Understanding the Jargon
Agreeing an acceptable price is only the first stage of the negotiation - now you get into the detail of negotiating the individual clauses of the contract. The following takes you through some of the main headings you should consider in drafting a contract and attempts to explain the purpose of such a clause. To skip straight to a heading that interests you select the option from the drop down list and click view.
Acceptance Tests
Confirmation that the agreed project deliverables and hence the key milestones in the plan have been achieved, is normally by some form of acceptance test. Don't be fooled by clauses to the effect that the software passes the supplier's standard installation tests – the acceptance testing must be related to the satisfaction of your customer requirements. You will agree with the supplier the form of a test appropriate to determine that the customer requirements have been met and the agreed procedure for carrying out the test. This should be clearly documented and the contract should outline the procedures by which software which does not meet the acceptance tests will be rectified free of charge. The supplier may require you to complete an acceptance certificate on the satisfactory conclusion of a test. To avoid the final acceptance of the software overshooting a defined completion date you may wish to consider incentivising the supplier to meet milestone dates or impose liquidated damages by way of deductions from the purchase price in the event of a delay (see below under Liquidated Damages).
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Assignment
Mergers and takeovers are common in the IT industry and you do not want to find yourself in a position where a new supplier takes over and will not support the product you have purchased or requires you pay to upgrade to a new version of the product. It is therefore advisable to ensure that the contract terms will survive any such acquisition of the supplier by a third party.
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Change
See Variation.
Conduct of Supplier's Staff on your Premises
You may wish to insert a clause that supplier's staff comply with your own policies and procedures whilst on your premises. You would generally expect professional conduct from all such staff but issues can arise. These are often small matters but can impact on the morale of your project team. Examples could be discontent caused by supplier's staff taking smoking breaks when your own staff are not permitted to do so or using your phones for personal calls etc.
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Customer Responsibilities
The supplier will generally wish to specify certain facilities and resources that the customer is expected to provide to the project. It is in your interest to have these clearly laid out at the start as you do not want to be hit by any unexpected resource requirements such as having to install new phone lines at short notice.
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Data Protection and Security
Data Protection is a major issue and you should take all possible steps to ensure that you do not fall foul of Data Protection legislation as a result of the supplier's actions. It is reasonable to expect the supplier to warrant that they will comply with the requirements and the principles of the Data Protection Act 1998. You may also wish them to warrant that they will comply with a recognised code of practice on information security management such as BS 7799 or an equivalent.
Areas of potential difficulty may occur when a supplier wishes to access your data for the purposes of installation, testing, maintenance or support, especially if they do this from outside the European Economic Area. The contract should specify that access is only for these purposes and that the supplier will process personal data to which it has access only on your instructions. It has also been known for lazy/unscrupulous suppliers to use copies of actual customer data for demonstration purposes. Needless to say use of your data for any marketing or other commercial purpose should be expressly forbidden as should any transfer of data to a third party without your prior consent. You also should seek an indemnity from the supplier against any liabilities you incur as a result of the supplier (or its employees or sub-contractors) breaching your instructions or data protection legislation.
For personal data that your university or college collects from learners and staff the institution remains the data controller and responsible for data protection compliance. If you engage an external provider to process personal data on your behalf then they are the data processors and you should restrict them to processing in accordance with how you direct and you must ensure that they comply with your requirements. This is usually done by means of a data processor agreement.
For any personal data that an external service provider collects themselves from your staff and learners the provider is the data controller. As such you are not responsible for the data protection compliance with regard to that data rather the provider is.
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Definitions
You will need to include a set of definitions of the terms used in the contract such as 'hardware', 'software', 'system' etc in order to avoid any ambiguity.
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Delay
You should specify what will happen in the event of a delay in delivering the goods/services in line with the agreed implementation plan.
Should the delay be the responsibility of the supplier, it is reasonable to expect them to notify you of the expected delay, agree a contingency plan with you and meet any direct costs arising as a result of workarounds needed to implement the contingency.
Should the delay be a direct consequence of your own actions and prevent you achieving a milestone in your implementation plan, you cannot expect to withhold payment from the supplier for work to date (see payment plan).
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Escalation Procedure
It is normal practice to identify key staff to whom issues will be escalated in the event that a dispute cannot be easily resolved. You will generally identify staff at corresponding levels in both organisations in the form of an escalation hierarchy.
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Escrow
Escrow is not an acronym - it is a term describing a legal arrangement whereby a supplier deposits the source code for their product with a third party. In the event of the supplier going out of business, customers who have taken out an Escrow agreement will be able to obtain a copy of the source code. This offers the customer some protection in that, although you may be left with an unsupported product, you would be able to undertake essential maintenance and development provided you have the resources to do so.
