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Software licence audits: Confidence in Your Choices

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Over the last few weeks Computer Weekly has written about software licensing and how suppliers are demanding IT departments run costly software audits. At the same time, we have started looking at the complexities of licensing, such as in a virtualised environment.

In this guest blog post, Martin Thompson, a SAM consultant and founder of The ITAM Review and The ITSM Review, provides some top tips on what to do when you receive an audit letter:


Payment Protection Insurance (PPI) spam is in vogue.

You may have received one or two of these recently:

"You are entitled to £2,648 in compensation from mis-sold PPI on credit cards or loans."

PPI claims and other spam solicitations are the bane of our inboxes. The vast majority of us know to simply ignore them. Unfortunately the handful of those who do respond justifies the exercise to the spammers. 

This mass-marketing technique is used in exactly the same fashion by trade bodies such as BSA and FAST to force their agenda and start software audit activity.

Supplier audits are a fact of life, some software audit requests are serious and expensive, some are merely spoof marketing campaigns - how can IT professionals decipher between the two?

Whilst I'm not a legal expert, fifteen years in this industry has taught me that there instances when you should respond to an audit request and instances when you should simply walk away.

When to Take Software Audit Requests Seriously

In my opinion there are two instances when you should take software audits seriously:

  1. When you are approached by a software publisher directly with reference to a signed contract
  2. When you are approached by an organisation with real proof of a breach of intellectual property law.

Contracts with software publishers have 'Audit Clauses', the right to come and audit you periodically at your own cost. Your company either signed this and agreed to it or will need to fight against it. Smart companies negotiate it out of the contract by demonstrating maturity in their internal processes.

Breaches of intellectual property supported by evidence are a legal dispute and should be treated as such - by passing the issue over to your legal team in the first instance.

When to Ignore Software Audit Requests

Requests for 'Self-Audit' or other direct mail fishing exercises can be ignored.

Trade bodies such as BSA and FAST commonly write letters to companies requesting them to 'Self-Audit' or declare a 'Software Amnesty'.

These organizations are masters at crafting well-written legal sounding letters but have no legal authority whatsoever. Nor do they have the resources to follow up to every letter sent.

Just like any other complaint made to your business it should only be taken seriously if there is firm evidence or the organisation issuing the dispute is supported by the appropriate government agency. For example the Federation Against Software Theft (FAST) has no teeth whatsoever unless accompanied by HM Customs and Excise.

Confidence in Your Choices

IT departments with the appropriate Software Asset Management (SAM) processes in place have both the confidence and the supporting data to discriminate between bogus claims and genuine supplier audit requests.

Whilst much noise is made in the industry of senior management being sent to prison or the company name being dragged through the gutter - the real and compelling downside to a lack of software management is UNBUDGETED cost and DISRUPTION. Surprise license costs and massive disruption whilst IT staff are diverted from key projects to attend to an audit or hunt down the appropriate data.

Unexpected software audits can be good for your health in the longer term if it allows the organisation to realize it is out of control.

SAM is so much more than compliance and counting licenses. Organisations with a solid SAM practice are more nimble, competitive and dynamic. No more stalling on that virtualisation project because we're unsure of the licensing costs, no more uncertainty about moving to the cloud because we don't know how that leaves us contractually. SAM provides the business intelligence to innovate and take action.

Martin is an independent software industry analyst, SAM consultant and founder of The ITAM Review and The ITSM Review. Learn more about him here and connect with him on Twitter or LinkedIn.

IT Disputes - Spotting them Early and Resolving Them Quickly

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JimmyDesai.jpgYou might say that you can spot an IT dispute as soon as you see a few emails from your IT supplier to you (the Customer) demanding payment (or some other remedy). You, the Customer, may not being willing to pay for services which you believe have not been provided at all or to a standard which is far below what you were expecting.

However, from my point of view as a lawyer that has dealt with hundreds of IT disputes over the past 15+ years for customers, when I look through the documentation and correspondence in many disputes (which can be vast), it appears that those demanding emails or lawyers' letters (and the ensuing IT dispute) were a culmination of perhaps weeks (if not months or years) of more gentle emails between the parties which flagged that a dispute was on the way if the matters complained of were not resolved.

