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You have been in discussions with an IT supplier about implementing a major new IT system for your transport business. Should you just sign the supplier’s quotation and his standard terms and conditions?
As most IT projects experience problems, it is statistically unlikely that implementing your integrated transport system will go precisely according to plan. Most standard terms are not especially favourable to customers – so if something does go wrong, the standard terms could seriously undermine your ability to pressure the supplier to rectify the problem at no extra cost. For example, standard terms often make it the customer’s responsibility to ensure that the new software is compatible with the existing system. However, often the IT supplier is better placed to advise on this and it is important to ensure that the contract reflects this.
Most IT suppliers will provide a 'specification' document setting out what they are proposing to implement. They are also likely to provide a timetable for implementation. Both must be reviewed to ensure they reflect your requirements with sanctions for the supplier’s late implementation. They must also be clearly linked to the standard terms, otherwise a court may not regard them as part of the contract (and they will not be binding on the supplier). Your payments to the supplier should be linked to the achievement of specific milestones and it is advisable to hold a significant percentage in reserve until final acceptance.
It is essential to ensure that your new system fits your requirements and integrates with your existing applications before you accept and pay for it. Both the timing and the scope of the acceptance tests must be agreed in advance. IT suppliers' standard terms often deem acceptance to have occurred automatically on the customer’s 'live' usage of the system – your staff need to be made aware of this. Ideally, the contract should also spell out what happens in the event of non-acceptance; for example, requiring the supplier to remedy any defects within an agreed timescale.
It is important to agree in advance exactly what your IT supplier will be providing in terms of support, maintenance and upgrades. The scope of such 'service levels' must be documented and sanctions should apply if they are not met. Often the sanctions provide for the customer to receive a 'service credit' (ie an amount is deducted from the amounts to be paid under the contract) if the specified service levels are not met. However, to be enforceable the level of the service credit must be proportionate to the customer’s likely loss.
Given the risk of problems arising, it is worth building procedures into the contract that are designed to avoid a complete relationship breakdown, such as:
Where the supplier has failed to meet its contractual obligations, eg to deliver on time, a liquidated damages clause may allow you to claim an agreed amount of compensation without going to court. However the courts will only enforce it if the amount of compensation is not excessive, ie it corresponds to the customer’s likely loss.
If the software supplied was based on code which was not developed by your supplier, your business could face claims for infringement of a third party’s intellectual property rights. An IPR indemnity would oblige your own supplier to meet the costs of dealing with the claim – so it is usually worth having.
An escrow agreement requires the software supplier to deposit a copy of the source code with an escrow agent, eg the National Computing Centre, which would only release it in certain circumstances. For example, if your supplier became insolvent, access to the source code would enable you to bring in another software firm to take over maintenance and upgrades.
By: Richard Marke and Lucy Etherton
Richard Marke is a partner and Lucy Etherton is a lawyer at City firm Travers Smith.
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