explain clarity of such specific words’ exclusivity for the agreement. This clause is usually the first clause in the agreement.

This clause also establishes the scope of certain terms to avoid any ambiguity and uncertainty that may arise in future.

Duration

This clause specifies the validity of the Agreement. The time period for which the Proof of Concept agreement shall be carried out or stay active. This clause mentions the exact dates of the effectiveness of the agreement and when the agreement is to come to an end or to be terminated.

Termination

The ‘Termination clause’ is an important clause found in any form of legal agreement that allows for the agreement to be ended or terminated, under circumstances specified or breach of duties. The termination clause is typically placed along with the terms & conditions agreement. 

Performance Obligation

This clause includes all the details of the product/service for which the agreement has been executed. The performance clause differs from sector to sector as different kinds of products with different features and different results are manufactured by these sectors.

Even though, there are various parts where the manufacture various products, the questions are answered by the general performance clause, which are commonly in use. 

Example of questions are:

  1. Who is the target audience?
  2. What type of product/ service would the agreement offer?
  3. What is the main purpose for the manufacturing the same?
  4. What are the desired results from the usage of the product or service?
  5. How can any accidents or mishaps be avoided? 
  6. What are the precautionary measures that can be followed?

General performance clause answers all these questions regarding the product or service mentioned in the agreement. If any information which is exclusive to a particular product or service then that shall also be stated in this clause itself.

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Ownership

The ownership clause is one of the most important clauses in the Proof of Concept Agreement and that is imperative to the agreement. This clause declares that notwithstanding anything mentioned in any other clause the rights to the product or service mentioned in the agreement belong to its manufacturer. 

The rights mentioned above include all rights such as copyright, patent, trademark, trade secrets and any other intellectual property rights. It includes all copies, modifications, changes made in the product or service by either of the parties to the agreement. 

Any new product/service that is resultant from the existing product or service mentioned in the agreement that shall also be the property of the manufacturer and no receiving party shall have any obligations or rights on it. The receiving party shall use the product or service only in the manner as specified in the general performance clause of this agreement; however, if the manufacturer creates or invents any other product or service to aid such usage or add value to the mentioned product or service then the additional product or service also belongs to the manufacturer along with all its rights.

Payment Terms

This clause states the remuneration or consideration that is to be paid to the manufacturer by the receiving party in exchange of the service used by them. 

The payment clause shall include the following:

  • The amount to be paid as remuneration or service charge or consideration
  • Reimbursement or extra charges, if any
  • Any damages if the product or service is damaged or any deviation in the product or service
  • Penalty on account of late deliverables 
  • Penal interest on late payments 

Confidentiality

A confidentiality clause is generally included in any contract and they are quasi-miscellaneous provisions. Most confidentiality clauses contain obligations on the both parties from assigning the agreement or sharing the information to third parties. Confidential information means any such information that is very sensitive and if made public then that would result in huge loss to be borne by the organization.

According to the confidential clause, the receiving party shall not disclose or publish any information regarding the disclosing party unless the disclosing party has granted such particular permission to do so.

Warranty and Representation

This clause ensures that both the parties to the agreement are competent enough to enter into any agreement. This clause ensures that the invention has been created by trained professionals in accordance to the applicable laws and if any mishaps or accidents occur due to the avoidance or negligence of the inverter or manufacturer then that party shall pay the amicable damages. 

This clause includes a declaration by the one party i.e. receiving party, that they are authorized to do such acts and have the required permissions, licenses, consents or authority to enter into the agreement.

Governing Laws

‘Governing Law’ clause is a clause used in all legal agreement templates that you intend to declare which type of rules and laws shall govern the agreement if any of legal issues ascend. This clause forms a mandate part of any legal agreement and its consistently included in the contracts between parties to the contract.

These laws state the rules and regulations that to be followed by both of the parties to the contract and make the necessary compliances, if any. This clause also states the punishment in case of breach of any duties by either of the party. Such punishments are to be declared when the parties to the agreement breach the clauses of the agreement or violate the law.

General Provisions

  1. Entire Agreement – This agreement represents the entire understanding between the parties with respect to its subject matter and shall supersede any previous contract or resolution or communication that may exist.
  2. Amendment – This agreement can be amended only in written form and signed by both parties.
  3. Assignment – This Agreement may not be assigned by either party without the consent of the other party in written form.
  4. Notices – The parties shall provide all notices and communications between the parties in written form by:
  • Method of Notice.
  • Receipt of Notice.

Proof of Concept is used in various sectors such as science and engineering sectors, drug discovery, hardware, software, manufacturing, etc. to assess the procedure of the idea before further pursuing the idea and converting it into full-scale production. A Proof of Concept should explain in what ways the product or service shall be used, the objectives to be achieved via this idea, any other business requirements.

As explained before, Proof of Concept is helpful in testing ideas. But the effectiveness of this concept depends a lot upon the business environment. If the POC is not tested in a realistic business environment, results can be inaccurate. This does not mean to replicate the market environment fully, but to create a close version of it. This will increase the accuracy of the results.

The PoC Agreement template is intended to be used for any presentation that requires more protection than a final decision and yet is not an engagement. The use of the POC template requires a three-step evaluation to determine if it is a final decision or not and if the POC is appropriate. They are:

  1. Does the presentation differ from a stereotypical sales call? 

– If no, then no agreement is required.

2. If yes, is there anything condition precedents, the Business can do to mitigate risk rather than proceed directly to a condition precedents or other form of contract? For example, use:

a. A Non-Disclosure Agreement,

b. Condition precedents provide a covering letter (outlining limits to the presentation, signed by both parties with consideration),

c. Make the presentation/POC part of master terms the vendor already has with condition precedents, etc.).

3. If yes to 1 above, and No to 2 above, then use of this POC Agreement is required.

The POC template will also require the attached Statement of Work outlining the requirements and referencing the POC.

  • The outcome of any POC cannot be determined. 
  • You can make sure to improve the overall process, but the element of uncertainty will still exist. Here are a few more tips for a successful POC.

Proof of Concept because of all its advantages holds an important position in product development. Without POC there would be too many errors and mistakes. Businesses would be exposed to a lot more risk and uncertainty. POC is a tool to make a successful and marketable product. It helps businesses succeed and avoid unnecessary risk.

To avail all the advantages, follow the Proof of concept template. This will help in making the process systematic and efficient.


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