Hence, often the IT dispute actually began a long time before the demanding emails or lawyers' letters from the IT supplier to the Customer (or vice versa) began. Surely a party can stop an IT dispute in its tracks before it gets to the stage of demanding emails or lawyers' letters having to be sent at all ?

The chain of events or characteristics of an IT Dispute are often as follows:

  • IT supplier complains about Customer's actions (be it late payment, not providing the IT supplier with a proper brief, not fulfilling the Customer's side of the bargain by, for example, the Customer conducting or attending acceptance testing etc.)
  • Customer complains about IT supplier's actions (e.g. late delivery etc.)
  • At this point, it may be that neither party is completely without fault
  • The party at fault (or both parties) might ask for more time to conduct various actions or might ask for more information   
  • The actions of Customer and IT supplier are probably dependant upon one another and so if either party does not do 100% of what it was meant to do then the other party might complain that it could not do what it had to do because of the non-compliance of the other party
  • A party might agree to provide the other party with an extended period of time to do the relevant actions or to provide more information. This can sometimes be wrapped up in some kind of loose written agreement or email chains between the Customer and IT Supplier apparently agreeing what should happen 
  • Customer or IT Supplier (or both parties) might then not conduct the agreed actions on time
  • The parties enter into correspondence asking the other party to conduct agreed actions and, in the meantime, the parties go on and conduct other unrelated activities together (i.e. the project continues regardless of the difficulties between the parties)
  • Customer complains that work has not been done on time
  • IT supplier states that this work would have been done had it not been for Customer's own conduct
  • Customer queries why IT supplier did not do more to assist Customer or did not act in a proactive way rather than waiting for Customer to conduct the relevant actions
  • Customer withholds payment of various invoices and IT supplier claims payment of those invoices
  • Customer states that it will not pay for work that has not been done or which has not been done to the standards expected by the Customer
  • A more formal dispute begins between the parties 

This process can go on over many weeks, months or years but the culmination is often letters from a party's lawyers to the other party demanding various remedial action to take place.

The issues that the parties then face include:

  • they are both dependant upon one another regarding the project and so litigation is not an attractive option for either party - the Customer wants the project to be completed and the IT supplier is relying upon ongoing revenues from the Customer
  • the IT project might be business critical or high profile and the amount of money involved might run into hundreds of thousands or millions of pounds and so each party has a vested interest in ensuring that it is a success - entering into litigation can be seen as an admission of failure and this can be damaging to each party (and the individual people from each party who are involved in the project)
  • litigation is time consuming and costly and there is no telling exactly when the litigation will end - again, this is not good for either party
  • It is not absolutely clear what impact this might have on an ongoing project and this litigation may well end the project mid way through the project which is not a good result for either party (or the individuals at each party that are involved)
  • even if the project continues, goodwill and co-operation may be in short supply between the parties

To try to avoid this chain of events, I think (having dealt with numerous IT related disputes in the past) that it would definitely help Customers (and IT Suppliers) if they:


  • have some kind of early warning system so that if a party receives a complaint then each complaint is reviewed carefully in the first instance (perhaps by someone that is not actually involved in the day to day management of the project) to see what the substance of the complaint is and whether or not it has any merit
  • that complaints by either party are dealt with swiftly. If it is indeed a party that is at fault then remedial action is agreed as soon as possible in a formal written agreement
  • have the party's respective in-house lawyers look at the complaint (or external lawyer if there is no in-house lawyer) to advise on next steps. Far too often the parties try to patch up a dispute without a lawyer being involved and the patch up activity/agreement turns out to be inadequate and ends up forming part of and/or extending the dispute itself.
  • use lawyers who can demonstrate that they are IT law specialists and understand how IT disputes might arise and how they can be resolved as they will have a better understanding of the interdependancy between the parties on IT related projects

You may think that a lawyer is not necessary or is too expensive and should only become involved towards the end of this chain of events above. Alternatively, you may believe that involving lawyers may be seen as some kind of admission that the project is not going as successfully as people hoped it might.  

However, experience and case law tends to suggest that waiting until the end of the chain of events above before consulting your in-house lawyer or external IT legal advisor is far too late. It is often the case that if legal advisors had been engaged earlier on then there would be a better chance of resolving the problem at a much earlier stage in the chain of events above and before the matters balloon into a full blown dispute, at which point the relationship between the parties may be irreconcilable. 

