1. IT Contracts – Risk Management
Edmund Probert
Marlene Naumann
21 March 2006

2. Outline Contract and Risk Accepting the Risks Mitigation of Risk
Contract Specifications
Apportioning Risk
Contract Management
General Issues
Conclusion
Purpose of this presentation is to explore certain risks that may apply to IT contracts and how these can be minimised.
We will consider different ways of minimising risk – mainly by ensuring that a water tight contract is drawn up.
We will also consider other areas of risk (Confidentiality / Intellectual Property Rights) and how these can be dealt with.

3. Contracts and Risks IT Contracts IT Supply/Integration Agreement
Outsourcing Agreements
Software Development Agreements
Support and Maintenance Agreements
Software Licences
A brief discussion of the different types of contract to demonstrate that there is an inherent risk in most business functions/agreements.
All these carry risks – those in the maintenance areas are more controllable than those that involve creating something new.
IT Supply/Integration Agreement – a customer is purchasing a IT System for its business
Outsourcing Agreement: These are generally agreements entered into where the system is purchased is substantial (many of the Government IT purchase agreements). They outsource the purchase and the operation of the system to a third party
Software Development Agreement: Developing a specific piece of software for a customer. This may or may not need to integrate with the customers own hardware and software.
Support and Maintenance Agreement: Services Agreement – After a business buys a system they may require support (helpdesk/training) and maintenance services (dealing with errors, providing updates and improvements).
Software Licence: Licences granted so that one can use specific software without infringing third party rights.
FOR PURPOSE OF THIS PRESENTATION CONSIDERING A BIG IT SUPPLY/INTEGRATION AGREEMENT (E.G. PURCHASE OF A REVENUE & BENEFITS SYSTEM)

4. Contracts and Risks Principal Risks Uncertain obligations
Non-Performance
No Useful Remedy
Unlimited Liability
Uncertain Obligations - if there is no clearly drafted agreement parties may not fully understand what their obligations are
Non – Performance – the system or suppliers may not perform in the way it/they were expected to by the Customer, or do perform to some extent in the way expected but not in its entirety.
No Useful Remedy – the parties may not have considered what type of remedies may be available if the other party is in breach. For example, if say the Support and Maintenance Services are not provided in accordance with the Service Levels will the customer receive Service Credits or will the Supply need to pay damages in that instance.
Unlimited Liability – There is always a risk that if the agreement is not drafted in the correct way that either party could be in a situation in which their liability to the other is unlimited.
There are many other areas that a contract attempts to reduce or control.

5. Accepting the Risk Due Diligence Credit Score
Other suppliers’ experiences
Accounts
It is important to carry out such due diligence as is practicable. If the accounts look shabby or the credit score is poor then it is wise to ask to be paid in advance.

6. Contract Specifications
User’s
Suppliers
Change
Timetable
Now we look at the various risk areas individually.
A user’s specification is going to be conceptual (list of requirements of the customer). Conversely, a supplier’s will be detailed and will set out how the requirements will be met. Balance required for certainty and avoids onerous obligations.
A specification may need amending during the term of the contract and provisions are required to give effect to this without terminating the contract. It should be reviewed on a regular basis.
CORRECT SPECIFICATION IS VITAL to ensure that the parties understand their obligations under the agreement
Time – should it be of the essence?
Specifications for maintenance are usually drafted to promise nothing but a telephone call.
Generally, users will want to make time of the essence (i.e. if the system has not be accepted by a certain time) then the Customer will be able to terminate the agreement. This is important, because if the supplier is not able to supply a suitable system then the Customer should be able to use another supplier capable of providing what is required.

7. Apportioning Risk Acceptance Testing By the User or Supplier
Procedure – who writes the test criteria?
Mechanisms to Remedy
Acceptance Testing : the purpose of this is to ensure that the system (which may consist of hardware/software) actually does what is specified. Objective testing criteria are developed so that testing can be measured as unsuccessful or successful.
Usually successful testing causes balance of price to be paid to Supplier.
Risk is that if the specification is not correct, acceptance testing may be achieved without the system being capable of doing something it should be able to do.
Also often this process can be gone through a number of times to ensure that errors are corrected by the Supplier. However, perhaps if acceptance has not taken place after 3 or 5 acceptance test procedures the Customer should be able to terminate agreement