The supplier will pass on to you the administrative cost imposed by the Escrow agent. Fees are of the order of £300 per annum at the time of writing (2002) although complex systems may require more than one agreement e.g. where the application, the underlying database and reporting tools are separate products.
Your Escrow agreement should specify which versions of the source code and documentation are to be held (it is important to have access to previous versions if you are not on the latest release) and the circumstances in which and conditions on which it will be released. The National Computing Centre (NCC) is a recognised Escrow agent. Click here to find out more about NCC.
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Intellectual Property Rights
The supplier should fully indemnify you against any legal action/costs arising from any actual or alleged infringement of Intellectual Property Rights (IPR) as a result of your legitimate use of the system. In other words, even though the supplier may have infringed someone else's copyright in developing the system, you, as a legitimate user, should not suffer any of the consequences. The supplier may of course have to replace the offending element of the system with functionality of an equivalent standard.
The question of Intellectual Property Rights becomes more complex when the supplier undertakes bespoke development on your behalf. Generally they will want to retain IPR even though much of the analytical and design work may have been done by your own staff. Unless you are getting the development at a knock-down price you may wish to argue for a share of future sales.
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Insolvency and Bankruptcy
The contract will provide for termination in the event of insolvency or bankruptcy. You should also consider the notes under Assignment and Escrow to protect you in the event of the supplier going out of business.
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Law
The parties to a business to business contract are generally free to choose in which jurisdiction a dispute may be litigated. It is to the institution’s advantage not to have to pursue a party to a contract in a jurisdiction outside the UK.
It is important then to ensure that the Agreement is subject to and constructed and interpreted in accordance with the laws of England and Wales (or Scotland).
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Liability and Insurance
The supplier should indemnify you against any loss or damage resulting from an act or omission of the company and its employees or sub contractors. A supplier will normally be expected to show evidence of:
Employer's liability insurance
Professional indemnity insurance
Public liability insurance
You should take advice from your own insurers as to the required levels of cover.
Suppliers will usually attempt to limit their liability for breaches of warranty to the amount paid for the software and/or services (sometimes plus a percentage). You may wish to reserve the right to require them to repair or replace the software rather than go straight to a refund and termination situation.
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Limitation of Liability
The supplier should be obliged to repair or replace any software which does not function in accordance with the specification free of charge during the warranty period.
Any clause that attempts to exclude or limit the supplier's liability for personal injury or death caused by its negligence will be ineffective pursuant to the Unfair Contract Terms Act 1977 ("UCTA"). Any other damage caused to or loss sustained by the purchaser should be limited only to the level of insurance that it is reasonable to expect the supplier to obtain.
There have been a number of recent cases concerning the exclusion by a supplier of liability for consequential or indirect losses and whether or not this is reasonable. As a result, it appears to be a matter of fact in any particular case whether it is reasonable to include an exclusion or limitation clause. The specific provisions of UCTA and these cases demonstrate that it is important to consider the following in deciding whether or not a liability limit imposed by a supplier is reasonable (and therefore enforceable):-
What are the resources and insurance available to each party should a loss arise? For example, is business interruption insurance available to the customer? Could the supplier realistically obtain insurance against all consequential loss?
What are the bargaining positions of the parties?
Has the contract been negotiated in any way?
Has the price factored in the allocation of risks?
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Liquidated Damages
The contract will generally include some form of incentive to encourage the supplier to deliver as per the agreement. The use of price retentions and the imposition of liquidated damages are examples of such "incentives". For example should you purchase a payroll system which doesn't work and you are unable to pay your employees, you would be asking the supplier to be responsible for all related costs e.g. meeting employee overdraft charges which arise as a result of the non payment of salary. Similarly with a student or finance system, if you were unable to collect student fees, you would incur substantial losses as a result of the supplier's breach. Needless to say most suppliers will strongly resist the introduction of such a clause and they can be difficult to enforce in law unless the liquidated damages payment can be demonstrated to represent a genuine estimate of the loss that will be incurred as a result of the breach. A liquidated damages payment such as a fixed percentage of the contract price deducted for each week of delay also is more likely to be agreed.
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Maintenance
Where maintenance is to be provided, the contract should assign priority levels to faults and define service levels in accordance with which reported faults should be responded to and fixed. The provisions should also cover how future increases in maintenance costs will be limited.
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Non Disclosure
There will generally be a clause that neither party will disclose information identified as confidential to any third party.
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Parent Company Bond or Guarantee
Where you are dealing with a company which is a subsidiary of a larger parent you may require some form of bond or guarantee stating that the parent company will meet the supplier's obligations in the event of the smaller company folding. You should take advice from your Treasurer's/Finance Department at an early stage about what financial information they need to see at the tender stage and they will advise on whether such a clause is necessary. Even very large companies can be subdivided in such a way as to make this an essential precaution.
