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SMEs taking ownership of big IT contracts

IT Legal expert Louise Handley of Leeds-based law firm 3volution says IT SME contractors shouldn’t be afraid to scrutinise the small print when chasing deals with big clients

In the last few months we have seen an influx of IT contractor clients asking us to look at their contractual agreements. Outsourcing IT projects of all sizes is a trend that’s been building for a while, but what is really encouraging to see, is the increasing number of SME providers taking control of their legal position when contracting with bigger organisations. More are interrogating the legal details and seeking adjustments to contracts before signing.

Web developers, systems integrators, software licensors and application management service solution providers who want to more effectively manage their working arrangements would do well to focus on three key contract headings: intellectual property, customer dependency and liability. Of course, there are many other aspects to a legally binding deal that need attention but this trio is currently causing (or solving – depending on your stand point) the most contention.

Be sure to identify precisely what you and your customer will own once the work has been completed. This requires a careful assessment of your existing intellectual property (IP) and making sure that it is properly protected prior to embarking on your new contract. That will be things like source code, templates and methodologies.

If your proprietary IP isn’t ring-fenced, your client may end up owning everything you bring to their project and could prevent you using it again. Having established what’s yours, take the smart route and provide your client with a licence which is to be used only in relation to the new products and services you have developed for them. 

Now we come to client dependency. Most contractors know that getting (most) new projects up and running is a stop-start business, so the astute ones will act on this business reality to negotiate the appropriate contingencies. For example, a systems integrator client of ours was wary of the robustness of the legacy platform he was to augment and so we negotiated client dependency relief provisions for him.

Essentially this ensured he wasn’t liable for delays resulting from the condition of the pre-existing platform – in particular those of which he couldn’t reasonably be expected to be aware. He was however, in a position to negotiate new timescales if necessary without risking costly penalties.

The aim is to avoid being in a position where you are liable for any defects or delays caused by the client or a third party, and to make sure you continue to be paid while you wait.

Finally, whilst liability caps are not freely offered by outsourcing organisations, growing caution amongst SME contractors is putting the need for them in the spotlight, which is a good thing. Those trying to align project values with the very high cost of potential contract breaches are keen to negotiate reduced levels of compensation.

Sadly, a number of technically excellent IT development and integration businesses have seriously struggled because of un-capped compensation claims – claims that were beyond their insurance cover.

Whilst capping liability is getting more attention, indemnity obligations which are excluded from caps on liability are being missed. For example, exclusions for data protection breaches, breaches of confidence, IP infringements, wilful abandonment and even negligence. A lot of contracts now have these and they’re catching contractors out.

Whether it is the increased number of contracts being offered by larger organisations, or SME contractors learning difficult business lessons from delivering these projects, there is most definitely a growing desire to shape IT outsourcing contracts into more practical working documents. That in turn is hopefully bringing greater clarity and parity to the working relationship being forged between the development team of, say, just five people and the high street retailer or Government body employing 50,000.

3volution specialises in intellectual property and information technology, corporate, commercial and employment advice, commercial and property litigation

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