This article from Kit Burden and Heidi Kwei of Barlow Lyde & Gilbert comments on the factors which parties need to consider when considering the use of a framework agreement for an IT project or a series of projects.
IT projects are invariably complex and technically involved. Software development or systems integration projects for example may have different specifications and timescales for different aspects of the project, with the result that the parameters of the project are difficult to define at any one time. For instance, a large multinational company with several international affiliate group companies might need to have its business processes and systems integrated and harmonised; it may want to use specific software which will be tailored to its business needs, followed by the global roll-out of the new business processes. Such a project would involve various stages (including strategy development, change management, applications development, applications implementation and programme management). The client company and the supplier could either seek to use a single contract to provide for all of the contractual arrangements in respect of the entire project, or a framework agreement which caters for more than one project, or more than one aspect of a single project. This article comments upon the factors which the parties need to consider when deciding upon how to structure the contractual arrangements for such a project.
Why use a framework agreement?
With a typical software development contract, it is often not feasible at the time of contract to define all the details of the nature of the services or the timescale for each of the phases which will take place throughout the project until the first phase (eg the design) has been completed. A single contract can govern the performance of the entire project by including provisions for future phases to the extent then possible; it caters for the details yet to be ascertained by providing that such details in respect of future phases will be agreed upon by the parties at some future date.
In contrast, a framework agreement provides the outline structure of the project generally and sets out the main terms and conditions to be applied, for example with regard to payment, IPRs, liability and termination. Each phase is then governed by a separate service agreement which details the nature of the services to be provided and expressly incorporates the terms of the framework agreement by reference.
Advantages of using a framework agreement
In effect, the framework agreement acts as a safety mechanism. If the relevant service agreement is silent as to certain terms (such as payment or acceptance procedures), it will automatically default to the framework agreement, which may provide for payment on a time and materials basis subject to any other provisions contained in the service agreement.
Flexibility can be catered for by means of service agreements which facilitate the use of different provisions for different phases. For example, the responsibility of the supplier may need to be increased or reduced to reflect the input of a third party during a particular phase, or perhaps a change in the acceptance procedures may be required.
A framework agreement can easily be extended to other parties and can be used to provide a flexible contract for client group structures (however, careful drafting would be required in such circumstances, so as to ensure that the ‘flow through’ of terms properly reflects the circumstances of the other entities involved, and takes account of any local laws or trading conditions). Where the client company has international affiliates, the framework agreement can be used to facilitate the roll-out of the systems solution to those foreign affiliates with the use of service agreements drafted to take account of local law abroad. In this way framework agreements can be used to effect multi-jurisdictional arrangements.
Another benefit is that termination of the framework agreement does not have to affect the applicability of its terms to the individual service agreements which are then underway, since the terms of the service agreement in respect of that phase will continue regardless and vice versa.
In theory, the use of framework agreements can save time and costs as the time taken to renegotiate contractual terms in detail will be reduced (although the service agreements may still need to be negotiated to some extent). Framework agreements can also be used as the basis for the contract on entirely separate projects (and many agreements are negotiated on this basis, ie for use on as yet unknown engagements). A properly drafted agreement should be easy to use and the standardised contract terms covering various service offerings is a good incentive for clients to use them.
Disadvantages
Unfortunately, the counterpart to the flexibility afforded by a framework agreement is the lack of commitment that it entails. Obviously, each party will want the other one to be bound to provide or receive all the services envisaged for each phase and to stick to the set rates originally contemplated, but since each service agreement is subject to separate agreement between the parties it is possible for one party to walk away at any time, leaving the other party potentially with either (in the case of the client) a partially completed programme of work or (in the case of the supplier) costs which have not yet fully been recovered. As a result, the supplier might stand to lose work if the client decided to contract with another supplier to do one of the later phases. Likewise, the client may have become dependent on the supplier in respect of its knowledge of the project, the product itself and the IPRs which attach to it. In the event of the supplier walking away, the client would have to duplicate a lot of effort to bring another supplier up to speed. The client could also be put into a difficult position if the supplier decided, for example, that it wanted to increase its rates.
Another disadvantage perhaps is the scope for differences in drafting. The use of future service agreements creates a degree of risk for both parties that they will not be drafted to the same standard as the previous agreements. In order to counteract this, quality control procedures need to be put in place to deal with any drafting discrepancies (and, if necessary, to ensure adequate legal/contractual review).
Finally, both parties must recognise that one size does not fit all. The terms of a framework agreement must be tailored to fit the services provided under each individual service agreement, as the sub-projects involved may have very different kinds of requirements.
Which type of contract?
There are factors which need to be considered by each party in respect of what type of contract should be used. It is of course important in any contract to define who the parties to the contract are. If the benefits under the contract are intended to extend to both the client and its affiliates, it is essential that those affiliates are named as parties to the contract or else the supplier runs the risk of liability in tort (or its foreign equivalent) if the party receiving the services is not included in the contract.
In respect of the extension of the contract to other jurisdictions, the supplier should bear in mind that if it provides a substantial amount of services overseas, the tax authority of that jurisdiction may deem the supplier to have a permanent establishment there, which may result in adverse tax consequences attaching to the supplier’s provision of services. The use of a framework agreement enables the respective local subsidiaries and recipients to enter into service agreements directly in order to avoid that risk. If using a single contract, the supplier would have to ensure that he would be indemnified by the client for any adverse tax consequences.
In addition there is the question of how liability should be capped. Framework agreements allow the supplier to ring-fence liability by capping liability under each service agreement to a certain amount. However, clients should be wary of this if the framework agreement is genuinely focussed on a single project, albeit one being carried out in stages. Under a single contract a client might prefer to cap liability at the aggregate amount of all fees paid to the supplier in respect of every phase.
Conclusion
Obviously each party will need to consider carefully for themselves the implications involved in opting for a particular contractual mechanism. As a basic guideline however, a framework agreement is likely to be suitable if the parties want to maintain a degree of flexibility with regard to certain provisions and/or to set a general basis for working together. If on the other hand the parties want to ensure that the other is bound to providing or receiving the services on the terms agreed for the duration of the project and the details of that project are reasonably clear, then use of a single contract may be more appropriate.
In short, whilst framework agreements can constitute a tidy, flexible and time and cost efficient contractual device, careful consideration and drafting is still required to ensure that they are tailored to meet the needs of the project and its respective phases as opposed to being used as a standard precedent for all transactions.