I often get calls from clients where a dispute is just brewing or on the horizon.

Even if they just get general initial IT law advice as to how to deal with an IT related dispute, this will provide them with at least some comfort that they are dealing with the matter appropriately and in a way that protects their commercial and legal interests later on if the dispute continues.

Sometimes it can be just a few words and activities early on from an IT lawyer that can avoid a dispute escalating. This can help to make all the difference in keeping a project on track,  protecting the positions of the individuals that are involved in the IT project and avoiding litigation and Court proceedings later on. 

If you would like a summary of some recent cases which demonstrate the principles above then you can obtain these from me (for free) by emailing me at














(Legal) Questions about the Cloud

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I've been at a number of IT conferences over the last few weeks where people have spoken about the changes in the IT industry and the general direction of travel - where will IT be in 2yrs, 5yrs and 10yrs+ time ? Conferences on IT now tend to have at least some discussions about the cloud

But what is the Cloud ? The National Institute of Standards and Technology defines it as:

"Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction".

The term "cloud" is also used as a metaphor for the Internet, based on the cloud drawing used in the past to represent the telephone network.

However, talking about the "cloud" with delegates at these conferences, each person seemed to have a different opinion upon what exactly the "cloud" consisted of or what services would be included in "cloud" services.

Many IT suppliers talked about how "cloud" services could benefit customers via cost savings for those customers but there was some uncertaintly as to exactly how IT suppliers could make reasonable profit margins out of IT suppliers providing "cloud" services.

From a legal perspective, the "take away" points for me from these conferences about cloud were that:

1. If an IT supplier is providing "cloud" services then it is really important to understand how these services are provided, who they are provided by and where they are provided from - here rules and regulations relating to Data Protection are likely to come into play;

2. Does the IT supplier's business model work regarding providing you with these services. For example, is it clear that the business model that the IT supplier is using has a proven track record and that it is enduring so that the IT supplier can make a profit out of providing its services on a long term basis.

This is important because if the IT supplier's business model is not robust or profitable then problems that the IT supplier may face may, in turn, actually start to become a problem for you as the IT customer;

3. The legal terms of any IT supplier need to be scrutinised carefully to establish 1 and 2 above.

However, other questions arise that need to be answered to your satisfaction such as:

- is there a Service Level Agreement (SLA) and what are the remedies for breach of that SLA ?

- what happens if there are internet outages ?

- what security and confidentiality measures are in place to ensure that data that is stored and processed by the IT supplier is safe and secure ?

- what kind of exclusions and limitations does the IT supplier have in its standard terms - i.e. what kind of events or circumstances does the IT supplier exclude or limit its liability for ?

Overall, the message I took away from these conferences was that although Cloud services can provide benefits, including cost savings, BEFORE entering into a Cloud Services Agreement with an IT Supplier it is important to double check that (i) the services that you are receiving are, in fact, what you expect to receive (in terms of pre-defined standards, speed of delivery and continuity); and (ii) the legal terms upon which the services are being provided to you do not leave your organsiation exposed to any unnecessary risks.

At the moment I'm reviewing cloud service agreements for a number of clients and so if you would like more tips on what to look out for in these t's & c's then please get in touch.



7 Clauses that IT Customers Should Consider

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I've been negotiating quite a few IT contracts this week and I thought that it would be interesting to reflect upon the kinds of clauses that IT Customers should ask for but which they often don't. I think that this is partly due to many IT Customers studying an IT Supplier's standard terms and conditions and working to improve clauses that the IT Supplier has tabled.

For example, the IT Supplier might have said that the IT Customer can only terminate upon 12 months notice and the IT Customer then spends a lot of time trying to reduce this termination period so that the IT Customer can, say, terminate upon 6 months notice. Clauses like these are important but the focus of the IT Customer is then centred on this type of clause, whereas a lot of other clauses which are simply not mentioned in the IT Supplier's standard terms and conditions do not even get considered by the IT Customer.

Hence, an IT Customer may simply improve upon the IT Supplier's standard terms and conditions but might sometimes forget to add its own new ideas, thoughts and clauses to the IT Supplier's standard terms and conditions.

