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Issue of August 2003 
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Cover Story: Enterprise-wide IT Projects

The recipe for Business Contracts

Incorporating processes like risk assessment, risk management, and negotiation before signing the contract will enable the IT user and vendor to have a well documented contract in place. by Minu Sirsalewala

"IT customers and vendors need to be extra vigilant before the execution of a contract. As signing on the dotted lines is no guarantee that your back is covered" —Vaibhav Parikh, Head of Technology Law Team, Nishith Desai Associates (Legal & Tax Counselling)

One needs to be cautious when drafting business contracts with vendors and implementers. Vaibhav Parikh, Head of Technology Law Team, Nishith Desai Associates puts it this way: "It is better to build a fence around the cliff, rather than fall of the cliff and have first-aid ready. Similarly, an organization signing a contract should spend more time in negotiating the contractual terms rather than have clauses providing solutions for issues arising in the course of the business."

Drafting a contract is a collective effort of the management board, operations, and the legal department. All three play an equally important role in this activity. There are certain essentials that one should follow while drafting the contract. A strong framework of the contract would ensure that the services and products meet the business objectives, quality, and security needs.

Especially in the IT industry where buying and selling of products, solutions, services or any kind of business arrangement needs to be documented to ensure that the parties involved have their roles, deliverables, liabilities and obligations clearly defined. Technology disputes involve unique legal and business issues. The document comes in handy if disputes of any kind arise in the future.

Incorporating processes like Risk Assessment, Risk Management, and negotiation before signing the contract will enable the IT user and vendor to have a well documented contract in place.

Risk Assessment

Conduct a technology audit to evaluate the existing products and solutions, and to identify inconsistencies in software licenses and AMCs, if any.

The audit helps to evaluate the rights and obligations of the organization and to identify inconsistencies in the system.

Risk management/Legal re-engineering

After assessing the risk the enterprise needs to mitigate those risk factors. This is known as risk management or legal re-engineering. The enterprise should identify the top 10 key areas that need to be addressed to mitigate the risk.

There are two ways to mitigate risk:

  1. Re-negotiate the clauses. Clauses that are seen as potential problem areas should be reworked for future transactions.
  2. Consider non-contractual issues like company details, background, and services offered while drafting the clause.

Legal re-engineering helps an enterprise to evaluate its position and take measures to reduce the risk.

This is then followed by signing of an MoU. Many parties generally sign an MoU before entering into a business contract, after which the process of documenting the contract begins. It takes approximately 6 - 8 months to draft a contract after the MoU has been signed. A service level agreement is also documented as a part of the contract.

A service level agreement (SLA) differs from a contract. It is a form of contract, but limited to the quality of service to be provided with the deliverables from the vendor. Whereas a contract is a detailed document covering a wide range of areas and implications of situations that could arise in course of the business.

The service levels should be clearly defined.

  • Specify deliverables, performance to be measured, methods for measuring service levels, etc.
  • Include provisions to audit the performance.
  • Provide for credits and bonuses.
  • Timely reports on the performance of services.

Any contract involves some kind of negotiation, from both the vendor and the user. It is advisable to put time and effort to these negotiations to avoid future inconsistencies.

Negotiation strategies

  • Set up a negotiation team.
  • Use time to your advantage.
  • Avoid boilerplate agreements.
  • Document everything in detail.
  • Adopt a balanced approach to negotiations.

Negotiating tips for the customer

  • Ensure that the vendor has a team of dedicated people to handle a particular transaction.
  • Impose training requirements on agents working on a transaction.
  • Ensure the vendor has the latest technology and infrastructure.
  • Prohibit the vendor from sub-contracting/assigning its services to a third-party without the customers consent.
  • Include a non-compete clause.
  • Indemnification of losses/damages.

Negotiating tips for the vendor

  • Carefully consider conditions relating to compliance with foreign laws.
  • Examine obligations relating to industry specific regulations
    of the country in which the customer operates.
  • Ensure that the contract does not restrict the vendor from entering into future transactions.
  • Obtain representations and warranties pertaining to timely payment of fees.
  • Non-solicitation clause.
  • Limitation of liability.

Intellectual Property issues for the customer

  • Ensure that the vendor has a valid right to use the software deployed to provide services.
  • Seek indemnification in case of any suit on the vendor for using infringing software.
  • Ensure control over the manner in which the vendor uses the customers copyrights, patents, and trade marks.
  • Negotiate ownership of all IP developed by the Vendor during the provision of services to the customer.
  • Protect confidential information.