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Price Movement
It may be appropriate to insert a clause relating to future price increases in relation to your maintenance agreement. This is likely to be capped at no more than the maximum increase in the Average IT Earnings Index plus an agreed percentage.
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Relationship between the Parties
The agreement is likely to clarify the relationship between the parties by stating that this is contractual and does not represent a partnership or joint venture etc. There may be additional clauses stating that each party must pay its own sub contractors and not order goods or services in the other's name.
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Resolution of Disputes
This section clarifies how you will proceed should you be unable to settle a dispute arising from the contract through the specified Escalation procedure. The settlement of a dispute by mediation in accordance with the Centre for Disputes Resolution Model Mediation Procedure is a common precursor to (and often avoids) litigation or the appointment of an arbitrator is a common practice that may help to reduce the costs involved in going straight to litigation. You may wish to nominate an authority, such as the President of the British Computing Society, who will appoint an arbitrator should the two parties involved be unable to agree on one.
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Software Licence Terms
The supplier should include a clear and unambiguous statement of their licence terms covering the number of users, levels of access and number of copies you may make for back-up purposes. They will probably include clauses to the effect that you cannot provide bureau services or training to third parties without their consent and they may wish to audit your use of the system.
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Specification
The supplier should be prepared to warrant the software's compliance with an agreed functional specification for an agreed minimum period from the final acceptance date of the software. You may also want them to warrant compliance with specific versions of your existing software although it would be unreasonable to expect them to give an open-ended warranty in this area.
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Staff Skills and Expertise
The supplier should warrant that their staff employed on the project possess the necessary skills and experience to undertake the work. Don't underestimate the importance of this clause or you may find yourself training their consultants and paying for the privilege of doing so. You should reserve the right to interview the staff they assign to the project and reject unsuitable candidates.
The supplier should also warrant that, having appointed suitable staff to your project, they will not seek to remove them without your permission (allowing for unavoidable situations such as illness or resignation). There are numerous examples of suppliers sending in a high flyer to win the business then replacing them with someone of considerably less experience when another project comes up.
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Sub Contractors
It is advisable to insert a clause to the effect that the supplier will not sub contract any of the work without your prior permission otherwise you may be paying for the name and reputation of one company but find you are actually working with another.
Where you have agreed to sub contracting you need to be absolutely clear about your relationship with both parties. We strongly recommend that you contract with a single supplier who takes responsibility for the whole project and undertakes to pay for and manage the work of sub contractors. You may otherwise find yourself caught in a blame loop as soon as something goes wrong in the project. Examples of such situations may include hardware/software issues such as incompatibility between the software and the operating system or inadequate specification of hardware and/or software/implementation issues where one supplier's consultants implement another supplier's software.
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System Compatibility
If you have explicitly stated that the system must interface with a specific version of another product or work within a specific environment it may be worth asking the supplier to warrant this as part of the contract.
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Term and Termination
The agreement may be for a fixed term or open ended, either way it should indicate a period for either party to serve notice of termination on the other. Where you are undertaking a lengthy implementation project it may be advisable to include the duration of the implementation plan as a minimum term as you do not want the supplier to pull out before the work is complete.
The contract should indicate the circumstances under which a purchaser has the right to terminate. Such circumstances might include the supplier's insolvency, breach of a material obligation or change of control of the supplier's business.
There will normally be a clause stating that either party has the right to terminate as a result of breach of contract.
You may wish to add a clause that in the event of termination the supplier will, for reasonable reimbursement of expenses, take all reasonable steps to ensure that you can continue to support and maintain the system until a suitable alternative is implemented.
Should your contract include a perpetual software licence then it should specify that termination of the agreement does not imply termination of the licence provided you have not breached any of the licence conditions.
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Variations
You should outline the procedure by which the contractual agreement may be varied. Normally this will be by prior written agreement. Should you request additional work from the supplier, you should specify the basis on which you will agree the increased cost. Don't forget to include words to the effect that if you reduce the requirements, the cost should show a corresponding decrease.
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Waiver
Most contracts will contain a clause similar to the following:
'Failure by either you or us at any time to require the performance of any provision of the Agreement shall not affect the right of such party to require full performance of it at any time thereafter nor shall it constitute a waiver of any subsequent breach of any such provision or in any way prejudice such party's rights under this Agreement.'
This means basically that, should you choose to overlook a breach of contract terms for whatever reason, you are not affecting your future right to redress. There may however be a time limit within which you must bring an action.
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Warranty Period
The supplier will generally warrant the goods for a specific period. A common bone of contention is that the customer is expected to pay support and maintenance costs even during the warranty period and that bug fixes will be in accordance with the standard support agreement. There isn't generally any way round this so this particular warranty isn't worth a lot.
