Companies that pay attention to the small print in their
ITsupply contracts are likely to benefit in the long run. There are
key contractual areas that users should review to underpin the
success of IT projects and avoid costly disputes.
Users should not be in a hurry to sign up to their supplier's
standard terms and conditions. If the parties have taken the time
to turn the supply contract into a useful roadmap for each project,
disputes are less likely to arise. So users should make sure that
their business requirements and timelines for delivery are
reflected fully in the contract.
Even with the best laid plans, things can go wrong. Users should
consider other contractual safeguards to underpin the successful
completion of the project on time and within budget and to provide
added protection. This means focusing on bottom-line safeguards
such as rights to terminate and ensuring that any limits on the
supplier's liability will provide realistic compensation to the
user.
Getting this right in the contract also gives the supplier an
incentive to meet its customer's expectations, as the option of
breaching the contract is not the cheaper route.
All too often there are only limited rights to terminate in a
standard contract, which leaves the customer with no option other
than to continue with (and pay for) an implementation that they are
unhappy with.
In a recent case, a call centre operator found significant
problems with its critical software. The project was also seriously
over time and over budget.
The operator found out only when it was too late that the
supplier's standard terms only obliged it to provide a specified
number of hours of work, with no certainty that the system would
perform as expected.
The operator found that there was no obligation for the supplier
to perform to time and no meaningful rights for the operator to cut
its losses and terminate the contract. The customer was left
significantly out of pocket and was unable to recover its
losses.
Recently, a stockbroker customer lost out when its supplier was
able to rely on a clause limiting its liability (to the licence fee
paid) to avoid paying the full extent of that customer's losses for
a defective system.
In another case, a supplier provided a bespoke integrated
software system which did not comply with the terms of its contract
with its customer. It also misrepresented various facts.
The supplier was, however, able to rely on its limitation of
liability clause in its standard terms and conditions attached to
the front sheet signed by both parties. That clause capped the
supplier's overall liability to the contract price and excluded its
liability for certain types of loss suffered by its customer.
This meant that the amount the customer could recover from the
supplier was significantly lower than it otherwise would have
been.
So what should users do to safeguard their position?
They should address the real business risks they are trying to
guard against when considering termination provisions and
exclusions and limitations from liability in their contracts. These
are not matters to be left to the lawyers alone or to the last
minute.
They should anticipate the worst and think about what they would
expect their suppliers to pay for if the chips are down. For
example, a user should not just accept an exclusion of liability
for "consequential loss" or "loss of profit" without knowing what
that means - otherwise there may be some unpleasant surprises.
Although users will probably have to live with an overall cap on
the supplier's liability, they should make sure they are covered
for key business risks within that cap and consider higher caps for
serious non-performance.
It is risky to assume that the supplier's limitations and
exclusions will be unenforceable if they are low or too all
embracing. This area is something of a minefield and users may end
up with a court battle. In any event, most limits on suppliers'
liability have been upheld in court cases.
There are some new safeguards for small businesses, with changes
in the pipeline (in a bill going before parliament) that will
affect the enforceability of IT supply contracts with small
business users. They include:
New protections for contracts between suppliers and small
businesses (those with fewer than nine employees), in contrast to
the current position which distinguishes between businesses and
consumers but not between businesses of differing sizes
A right for small businesses to challenge any standard term that
is not "fair and reasonable" - including any standard term which is
not clear or favours the supplier - but not core commercial terms
or the price payable.
Certain terms (including some often found in IT supply
contracts) will automatically not be "fair and reasonable" and so
are blacklisted for use with small businesses. Larger customers
will still have the narrower rights to challenge limitation and
exclusion clauses in supplier's standard terms (along the lines of
the rights that all businesses have under the existing regime).
Kiran Sandford is a partner at law firm Mishcon de
Reya