Intellectual Property issues for the vendor

  • Ensure ownership of IP during and after termination of the contract.
  • Negotiate joint ownership of IP developed during the performance of services for the customer.
  • Control use of all IP licensed to the customer.

Term and Termination

  • Specify the term and provide for automatic renewal, unless expressly terminated.
  • Incorporate provisions for the aggrieved party to terminate the contract if the other party commits a material default.
  • Include provisions for termination for convenience after reasonable notice.
  • Provide for a transition phase - Termination Assistance Services.

Effects of termination

Ensure the following issues are taken care of:

  • Outstanding fees.
  • Escrow, if any.
  • IP and confidential information.
  • Current work orders.
  • Termination fee - if terminated for convenience.

Additional issues

  • Privacy and data protection.
  • Applicability of foreign laws.
  • Governing law and jurisdiction.
  • Dispute resolution.

Minu Sirsalewala can be reached at

12 things to consider before signing the contract

1. Know what you want
Document your requirements in detail and communicate these clearly to the implementer or vendor.

2. What you see is what you get
Don't go by promises, claims and assurances, even if these are given in writing. Ask for proof of concept and visit a reference site that runs the same application in an environment that's similar.

3. Look at volumes
What's the load (volume of transactions) that the system can handle today and tomorrow (when your business expands)?

4. Total Cost of Ownership
Don't only look at the cost of the solution. Rather, think about the cost of all components required to support the new solution. Include recurring costs, cost for software licenses, AMC costs, etc.

5. Recurring costs
Don't get locked in to expensive AMCs, or be forced to pay for software upgrades in advance. Ask the vendor to give a break-up of such costs for the next 5 - 6 years. There should be no surprises later.

6. Understand the solution
What kind of functionality does it offer? Does it fulfill your business requirements? How much customization and fine-tuning will be required?

7. Compatibility and integration
How well does the new solution integrate with existing infrastructure? Platform compatibility is crucial, else TCO goes up.

8. Product roadmap
The product may address your business requirement but how strong is it in the market? What kind of roadmap does the vendor have for the product? If unsure, select alternate product.

9. Support
What kind of support infrastructure does the vendor have in your country? How big is its commitment to India? Does it have a presence here or does it operate through local partners?

10. Vendor credibility
Will the vendor be around seven years hence to support the solution? Can the vendor's solution evolve with your business and with evolving technology? Check the financial stability and credibility of the vendor.

11. Skill sets
What kind of skill sets (people) are available in the market to support and maintain the solution on an ongoing basis?

12. Spend more time making the contract
User organizations spend too much time negotiating prices with vendors or discussing implementation strategies in-house. Instead, they should spend more time thinking about the possible risks and should plan for these upfront. Then put clauses in the contract to protect yourself. Get a good advocate.

What should a contract capture?

  • Nature of the transaction
  • Scope of services to be rendered
  • Performance specifications
  • Accountability and measurement standards
  • Pricing structure for services
  • Schedule of deliverables
  • Factors like employment, confidentiality, termination, limitation of liability, indemnification, etc.

Characteristics of a good contract

  • Minimize future disputes by laying down the rights and obligations of each parties
  • Clear and unambiguous statements
  • Definitions play a crucial role, they need to be well understood and defined mutually
  • "To be mutually agreed" is the most abused term
  • Number of pages do not count - shorter agreements could be more dangerous
  • Limit open issues
  • Avoid long term open issues especially ones likely to arise after dispute. E.g. arbitration, termination assistance services, etc
  • Short term open issues may be included, e.g. acceptance tests
  • Liability should be inversely proportional to control

Drawbacks of poor documentation

  • Incomplete documentation of obligations of the parties
  • Inaccurate categorization of service volumes and charges
  • Customer dissatisfaction
  • Additional expenses for both the parties
  • Disputes over the terms and conditions
  • Loss of reputation
Negotiate your contract

Contract negotiation process

Negotiation scale

Assessment of business and legal risks

1. Categorize events/issues as :

  • Non-negotiable
  • Give Aways
  • Not important

2. Impact vs. Probability TheoryImpact vs. Probability Theory

Scope of services

  • Transcribe the entire scope including resources for providing services, etc.
  • Include provisions for increasing the scope and fees for additional services
  • Provide exhibits with complete and accurate content
  • Ensure consistency of exhibits with terms of the agreement
Source: Nishith Desai Associates
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