Technology Proof-of-Concept Agreements: 6 Legal Issues Businesses Often Miss

Businesses frequently want to test new technology before committing to a full commercial contract. A supplier may offer a proof-of-concept (PoC) or pilot project to demonstrate how its software or platform works in practice.

Because PoCs are usually short-term and relatively informal, the legal aspects are sometimes overlooked. The parties may start testing the technology quickly, assuming that the legal details can be addressed later if the project progresses.

However, even a limited PoC can raise important legal issues. It may involve access to systems, the use of confidential information, or the processing of real data. If these issues are not addressed at the outset, they can create uncertainty or disputes later — particularly if the PoC leads to a commercial deployment.

This article highlights some of the key legal issues businesses should consider when entering into a technology proof-of-concept arrangement.

1. Ownership of intellectual property created during the PoC

One of the most common areas of uncertainty is the ownership of intellectual property created during the PoC.

Even in a short testing project, the parties may create new materials, such as:

• scripts or integrations
• configuration work
• custom code or extensions
• testing documentation or reports.

If the PoC agreement does not address intellectual property ownership, it may be unclear who owns these outputs and what each party is entitled to do with them.

For example:

• Can the customer continue using custom developments if the PoC does not lead to a full agreement?
• Can the supplier reuse any code or configurations created during the PoC for other customers?

It is generally advisable for the agreement to clearly state who owns any intellectual property created during the project and what rights each party has to use it.

2. Use of confidential information

Proof-of-concept projects often require the sharing of confidential information.

A supplier may need access to information about the customer's systems, processes, or technical environment. The customer may also gain insight into the supplier's technology and product roadmap.

Without appropriate contractual protections, there is a risk that this information could be used beyond the intended scope of the PoC.

A PoC agreement should therefore include clear confidentiality provisions covering:

• what information is considered confidential
• how that information can be used
• obligations to protect it
• requirements to return or delete information when the PoC ends.

3. Use of customer data

Another important issue is whether the PoC will involve the use of real customer data.

In some cases, businesses use test data or anonymised datasets. In others, the PoC may involve live operational data in order to properly evaluate the technology.

Where personal data is involved, the parties will need to consider compliance with data protection law, including the need for appropriate contractual arrangements governing the processing of that data.

Even where personal data is not involved, businesses should consider:

• how data will be accessed and stored
• security measures during the PoC
• what happens to the data once the project ends.

4. Liability if something goes wrong

Although PoCs are often conducted in test environments, they can still create operational risks.

For example, integration testing may affect existing systems, or software issues could lead to system outages or data corruption.

Many informal PoC arrangements do not address liability at all. This can leave uncertainty if the project causes problems for the customer's systems or business operations.

The parties should therefore consider whether the agreement should address matters such as:

• limits on liability
• exclusions for indirect or consequential losses
• responsibility for damage to systems or data.

5. Scope and success criteria

Another common challenge in PoC projects is the lack of clearly defined objectives.

If the scope of the PoC is not clearly documented, the parties may have different expectations about what the project is intended to achieve.

For example:

• What functionality will be tested?
• What integrations are included in scope?
• How will the results be evaluated?

Defining success criteria can be particularly important. If the purpose of the PoC is to support a purchasing decision, the agreement should ideally specify how the results will be assessed and what outcomes would indicate that the technology is suitable.

Clear scope and evaluation criteria can help avoid disagreements about whether the PoC has achieved its objectives.

6. What happens after the PoC?

Finally, the parties should consider what happens once the PoC has concluded.

In many cases, the PoC is intended to lead to a full commercial agreement. However, this is not always the case.

The agreement should clarify matters such as:

• whether either party is obliged to proceed to a full contract
• whether the supplier must offer specific commercial terms if the PoC is successful
• whether the customer can continue using any work produced during the PoC.

In most cases, it is sensible to make clear that the PoC does not oblige either party to enter into a longer-term agreement.

Final thoughts

Proof-of-concept projects are often an effective way to evaluate new technology before committing to a full deployment. However, even short and relatively informal PoCs can involve the use of valuable intellectual property, confidential information and business data.

Putting in place a short, well-structured PoC agreement can help ensure that both parties understand the scope of the project, manage potential risks and avoid disputes later — particularly if the PoC leads to negotiations for a full commercial contract.

If your business is planning a technology proof-of-concept, it can be helpful to obtain legal input early on.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.