Here are 7 clauses that you, as an IT Customer, should at least consider tabling in negotiations on IT Contracts with IT Suppliers:

1. Most Favoured Nation Clause - The general purpose of this clause is to say that you as an IT Customer are getting no less favourable prices than any other customers of the IT Supplier. Further, you might add that if the IT Supplier provides any special deals to customers in the future then you, as an IT Customer, can ask to have those deals and you can take advantage of those deals - this means that you will not lose out on future deals offered by the IT Supplier to "brand new customers only".

2. Price Caps -  You may ask that the prices that are quoted will not rise throughout the period of the contract or, if they do, then these are capped at a certain percentage increase and that the price rises can only happen, say, once a year.

3. Renewal - You may ask that if you renew the contract, let's say for another 12 months, then the prices that you agreed at the start of the original contract will apply to the renewal period, rather than new increased prices being quoted at the time of renewal.

4. Benchmarking - For larger and long term contracts you might ask that the prices and services are compared against the market average at regular points in the contract (e.g. every  2 years) so  that the prices that you are being charged are in line with the market. This is the general idea although this kind of clause can become complex as there are plenty of variables such as, for example, how are prices and services compared against "the market" and it might be difficult to compare "like with like". 

5. Termination Fee -  You may agree particular "break points" in the contract where you can exit the contract early and for no fault of the IT Supplier on the payment of a pre-agreed termination fee to the IT Supplier. This might at least provide you with an option to exit the contract early if your circumstances change such as if your organisation merges or is taken over or if you simply do not require the services any more (for whatever reason).

Otherwise, without such as option, you might be "locked into" the contract for the full duration or, alternatively, you might explain the position to the IT Supplier at the time but at that stage your bargaining position may be weak. Further, any termination fee that the IT Supplier might require at that time might well be much higher compared with if a termination fee had been pre-agreed at the start of the contract when you might have had a better bargaining position.

6.  Step-In Rights - The general idea behind this type of clause is that if the IT Supplier's performance is poor then you have the right to "step in" and operate the services (or part of the services) yourself or via one of your agents (i.e. another IT Supplier). This step in right might be used in certain limited circumstances (i.e. if there has been data loss). However, before tabling this kind of clause you need to carefully consider whether or not you would ever really invoke such a clause in reality and the practical consequences of invoking such a clause. 

7. Data Protection -  If your IT Supplier is processing personal data on your behalf then there are a whole list of clauses that should be inserted into the contract to ensure that, amongst other things, the personal data will be kept safe and secure and that it will not be transferred to countries outside the EU. The list of conditions regarding an IT Supplier processing your data can be extended to include issues such as the IT Supplier notifying you as soon as it becomes aware of any data loss.

These are just some of the "additional" types of clauses that you might consider adding to standard terms and conditions that might be presented to you by an IT Supplier. However, a word of warning - it is important to make sure that these kind of issues are tabled in the right context and to make sure that such clauses are appropriate for the type, nature and duration of the particular IT services that you are buying. 

Next week I'll provide some tips on cloud computing, the pros and cons and also things to watch out for when negotiating these kind of deals.



Indemnities in IT Contracts - What is the "standard" position?

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Imagine the scene in one of the deals I was doing recently. It was a long negotiation on an IT deal which was nearing its conclusion and I was acting for the IT customer. One of the last issues to be finalised on the deal was the issue of indemnities...

The usual debates played themselves out regarding the IT customer asking to be indemnified for a whole range of issues, in the knowledge that during negotiations it would probably have to accept that these would be whittled down to just a few indemnities (i.e. starting high but with a strategy of being prepared to accept something lower).  The IT supplier refused to give any indemnities "on principle" (i.e. starting low but being prepared to be pushed higher). So, after this apparent stalemate, the traditional legal and commercial debates regarding indemnities began and the parties eventually agreed to a relatively "standard" position on indemnities.

So, what is this relatively "standard" position" ? It's important to have a general idea of what this looks like so that at least you know what you are aiming to achieve in negotiations.

To understand this issue, it's important to understand what an indemnity is. Generally when an IT supplier indemnifies you for an event then if that event occurs the IT supplier will reimburse you for your losses regarding that event without any real obligation on you, as the IT Customer, to mitigate your losses. I remember one lawyer referring to it as "a blank cheque" and although this is a bit of a sound bite it tends to capture the essence of what an indemnity is about although I appreciate that this doesn't really give you the whole story.

