1. PROFESSIONAL COMPUTING Lecture 7: Contracts and Liability Dr. Mark Lee | m.g.lee@cs.bham.ac.uk School of Computer Science, University of Birmingham Autumn 2015

2. Some bad news … 44% of all outsourcing contracts in first three months of 2012 were re-negotiated contracts from previous agreements Economic Downturn (haggling) Plus the usual issues … Overran deadlines Changes in functionality Badly estimated costs Things are likely to get worse. (http://www.computerweekly.com/news/2240168932/Renegotiating-outsourcing-contracts-to-fit-new-reality)

3. Universal Credit Major IT project funded by tax payer Unifies all forms of benefit (housing/unemployment) under one IT system Plan to put 6000 computers in job centres plus online access (7 million UK citizens have never accessed the internet) Has already written off 140 million pounds worth of assets By April 2023, will cost UK 2.3 billion pounds … Gov. Digital Service insists UC will use a new identity service (but this is delayed) – resulting in much of the system being crippled. 7/11/13 Cross Party Review claims massive waste and no where near the 2017 deadline for full deployment … “Most people are claiming it online, the IT is working and comprehensive support is in place” (Lord Freud) (UC is now available in 50% of job centres since Sept 2015)

4. Contracts Contract law is old English law in England and Wales All parties intend to make a contract All parties must be competent to make a contract There must be a “consideration” (each party must receive something and provide something) There is no requirement for either lawyers, writing or witnesses (though all of these make it easier to enforce) Minor additions for new technology But fine for most things … except software.

5. Software projects are high risk Standish CHAOS Reports (2009) Only 32% of projects Completed on time Within budget Expected functionality 24% of projects failed BCS Public Sector – £12.4 bn on software (22 bn IT) Successful Projects – 16% (2004)

6. Contracts protect both parties Fixed Price Contracts Time and Materials Consultancy and Contract Hire

7. Fixed Price Contracts Typically tailor made, bespoke systems A short agreement Who the parties are What has been said before is not part of the contract Standard Terms and Conditions How the suppler normally does business A set of schedules/Annexes Particular requirements of the contract What is supplied Deadlines What payments are to be made etc. etc.

8. What is to be produced? The Contract must define the “product” Standard T&Cs refer to an Annex Annex refers to a Requirements Specification By now you should know that good Req. Specs are difficult to achieve (if often somewhat boring) Good Software Engineering is hard Client’s needs evolve Technologies change Contract must address how such changes are accommodated. Method for calculating payment to deal with modifications

9. What is delivered? Rarely just handing over the code as a text file. The contract needs to specify exactly what is delivered: Source code Command files for building executables Documentation Reference/Training/Operations manuals Training Test data and results Ownership Who owns the IPR for the software? Confidentiality Should be specified for both parties (though limited protection otherwise)

10. Payment “Payment shall be due within 30 days of the date of issue of an invoice. If payment is delayed by more than 30 days, the Company will have the right to terminate the contract or apply a surcharge at an interest rate 2% above the bank base lending rate.” It is unlikely such a clause will ever be used. Payment is more likely to be staggered Initial payment of 15% on signing Stage payments during project (say at 65% completion) 25% at acceptance of software Final 10% at end of contract Such staggered payments protect the supplier Client may go out of business Cash flow for supplier How to stagger: By calendar month – benefits the supplier By project completion – benefits client

11. Penalty Clauses Payment clauses protect the supplier but the client may also add penalty clauses Suppose a one million pound contract … Reduce payment by £5000 per week of project overrun Up to a maximum penalty of 100 K (10%) Software is often delayed but such penalties are limited Suppliers are often very reluctant to accept penalty clauses Smaller pool of reputable suppliers Contracts involving penalties usually increase bid price by at least half penalty If software is really late and penalty high – supplier has no incentive to complete work.

12. Penalty Clauses Payment clauses protect the supplier but the client may also add penalty clauses Suppose a one million pound contract … Reduce payment by £5000 per week of project overrun Up to a maximum penalty of 100 K (10%) Software is often delayed but such penalties are limited Suppliers are often very reluctant to accept penalty clauses Smaller pool of reputable suppliers Contracts involving penalties usually increase bid price by at least half penalty If software is really late and penalty high – supplier has no incentive to complete work.