8. Apportioning Risk Warranties/Indemnity An assurance or promise
Breach = Damages
Indemnity
Warranties: The customer will generally require that the supplier provide certain warranties in relation to the system provided. For example:
That it does not infringe third party rights
Will operate error free
Comply with the specification
The advantage of this is that if the system does not comply with the warranties then the customer may sue for breach of contract. In this case need to prove damages resulted as a result of breach; mitigate loss; recover damages.
Indemnity
Alternatively, the customer may also require the supplier to provide an indemnity.
This means that if the system is in breach of the warranties or perhaps in the event that the supplier is any sort of breach, the supplier must indemnify the customer against any losses, damages etc. incurred.
Difference here is that person relying on the indemnity does not need to provide that the loss resulted from a certain breach, does not need to prove the damages nor do they need to mitigate loss. This is clearly something the supplier will want to avoid signing up to.
However, arguably if the supplier believe that he is able to provide the necessary system then he should be able to agree an indemnity.

9. Apportioning Risk Limitation of Liability Insurance
Death, personal injury, fraud
Exclusion of types of Liability
Capping Liability
Insurance
Limitation of Liability
Limitation of Liability identifies the scope of liability.
One is not able to limit liability in relation to death, personal injury arising out of negligence and fraud. Therefore the parties will have unlimited liability.
However, you are able to limit liability in relation to other losses and/ damages. Generally the parties will exclude indirect losses. Furthermore, parties will also generally cap their liability. These caps need to reasonable and may not be seen as “penalties”. In relation to IT contracts there are generally two types of caps.
One relating to property (i.e. the system it self)
One relating to all other losses or damages. Often this is capped at 125 – 150 per cent of the value of the contract.
In relation to third party intellectual property right infringement, the customer will try not to limit liability. The reason for this is that it is very difficult to quantify the likely damages.
Insurance
In the event that the amounts payable could be substantial in case of breach the supplier may want to obtain insurance to cover such risk.
Professional indemnity
IP insurance
David and Jonathan have spoke about this.

10. Contract Management Variation Project Manager
Facilitates a working relationship
Avoids frustration and termination
Regular reviews
Project Manager
Regular meetings
Variation/Change Control
In relation to most complete contracts, it is also a good idea to include a variation provision in the agreement. This is a provision which will allow the parties to vary the terms of the contract provided that both parties agree. Usually this provides a defined way of specifying proposals and that the contract continues ‘as is’ until the change is agreed.
In addition, it is also recommended that regular reviews take place to assess whether the terms need to be changed or whether the relationship can continue as it is.
Project Manager
Generally both parties will appoint a project manager. Their responsibility is to manage the project. Often times the parties will agree to meet regularly to discuss the project. There should be continuous correspondence between the parties. The proviso should allow either to call a meeting which they must attend.

11. Contract Management Dispute Resolution Exit Plan Good Housekeeping
Senior staff / Mediation / Arbitration
Exit Plan
Assistance with data migration
Additional payments
Intellectual Property Rights
Competitor
Good Housekeeping
Dispute Resolution
Escalation – Explain.
This is a type of mediation. This generally is cheaper and more amicable than litigation. Many contracts require the parties to try and settle the matter through dispute resolution and if all fails to litigate in the courts.
Many of the disputes are settled at mediation.
Exit Plan
Not liked by suppliers – prefer customers to be practically locked in.
It is clear to understand what will happen at the outset if the customer terminates the contract. This plan will stipulate what is required by the Supplier upon termination. Generally it requires the supplier to co-operate with the new supplier and the customer in transferring the system across. This can be very difficult because in many instances the new supplier is likely to be a competitor. Therefore, it is important that it is absolutely clear what is required by the supplier – of this will also deal with IPR issues.
Question is also will the supplier get paid for this, given that this is after the contract has terminated.
From the customer’s perspective this needs to happen seamlessly.
Good Housekeeping
Proper recording of all discussions at meetings. Incremental record of all developments.

12. Other Issues Confidentiality Intellectual Property Rights
Existing rights
New Rights
[Confidentiality
Often confidential information will be shared between the parties during the project. It is important that such information is carefully protected so that it is not disclosed unnecessarily. It is important that from a practical point of view it is clear to whom such information has been disclosed , for what purpose and in what form (cd, manual etc).
This because important upon termination.
Intellectual Property Rights
It is also important that intellectual property right ownership is clarified early on. For example the customer may pay the supplier to write some bespoke software for its system. In this case the customer wants to make sure that the rights vest with it so that it can continue using it after the agreement has terminated.
A supplier will generally resist an assignment, but may agree to grant a perpetual, royalty free licence.]
Big areas – no time to discuss tonight.

13. Conclusions
Risk v. Rewards
Minimise
Insure

14. QUESTIONS?