Because an indemnity has this onerous nature, it should only be used in contracts where it is for very specific events that might happen, where those events are so serious that the party not at fault should be indemnified for that event.

Going back to the relatively "standard position" on indemnities, the indemnities that were included were: 

1. An IP indemnity - In general, if the IT Customer was sued or incurred losses for using IP that the IT Supplier had provided to the IT Customer then the IT Supplier would indemnify the IT Customer for losses suffered or incurred by the IT Customer as a result of this;

2. Confidentiality - each party indemnified the other party for any breaches of the confidentiality provisions of the agreement;

3. Data Protection - an indemnity was incorporated so that each party would indemnify the other party for any breaches by it of data protection law.

However, these indemnities were subject to caveats such that the party claiming on the indemnity had to:

1. notify the other party promptly of any claim on any indemnity;

2. not make any admissions regarding the indemnity to any third party;

3. provide reasonable co-operation to the indemnifying party in respect of the indemnity:

4. allow the indemnifying party to have control of any proceedings or actions regarding the indemnity if any third parties were involved in respect of the indemnity - i.e. if any third parties were suing the IT Customer and the IT Customer was, in turn, looking to claim any of its losses from the IT Supplier under the indemnity given by the IT Supplier;

5. mitigate its losses

What was not included in the contract was:

1. An indemnity given by the IT Supplier for any breaches or alleged breaches of any of the terms and conditions of the contract by the IT Supplier (i.e. the IT Supplier was not going to provide an indemnity to the IT Customer for every clause of the contract)

2. A cap on the indemnity (i.e. the indemnity was unlimited)

There are a number of interesting cases on the subject of indemnities and these are interesting to read if you are involved in negotiating indemnities in contracts.

Codemasters Software Co Ltd (Codemasters) v Automobile Club de l'Ouest (Automobile) Chancery Division (Patents Court)  25 November 2009 .

Automobile had a licence agreement with Codemasters. Part of this licence agreement warranted that use by Codemasters of car manufacturers' names would not infringe any IP rights. However, when Codemasters incorporated certain materials into its computer game, car manufacturers claimed that Automobile did not have the rights to grant such licences. Codemasters sought to rely on an indemnity in the licence agreement. The Court held that there are good reasons why parties agree to indemnities against third party infringement claims: generally the licensor of intellectual property rights is in a better position to ascertain whether the exploitation will infringe third party IP rights and so the Court ruled in favour of Codemasters.

Another interesting case is Rust Consulting v PB Limited regarding enforcement of indemnities.

I think that key issues regarding the indemnity position are:

  • understanding what indemnities stand for in IT contracts
  • understanding what the relatively "standard position" might be regarding indemnities in IT contracts
  • keeping up to date with case law on indemnities

Next week I'll look at interesting clauses that you, as an IT Customer, can add to contracts in order to make the IT contract more favourable for you.


What is Your IT and Business Strategy?

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When providing legal reviews of IT related contracts, one of the questions I ask IT customers is "What is your IT and business strategy ?".

This is because it usually starts a conversation about the background to the IT contract. This in turn provides a lot of guidance for me about where I should focus my attention on the legal review and also allows me to add value to any legal review of that IT contract. 

If you don't talk to your lawyer about your IT and business strategy regarding an IT contract, but simply ask your lawyer to do a "legal review" in isolation, then at best you will not obtain much added value and at worst you could end up in disputes or losing huge amounts of money.

Many disputes in IT contracts arise out of delays, the IT not working properly, the standards of the IT not meeting pre-agreed specifications, the pricing structure not being clear or the price of the IT being more than anticipated. Hence,  a "standard" legal review will tend to focus on clauses that relate to these issues.

However, explaining your IT and business strategy to your lawyers will really help to make their legal reviews much more useful. 

Here are typical examples of why it has been useful for me to talk with clients about their IT and business strategy when conducting legal reviews of IT related contracts.  

