This is the single most expensive IP mistake I see startups make, and it usually surfaces during due diligence, at the worst possible moment.
The default rule
Section 17 of the Copyright Act, 1957: the author of a work is the first owner of the copyright in it. For software, the author is the person who wrote the code. There is an exception where a work is made by an author in the course of employment under a contract of service, in which case the employer is the first owner absent an agreement to the contrary.
Why a freelancer is different
A freelancer or agency works under a contract for services, not a contract of service. They are not your employee. The employment exception therefore does not apply, and copyright stays with them unless assigned. India has no broad American-style "work made for hire" doctrine that automatically vests commissioned software in the person paying for it. The narrow commissioning provision in Section 17(b) covers a photograph taken, a painting or portrait drawn, an engraving, or a cinematograph film made for valuable consideration at the instance of another person. Software is not on that list.
The distinction is not settled by what the invoice or the engagement letter is called. Courts look at the substance: who controlled how and when the work was done, whose equipment and premises were used, whether the person was integrated into your organisation, who bore the financial risk, and whether the person was free to work for others at the same time. A developer who worked to your specification but on his own machine, on his own hours, invoicing with GST and serving other clients, is on the wrong side of the line for you. Even where you would win that argument, it is an argument, and an argument is exactly what a due diligence exercise cannot absorb.
Paying the invoice buys you a licence to use what was delivered, at most, and the scope of even that licence will be argued about. It does not make you the owner. An investor's lawyer will ask for the chain of title to your core technology, and "we paid them" is not an answer.
Who owns it, on the default rules
- Written by an employee in the course of employment? The employer is the first owner, subject to any agreement to the contrary.
- Written by an independent contractor or agency? The contractor is the first owner unless there is a written assignment. Paying an invoice does not transfer copyright.
- A written assignment exists? Ownership passes on its terms, and the assignment must be in writing and signed to be effective.
- The work is already done and there is nothing in writing? A confirmatory deed of assignment now, executed for consideration, before the relationship sours.
- Third-party or open-source components included? Ownership of the whole is subject to those licences whatever the contract says.
The fix
A written assignment complying with Section 19: signed by the assignor, identifying the work, the rights assigned, the duration and the territory. If duration is omitted it is presumed to be five years; if territory is omitted, India only. Both defaults are fatal for a technology company, so state them expressly as perpetual and worldwide.
Two further defaults in the same section need displacing. The assignment must specify the royalty or other consideration payable to the author during its currency, so record the agreed fee as the whole consideration for the assignment rather than leaving it to be implied from the invoice. And where the assignee does not exercise the rights assigned within one year of the assignment, they are deemed to have lapsed unless the agreement provides otherwise. A module that is built, paid for and then shelved for eighteen months is exactly the scenario that provision catches, so contract out of it in terms.
A proper development agreement should also cover:
- Assignment of all IP created under the engagement, present and future
- A waiver of moral rights so far as permissible, since moral rights under Section 57 are not assignable
- Disclosure and licensing of any third party or open source components, with the licences named. An unnoticed copyleft licence can be a bigger problem than the assignment
- Delivery of source code, documentation and repository access
- Confidentiality, and a warranty of originality with an indemnity
Those clauses belong in the engagement document itself rather than in a separate side letter nobody can find two years later. Our note on drafting a service agreement, its scope, payment, indemnity and termination covers how the IP clause sits with the rest of the contract, particularly the acceptance and payment milestones, because an assignment expressed to take effect only on full payment leaves you owning nothing during a fee dispute. Take the assignment on creation, and secure the fee through the payment terms instead.
If the work is already done
Get a confirmatory deed of assignment signed now. Most freelancers will sign one, particularly if there is an ongoing relationship. It is far cheaper than the alternative.
Make it retrospective in terms, covering everything created under the engagement from its commencement, list the deliverables and repositories it applies to, and have it signed by the individual who actually wrote the code as well as by the agency, since the agency can only assign what it holds. Where a freelancer has since become unreachable or refuses, deal with it honestly in diligence and consider whether the affected module can be rewritten, which is often cheaper than the negotiation.
Finally, treat this as one item on a list rather than a standalone repair. The same gap usually runs through the founders' arrangements, the employment contracts, the contractor engagements and the confidentiality undertakings. Our founder's guide to IP protection for startups in India and our checklist of the key legal documents a startup needs before launch set out the full set, and registering the finished codebase is a sensible last step, for which our note on copyright registration in India explains what has to be deposited.