Achieving ‘Best Practice’ Technology Contracts

Practical steps to creating technology contracts that meet real world requirements

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By  Chris Edwards Published  January 5, 2010

Technology products and services look set to continue their critical role in assisting companies navigate through the challenging economic environment during 2010. A recent Gartner survey revealed that an overwhelming majority of CEOs believe that IT-enabled changes will be a key element in their firms' post-recession strategy. Therefore, despite the wide-scale reduction in procurement and legal budgets within companies, the need to ensure technology contracts meet best practice is as relevant as ever.

This article highlights, often overlooked, practical steps that parties to a technology transaction can take to efficiently conclude a contractual document that accurately reflects the deal struck.

Preparation

To finalise a contract for any transaction - preparation is key. Given the often complex and detailed nature of technology transactions (e.g. outsourcing, managed services, software licences, cloud services) a customer needs to ensure that their reasons for entering into such a transaction are clearly documented. This aids a legal counsel's (internal or external) understanding of the deal and lays the foundation for production of a first draft closely reflecting the transaction, thereby reducing the need for extensive re-drafts.

Large scale technology transactions often require input from a range of individuals within a company. A project manager should ensure that all work streams (e.g. legal, commercial, technical, finance) are aware, prior to beginning any negotiation phase, of their responsibilities and inputs required to finalise the contractual documents. Where necessary, external advisors should be consulted and involved in this process in order to leverage their industry expertise.

Drafting clarity

As with all legal documents, technology contracts should be written in plain understandable language. Legalisms, use of archaic language and overly complicated clause structures should be avoided. As a general rule, if the terms of a contract cannot be understood by a non-legal person within a company - it needs to be re-drafted.

Clearly drafted contracts enable efficient negotiations. Parties can immediately understand their respective positions and respond/negotiate accordingly. For further information, the Plain English Campaign has free guides available on the subject at www.plainenglish.co.uk.

Company policies

Companies that are often involved with technology transactions (e.g. managed services providers, equipment/software vendors) should consider implementing standard policies on issues which continually arise in negotiations. Such issues often include:

    • intellectual property ownership/licensing;

    • transfer of risk and title in technology goods/products;

  • • service levels and service credits;
  • • liability levels;
  • • indemnity provisions;
  • • termination rights;
  • • payment terms;
  • • change control procedure.

By adopting standard corporate policies/positions, a company can easily identify areas of a draft contract which may require amendment. It is appreciated that certain material contracts will necessitate a bespoke approach. However, clearly understood company policies/positions can assist considerably in providing a starting point for effective and efficient negotiations.

Contract schedules

Although not widely acknowledged, the schedules to a technology contract are often its most important part. A contract's schedules provide the real detail of any transaction. Descriptions of services or products, governance arrangements between parties and payment provisions are just a sample of the critical areas often dealt with in the ‘back-end' of any contractual document.

In the pressure to conclude deals, schedules are often left to the end of a negotiation process long after the front-end terms have been painstakingly negotiated, revised and amended. In such a scenario, the same level of extensive review and ‘stress-testing' is often not applied to a contract's schedules.

Legal advisors can assist the efficient finalisation of schedules by creating ‘drafting guidelines' at the outset of a transaction. Such guidelines should detail how schedules should be structured and drafted. In our experience, this approach provides non-legal drafters with a clear roadmap on how to produce and present important schedule content.

In practice, companies often produce the first drafts of non-legal schedules. This approach is encouraged as it enables key commercial/technical representatives to contribute their specific insights and expertise into the contracting process. However, a company must always consider the appropriateness of a legal ‘review' prior to finalisation. A legal review is commonly required to uncover any potential risks lurking within. Examples include:

• a schedule containing ambiguous language (e.g. presence of undefined terms or ‘sales' language which does not impose any form of obligation);
• the obligations set out in the front-end terms being diluted or made more onerous by the content of a schedule;
• a schedule's content being in conflict with the front-end terms - posing a significant commercial and legal risk to both parties;
• unqualified ‘agreement to agree' language (e.g. language stating that "A and B will be agreed within X days" which often creates problems rather than providing a real process/solution for the parties to implement); and
• a schedule not containing all the required information/content as envisaged in the front-end terms.


Further, companies should be aware of counter-parties providing ‘final' schedules that seek to re-align the risk allocation positions agreed in the front-end terms of a technology contract. For example, in an IT managed services context, a supplier may seek to dilute its core obligations by providing an SLA schedule that includes event carve-outs to meeting specific service levels. Whereas, a customer may seek to insert unrealistic descriptions of services within a schedule which could place the supplier at immediate risk of default.

Contract management and communication

During a negotiation process, companies should involve, where necessary, all the individuals who will ultimately be involved in the operation and management of the technology contract. This will ensure that the contract accurately reflects the reality of how the contract will be managed in practice (e.g. acceptance testing, notice provisions, acknowledgements, etc.). Timeframes for completion of tasks/obligations within contracts are often incorrectly determined by lawyers or management who might not appreciate the particular realities ‘on the ground'.

Finally, a company should make it a priority to keep its internal staff and external advisors abreast of any developments regarding a transaction, and its business in general, which could impact on the technology contract in any way. An open dialogue with external advisors especially is key to a company obtaining effective and transaction specific advice.

Conclusion

In seeking to efficiently conclude best practice technology contracts, companies should keep in mind the following practical steps:

• undertaking thorough preparation at the outset of a transaction;
• adopting a plain English policy for contractual documents;
• formulating standard company policies on common negotiation issues;
• ensuring appropriate focus is given to schedule content; and
• involving key individuals (internal and external) in the negotiation process.

Chris Edwards is Senior Legal Consultant with DLA Piper. For more from DLA Piper, see www.dlapiper.com/uae or follow the company's twitter feed www.twitter.com/dla_piper_news

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