Case Study 1 - I was asked to do a legal review of an IT contract by a well known national organisation. The IT contract consisted of the supplier's standard terms and conditions.  Having asked about and discussed the IT and business strategy with the CIO of the national organisation, it became clear that the national organisation might merge or take over other organisations in the near future. Hence, I inserted a break clause for the national organisation into the IT contract just in case the national organisation merged. As it happens, the national organisation did merge and this break clause was invoked by the national organisation so that the IT contract was terminated, allowing the newly merged organisation to select a new IT supplier that was more appropriate for its needs. In this case, if a break provision had not been inserted then the national organisation might have had to retain the original IT supplier or pay for the remaining portion of the contract which would have been very expensive.

Case Study 2 - An IT customer asked me to look at an IT supplier's terms and conditions where the minimum term was for 3 years, the reason for the 3 year term being that this would entitle the IT customer to better prices from the IT supplier. However, once I asked the IT customer about its IT and business strategy, it became clear that the IT customer was quite uncomfortable about entering into a 3 year commitment as it was not sure how its business levels would fluctuate over that 3 year period. The IT supplier would not agree to provide the better pricing if the contract was for less than 3 years. What I managed to negotiate for the IT customer were break clauses into this contract where the IT customer paid fixed payments to the IT supplier based upon the lost profit of the IT supplier if the contract was terminated early by the IT customer. This way, the IT customer obtained the better pricing and the IT Customer at least had the option of exiting early for a pre-agreed fixed price.

Case Study 3 - I was asked to review a contract for an IT Customer where the IT supplier had standard terms which said that the contract would only be for 12 months after which the contract was subject to review. Having spoken to the IT Customer, it became clear that they were quite keen on the IT supplier because it had specialist and unique skills and, because of this, the IT Customer actually wanted to work with the IT supplier on a long term basis, perhaps for 3 to 5 years. However, the IT Customer was satisfied with this 12 month contract because it was just "trying out" the IT supplier for 12 months to see how things worked out in practice. Again, having understood the organisation's IT and business strategy, I added provisions to the IT contract which said that the IT Customer could renew the contract on the same terms as the original contract at the end of the 12 month period with prices staying the same (except for an adjustment for inflation).

This avoided the situation of the IT Customer having to renegotiate the contract and the prices at the end of the 12 month period, especially if the IT supplier felt that the IT Customer was dependant upon the IT supplier at that point, which might have encouraged the IT Supplier to increase prices significantly.

Interesting points include:

  • explaining your IT and business strategy to your lawyer will help you to get more value out of any legal review of an IT contract rather than simply asking your lawyer to do a legal review in isolation
  • in each case above, the person doing the deal for the IT customer mentioned that the legal contract review had really helped to align the deal more closely with the IT customer's key business objectives and helped the IT customer to avoid business risks 
  • the legal fees in each of the contract reviews above were less than £1,500 ex VAT but in each case I would estimate that the added value or costs saved by each IT customer  were more than £30,000 (and in one of the cases probably more than £150,000)

Next week I'll talk about indemnities in IT contracts including what they are, should you demand them from your IT supplier and what customers normally agree to in their IT contracts when it comes to indemnities.


p.s. If you are involved in Outsourcing Deals or SLAs then take a look at these links and the work that I'm involved with:

What do IT lawyers actually do?

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In Computer Weekly, blogs and the press in general you often see quotes from various IT lawyers with tips or comments on recent cases or new legislation. However, how does that join up with the work that an IT lawyer actually does on a daily basis ? 

The typical IT lawyer's work is a regular diet of advising upon IT related contracts, IT related terms and conditions (e.g. websites and data protection policies) and advising upon any disputes that arise out of IT contracts. There are also a whole range of other IT law specialist areas such as SLAs, Intellectual Property, domain names, encryption and data security, databases, cloud computing and open source code that will keep the IT lawyer occupied.

In the next few weeks and months I will share some of the general IT law problems and issues that typically come up from time to time in my daily working life as an Technology & IP Law partner in London at law firm Beachcroft LLP ( I will share some of the legal and practical solutions that have been created and I hope that some of these solutions will come in useful when you are looking at your own IT systems and contracts.    


If you are interested in IT Outsourcing Contracts or SLAs then why not have a look at these links:

About this Archive

This page is a archive of recent entries in the Legal: The Technology Counsel category.

IT Works is the previous category.

licensing is the next category.

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