Who signed that contract? Inking supplier agreements

Karen Jones, solicitor at law firm Matthew Arnold & Baldwin, mines her 18 years at the frontline of dealing with IT contracts to provide some key advice...

Despite huge changes in technology and capabilities in the IT and telecoms industries, the same old issues remain at the heart of all IT contracts and litigation. While this keeps us lawyers in gainful employment, when things go wrong it does not do much for the reputation of the IT director and his relationship with the finance director.

What follows is some practical advice for when the next supplier contract or deal lands on your desk.

Dealing with suppliers (software, hardware, services)

Always ask yourself who am I dealing with? Be aware of whether the supplier really does have assets or is a shell company. My advice here would be to always run a search and credit check. If there is a dodgy history, then the best contractual terms are not worth the paper they are written on. Also, always consider obtaining a guarantee from a trustee party (or making them an additional party to the agreement).

Beware so-called standard agreements that are 'non-negotiable' - no contract is set in stone these days and there is no such thing as a standard clause. Do not be intimidated by those who tell you otherwise. Read boilerplate contracts carefully- small print can be extremely dangerous.

It is critical that you have clear descriptions of all the deliverables. These should include: the functional spec; stated performance criteria; invitation to tender (ITT) and associated documentation.

If you have relied on special features and promises made in the RFP, make sure that a detailed description of these is fully included in the scope of the contract. If there is room for vagueness or ambiguity, the supplier will not hesitate to exploit this in their favour.

Beware 'entire agreement' clauses which seek to exclude the liability of the supplier for non-contractual documentation. Identify what is important and make sure it becomes part of the description of what you are paying for - this will be critical for warranty purposes as well.

Managing change control process

Contracts cannot cover every eventuality, every change in requirement that may be unforeseen at the date of signature but is still crucial to the success of the project - and for which the same contractual warranty cover will be required. It is therefore very important to ensure flexibility by building in a simple change control process. The process should require that all changes to the specification or to the terms of the contract are recorded in writing, in an approved format and signed by authorised representatives.

That’s the first step. The hard part is implementing this. Make sure your staff understand and follow the process – this is as important as completing the contract and will provide vital evidence if the supplier does not deliver.

Intellectual property rights

When looking into the intellectual property rights to developed works, for example applications and web development, make sure you own the rights to all materials produced for you by the supplier – after all, you are paying for them. If there is an objection to this find out why - it could hamper your dealings with the materials and prevent you from going elsewhere to complete the work or have it maintained by a third party.

An alternative is to secure a non-exclusive, perpetual royalty-free licence with the right to assign and sub-license. The supplier still gets to own (and sell on) the material that he develops but you get the unrestricted right to do what you want with it. Make sure you get the source code or think about an escrow arrangement.

Ensure that you obtain a warranty that all deliverables will not infringe the intellectual property rights of third parties and that you are not paying for stolen goods. It’s usual to get an indemnity here as well.

Terms

Consider how long you want to be bound up with the supplier and build in break clauses with shorter notice periods so you can terminate at will (without giving a reason). Equally ensure that the supplier cannot simply get out of their obligations on written notice. In longer-term agreements think about giving yourself the right to terminate on the change of control of the supplier (for example they may become owned by a competitor of yours) or on its insolvency. Termination for breach is essential.

When it comes to payment terms protect your interests by linking payment with performance, perhaps in stages - make sure that you do not bear all the commercial risk. Give yourself the right to withhold payment if invoices are disputed or to set off payment against any successful claim in damages against the supplier. Don’t get caught by hefty interest rates on late payment.

Linking payment to acceptance is a good way to protect yourself. Include an agreed form of acceptance testing if appropriate. Warranty cover is always recommended – this could be repair and replace or a period of free support. The term of the warranty is up for negotiation –press for as long as you can get and do not accept less than three months unless you are getting very good commercial terms elsewhere in the contract.

Consider how delay will impact your business. If critical, build in incentives or liquidated damages ('a reasonable pre-estimate of loss') as agreed remedies.

Avoid minimum purchase commitments unless there is an established and proven need (and a budget).

Service level agreements are always the poor relation of support agreements as far as contracts are concerned and are often badly drafted but they play a critical role in nailing down the response obligations of the supplier – make sure these reflect your expectations and beware the difference between responding to a problem and fixing it.

Make sure that the supplier respects the sensitivity of information available to them including details of any application that they develop for you.

Limits on liability

This is the bottom line exposure of the supplier when things go wrong, so do not be surprised if the supplier presses for it to be as low as they think they can get away with (although this is a dangerous approach for the supplier). Limiting liability to contract price is not attractive from the customer’s perspective. Finding a reasonable amount acceptable to both parties (and covered by the supplier’s insurance policy) is usually a matter of horse trading and dependent on the whole context of the deal.

You will often find an exclusion of consequential and indirect losses but sometimes these types of losses are exactly the type that you would want to claim for if things went wrong. For example, loss of anticipated savings, data, revenue or management time. Read these carefully and if in doubt delete the exclusion. Time limits on when you can bring a claim are also restrictions that may be unattractive if it will take some time to find out what is wrong.

Disputes

The cost of IT litigation can easily get way out of proportion to the original deal. Most of this is spent on trying to decipher the contractual terms and to establish evidence in support. Apart from the financial cost (and the pain of having to pay legal fees) there are serious consequences in terms of management time and the whole stress that litigation brings to the parties.

Having seen this at first hand, both as a mediator and as a party to mediation proceedings, I cannot recommend strongly enough the benefits of mediation compared with litigation. Mediation is a means of facilitating a resolution between the parties. It is non-judgmental and the mediation process can be run at the same time as litigation.

In most cases mediation results in a successful outcome for both parties and is dealt with in hours/days rather than in months/years. In technical software disputes the parties can agree on a trained independent expert in the field to mediate or assist the mediator. Ensure that all your contracts contain a clause requiring the parties to consider this before (or even alongside) litigation.

Governing law

And finally, beware contracts containing clauses which make the terms subject to some foreign law. This is often overlooked and can be detrimental.


Of course this advice is not exhaustive. It is possible to write a book on each of these issues. If in doubt, or if a contract is important enough, get advice. You can use your adviser to your best advantage if you negotiate a rate or fixed fee with them in advance. Be organised. Know what is critical to you about the deal and keep your instructions clear and comprehensive.

Good luck!

by Karen Jones (Solicitor & CEDR Accredited Mediator, Matthew Arnold & Baldwin - karen.jones@mablaw)

For more information on Matthew Arnold & Baldwin, see: www.mablaw.com .