The speakers were:
- Natalie Hunt – In-house legal counsel – Marks & Spencer
- Sacha Wilson – Associate – Bristows LLP
- Mark Taylor – Partner – Osborne Clarke LLP.
Following an introduction from Mark Taylor, Natalie discussed the following issues in relation to the negotiating of an IT contract:
Preparation
When preparing to negotiate an IT contract, it is important to bear in mind the end goal of the business. This will include consideration of the business case, the cost, the solutions under consideration and any request for proposal or tender documentation.
It is necessary to identify and engage with the key stakeholders in the business at an early stage. You also need to engage with the key subject-matter experts, eg procurement teams, sales negotiators, and cyber security teams.
Take the project time-line into consideration. You need to take into account implementation timing and the fact that suppliers will need time to provide tender responses. You also have to allow time to engage with internal stakeholders. It is a good idea to work backwards and to identify key steps/deadlines and key people. Be alert to internal business requirements which may affect timing (for example, internal sign-off processes). The requirement to complete the deal by budget year-end may also affect timing.
Role in negotiation
The role you adopt will depend on the circumstances and the nature of the project. An in-house lawyer’s role is not set in stone – in negotiating an IT contract, that role need not be limited to a legal one.
Try to keep advice practical and commercial and avoid legal jargon.
Sometimes it is a good idea to stand back and think about the project as whole. An in-house lawyer may be in the best position to ensure different stakeholders are aligned and communicating with each other effectively. Sometimes the in-house lawyer may be the only person in the business who has spoken with all the relevant stakeholders about a particular project and may be in the best position to spot potential pit-falls in relation to a project.
Alternatives to a fully negotiated agreement
Depending on a business’s appetite for risk, the circumstances and the nature of the project, there may be alternatives to a fully negotiated contract. But one would of course normally opt for a fully negotiated agreement. One of the advantages of a fully negotiated contract is that it gives the purchaser the opportunity properly to assess the key risks.
Occasionally a provider of IT services will commence provision of services before a contract is signed. For example a provider of IT services may start work based on a heads of terms. This can be risky as heads of terms often fail to address important aspects of the contract.
Occasionally if the business procuring IT services wants a supplier to start work urgently, the supplier may commence the services without any negotiation at all. For example, the business procuring IT services may enter into a contract on a supplier’s standard terms. This can be very risky and is not advisable in a significant IT outsourcing. There needs to be trust between the parties.
It is also possible to put in place short-term agreements based on agreed success criteria which remain in place whilst the business and the supplier are negotiating the main contract. But this is not always appropriate.
Sacha Wilson
Sacha discussed the following five key future proofing issues which should be considered when negotiating an IT contract:
· customer flexibility
· change management
· framework structures
· customer improvements/tech refresh and
· exit.
Customer flexibility
In order to future-proof a contract for a customer, the customer is likely to need some flexibility in respect of its use of the IT services. Does the contract enable the customer to use the technology in the way it needs to or may need to in future? For example is use of the technology restricted to “internal business purposes”? Is use of the technology restricted to a certain number of end-users, or a particular group company? If so, this could potentially be a problem following a group restructure or an outsourcing.
Change management
There needs to be a clear mechanism for changing a contract. Having a clear mechanism gives the parties the proper opportunity to assess the implications of the change and ensures that the change is properly documented.
Generally changes should be mutually agreed. However, if customer is in a strong position, certain changes can sometimes be made mandatory (eg where changes to a contract are required pursuant to a change in a regulatory regime which applies to a business operating in a regulated sector or a change in a particular law).
The contract will need to set out who pays for changes. If the supplier will incur additional expense, should the change be included in the agreed fees? This can be difficult to negotiate. Different approaches are possible.
Framework structures
Sacha discussed the use of master services agreements and summary of works. These can be very useful in certain circumstances (eg if the customer wants to carry out a pilot of the relevant IT services). Framework structures can be simple or complex (for example where each summary of works is deemed to be a separate contract). You need to consider which documents take precedence in a framework structure (for example whether a summary of works should take precedence over the framework agreement or vice versa).
Customer improvement/tech refresh
Provision for customer improvement/tech refresh is sometimes included in an IT contract. If the relevant provisions are not well-drafted, it can sometimes be unclear what the supplier’s obligations are in relation to tech refresh. If the provisions are too one-sided, they could potentially undermine the customer’s credibility in negotiation of other points.
Exit
What happens in terms of exit when the contract comes to an end? It can be difficult to raise this issue in negotiations, but it is critical for the customer. The customer will want to ensure services continue during run-off period. It may take time to find an alternative supplier. An exit plan should be seen as a living document. It should be updated to reflect changes to these services throughout the life of the contract. You need to consider who bears the cost of exit assistance. The customer should be realistic – the supplier is unlikely to provide a good service if it is not receiving any form of payment or is making a loss in providing services during the exit period.
Mark Taylor
Mark discussed the following three key steps in negotiating clauses relating to liability and indemnities:
· risk assessment
· adapt (eg draft clauses) and
· negotiate.
Risk assessment
There is a clear need to balance the risks involved. It is unrealistic to expect the customer to bear all the risk; it is also unrealistic to expect the supplier to bear all the risk.
The key question to ask oneself is: “Do you understand what would happen if X went wrong”. Unless you are able to answer this question, you are unlikely to be in a position to assess what is acceptable in terms of liability.
The approach to assessing risk should take into account the following:
· Are there any particular third parties who may claim against you?
· Should warranties/indemnities be mutual?
· On liability caps, should you include one overall cap for all liability or have separate liability caps?
· Is a claims procedure required?
· What is the contract value/profit/revenue? Consider what the profit margin is for your client or the revenue (it can be detrimental for your client if you negotiate too good a deal – for example if the contract is drafted in such a way that the supplier is making a loss, the customer is more likely to receive a poor service from the supplier).
Adapt
The following factors should be considered in drafting liability/indemnity clauses:
· Liability caps – is cap per year, per event or in aggregate?
· Will the cap be calculated on a rolling annual basis, or will it be a fixed cap for each contract year?
· Will indemnities be within the cap or outside the cap?
· Which losses will be recoverable and which losses will be excluded? Advantages and disadvantages of excluding/including specific heads of loss – if acting for the customer are you confident you can predict all the losses which the customer might suffer?
There are risks arising from a lack of a substantial remedy if liability/indemnity provisions are too one-sided.
Beware of “market practice” arguments in negotiations. If it is not clear why a particular approach applies, don’t’ be afraid to challenge that approach.
The following factors should be considered in drafting indemnity clauses:
· Be clear in the contract about what the trigger for the indemnity is.
· Is the indemnity subject to a general duty to mitigate? The courts suggest there is no duty to mitigate, but there are certain exceptions.
· Consider the meaning of “hold harmless” in an indemnity provision.
· Should a conduct of claims wording be included?
· You cannot indemnify against criminal fines/procedures.
Negotiate
Mark discussed a number of IT contract negotiation scenarios he had encountered in real-life. Attendees discussed the approach they would adopt in each situation and shared some of their own experiences of similar scenarios.
Mark finished by providing each attendee with a contract negotiation scenario. Each scenario required attendees to adopt the role of either a supplier or a customer and negotiate the liability and indemnity provisions in an IT contract with a partner. Attendees then discussed how they approached the negotiation.
Michael Ahyow is an associate in the commercial team at Osborne Clarke
