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Bulletproof Technology Contracts

Posted 17th September 2010 by Jagvinder Kang, Director

Introduction

This edition of the Technology Column is on the topic of 'Bulletproof technology contracts.' It could be quite a brief article, by saying that such contracts simply do not exist (unless of course one side has not been properly legally advised!). However, the reason for broaching the topic, is that unfortunately, there are a number of businesses that think that not only do such contracts exist, but that they are also entitled to have them! To make matters worse, sometimes it is the respective supplier or customer client's lawyer that spurs them on with such thinking.

The Bulletproof Approach

I have had a number of occasions over the years (and again more recently within the last few months), where my clients and I have been faced with such situations. The reason why it typically occurs, is that a party feels that if the other side is in default of any arrangements, then it should be entitled to compensation and other remedies. As a general principle, this does not seem to be too bad a proposition, however, the absurdity comes into it, when:

  • a party raises the bar so high, that it will be inevitable that the other party will be in breach of the contract; and/or
  • a party feels that all remedial action should take the form of full reimbursement in respect of all losses (i.e. an 'indemnification' approach).
Implications of the Bulletproof Approach

There are a number of implications of attempting to 'bulletproof' a contract, including the following:

  • the time to conclude negotiations will be extended, due to the additional debate which will inevitably be generated as a result of such discussions;
  • a greater number of escalations or referrals will be required to the client's commercial team, in order to resolve contentious 'bulletproof' positions which are being proposed by a party. This will not only feed into the above issue, with regard to prolonging the timescales for concluding the contract, but it is also likely to start straining the relationship between the parties, as further referred to below;
  • highlighting that the party attempting to 'bulletproof' the contract is not being advised by a specialist technology lawyer who is familiar with the usual industry practice, or that the respective lawyer is simply being deliberately difficult;
  • successful technology arrangements need to adopt a 'partnering' approach between customers and suppliers - therefore, 'strong arm' tactics at the outset, are unlikely to be conducive to such a relationship; and
  • commercial qualifications being included within the deal unnecessarily - this could take the form of increased price and time being built into a project and therefore the contract, in order to mitigate the risk where a customer client is pushing too hard on certain positions — as the supplier is left with no alternative, but to build in commercial contingencies into its proposition, if the customer is unwilling to adopt a more realistic approach. This of course will adversely affect a customer from a 'value and strategic proposition' perspective, with the customer being left in a position where it is paying more than it would normally have to, and not being able to realise the strategic advantages from a project as quickly as it would otherwise prefer.
Shooting Down The Bulletproof Contract

From the above, it should be evident that a strongly one-sided contract, is not an appropriate approach. The key instead, is to bear in mind appropriate risk apportionment - balancing the pricing and commercial arrangements under the contract with an equitable share of risk to both parties.

Sometimes it is the IT team themselves, that are pulled into these commercial discussions, to help decide what the final arrangements in respect of these issues should be. It is important to ensure that a 'level head' is kept in such discussions, rather than a lawyer spurring on their client with a hypothetical and totally unrealistic doomsday scenario (- in my experience, this seems to occur more when lawyers who dabble in technology contracts and `badge' themselves as technology lawyers are involved, as their view of industry practice and norms seems to be greatly distorted - which of course is not surprising, when one considers that they do not have the relevant breadth and depth of expertise to provide such objective views).

In particular, one needs to bear in mind, that there are things which can be undertaken by the respective clients to mitigate against risks (such as internal business continuity and disaster recovery measures, or insurance), and in view of such, an appropriate balance should be capable of being achieved in the contract.

Final Thoughts

It is important to remember that technology contracts, particularly software development and implementation contracts, have a number of important aspects which differentiate them from contracts for the supply of simple goods. If one overlooks this, then it will give rise to the types of implications which are referred to above.

It is important to bear in mind, that the customer and supplier are looking to enter into a cooperative, rather than litigious, arrangement. It is therefore incumbent on the lawyers, to ensure that their respective clients are guided, by using an approach of 'pragmatism' rather than simple 'penalisation'.