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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
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| "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.
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:
- Re-negotiate the clauses.
Clauses that are seen as potential problem areas should
be reworked for future transactions.
- 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.
- 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.
- 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 minus@networkmagazineindia.com
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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
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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
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| Source:
Nishith Desai Associates www.nishithdesai.com |
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