13. Obligations on client Contract needs to specify client obligations Provide documentation Provide access to appropriate staff Provide machine facilities for testing Provide accommodation etc. etc. Most suppliers will have their own standards of testing & quality assurance. Large clients will prefer to use their own. All of this needs to be specified in the contract.

14. Acceptance, Warranty & Indemnity Client must provide a fixed set of acceptance tests Tasks, expected results, accuracy figures etc. Successful demonstration of system will constitute acceptance (but what happens when tests are not 100% successful) Warranty Standard is 90 day warranty. Any identified errors fixed free of charge Beyond this is subject to negotiation More likely enhancement of system rather than fixing errors Unlikely that any fixed price is realistic. Indemnity Risk of supplier infringing intellectual property rights of third party Usual for contract to indemnify client & supplier so each other is not liable for any infringement by the other due to own fault.

15. Termination and Arbitration It’s not uncommon for projects to be cancelled Client goes bust Merged with a larger company Technology becomes obsolete Contract needs to detail what payments to supplier for unfinished projects & what intellectual property rights exist. Arbitration So far – contracts are complex. Litigation is very expensive (and often not worthwhile) Contract may specify that in the case of a dispute the opinion of an independent arbitrator will decide Avoids legal costs BCS maintains a list of qualified IT arbitrators

16. Time and Materials Also referred to as “Cost plus” Contracts Supplier agrees to develop software Payment based on costs incurred plus Daily rate (possibly to a maximum price) Acceptance tests, payments etc. are far less complex Usually cheaper than fixed price contracts Sometimes project is unclear – a fixed price is impossible. Currently there is a shift from T&M to Fixed Price contracts in IT (especially in public spending)

17. Contract Hire & Consultancy Fixed price contracts are complex Contract Hire offers a far more simple alternative Supplier provides services of staff for a fixed period Agreed hourly/daily rates Client takes responsibility for managing staff Termination by either side can be done at short notice Consultancy – expert analysis of a key part of business Usually produces a report rather than a product Consultancy is usually done at a fixed price but Small amounts of cash involved Harder for a report to fail an acceptance test Reputation of consultant usually is a enough …

18. Consultancy Issues Confidentiality Needs to be safe guards to ensure consultant doesn’t profit against the client following project Terms of reference What is the consultancy meant to be looking at Often the issue isn’t what was originally agreed This is a major source of disagreements Who controls the final version? Usually client approves a draft version of the document Client may require amendments This might damage the consultant’s reputation etc. Liability Few consultants wish to be liable for their expert advice Most clients disagree – and also need to verify the consultant really is an expert.

19. Slightly off topic (perhaps) 22 nd October, 2012 Italian court sentences 6 academic geologists & one official Experts failed to predict a major earth quake in 2009 which 390 people died Since it’s impossible to predict earth quakes – how were the experts liable? (experts were acquitted 10 th November 2014, official’s sentence reduced to 2 years. Crowd outside court rioted at injustice)

20. Liability Most suppliers are very reluctant to agree to any liability for defective software or hardware Standard Terms & Conditions will usually limit liability to project cost or even a fraction of this The Law disagrees – Unfair Contract Act (1977) Impossible to limit liability in the result of a death or personal injury

21. Consumer Protection If the client is a “consumer” Client is a private person Supplier is acting as a business Goods are of a type usual for private use Sale of Goods Act (1979) Goods must be fit for purpose Otherwise … Supply of Goods and Services (1982) Goods are produced with “reasonable” care It’s unclear if software is “goods” Shrink wrapped, licenced software probably is. Bespoke systems are probably not.

22. St. Albans v. ICL (1996) St Albans council contracted International Computers Ltd Software to calculate community charge tax ICL insisted on using its standard T&Cs Liability will not exceed price or charge of equipment, program or service or £100,000 which ever is lesser Errors in Software & bad advice by ICL project manager Over estimated population Undercharged residents Council lost £1.3 million pounds Judge found Software not fit for purpose Project manager negligent ICL as an international company had liability insurance worth £50 million Council was not a “person” but was not operating as a “business” (and so not expected to have business insurance) Found ICL T&Cs unfair and required full compensation to council

23. Summary Software is often high risk Because of this both clients and suppliers need good protection via contracts Fixed Price Contracts Time and Materials Consultancy However as usual the legal status of software is unclear and often ill-specified in contract law