Uncovering the big issues in small print

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.

manuncover_150.jpg

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

Read more on IT for small and medium-sized enterprises (SME)

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.

-ADS BY GOOGLE

SearchCIO

SearchSecurity

SearchNetworking

SearchDataCenter

SearchDataManagement

Close