Legal Download 2.0 - IT contract issues

Tsung Wei Wong, Legal Consultant (Technology, Media and Commercial Group), DLA Piper Middle East

The following statement will come as no surprise to the average IT professional - there is no such thing as a ‘standard' IT contract. IT projects come in all shapes and forms, and each requires a different form of contract. Indeed, IT projects can encompass the gamut of IT outsourcing and managed services deals, software development contracts, software and hardware supply or service agreements, or even IT turnkey contracts. Trying fitting an agreement used for one type of project onto that used for another would therefore be akin to trying to fit a large round peg into a tiny square hole. It just does not work.

Nonetheless, there are some key issues that every IT professional or legal professional specialising in IT contracts will have to address when faced with an IT contract, that are separate from the issues faced in other types of agreements. For the purpose of this column, we will not address the usual generic contractual issues, but will look at a few of the key legal issues specific to IT contracts.

Key IT Contract-Specific Issues

In the Beginning - What Will Be Provided? An examination of the IT contract often first entails, and indeed requires, a review and understanding of the specification of the technology to be provided. Technical specifications are, by their very nature, the province of the IT professional, but because legal risks in IT contracts can often arise from loose or inappropriate wording in the specifications, a level of legal guidance is often required. A useful checklist would be to ensure that the specifications (i) contains a clear description of the technology or solution to be provided; (ii) sets out clear details as to performance, functionality or capacity of the technology/solution etc; and (iii) does not use inappropriate legal terminology.

In this respect, we often find the words "complies with the specifications" used in an IT contract, and this shows clearly the importance of ensuring accurate and unambiguous technical specifications.

To What Standards? Next, one would have to consider what are, or should be, the standards of performance of the services/obligations under the agreement. Performance standards can employ either broad standards (using terms such as "good industry practice" or "proper and professional matter") or specific measurable performance metrics, that can be set out in a separate document such as a service level agreement, or indeed both. While the use of measurable performance metrics is usually preferable, parties should always consider which is more appropriate in view of the type of IT contract in question.

Will It Be Acceptable? Another important step in the contracting process is the determination of when (depending on what is being provided) all deliverables have been provided or the system functions as it should. For this purpose, most IT deals use ‘acceptance tests' as part of this determination. It is essential for the parties to agree on what acceptance tests to use to determine this event. The scope of such tests also need to be clearly agreed upfront, including the acceptance criteria, timelines, and what will happen at each stage of acceptance testing. This is especially important in an IT contract since customer payment often hinges, and supplier obligations cease, upon successful acceptance. Clearly agreed parameters would therefore ensure that there is no ambiguity once the parties enter the acceptance testing stage - the customer will know when the solution works, and the provider will know when it can be paid.

Who Owns What? Consideration of intellectual property issues is an important aspect of any contract review, but especially so in the case of IT contracts where the ownership and licensing of intellectual property underpins the use of the technology or solution. It is also for this reason that intellectual property issues tend to be tricky to address. In particular, the parties will need to consider:

• what each party will be providing and/or producing with respect to the project (and hence what intellectual property rights will need to be licenced);

• the terms and scope of any intellectual property rights licences required by either party; and

• to what extent each party is willing to grant indemnities to the other party for any potential infringement of a third party's intellectual property rights - it is normal for the licensor of the intellectual property to provide an indemnity against any loss caused to the licensee due to claims of infringement by a third party.

The End - What Happens Now? Nothing lasts forever, and the fast pace of technology development ensures that nowhere else is this more true than in the IT sector. The customer may wish to upgrade its solution or service or switch to a new supplier; the supplier may in turn wish to move on to other projects. It is therefore important for the parties to consider the potential termination or expiry of the IT contract, and build in a process to address this eventuality. This may involve a transition process for the handover of services and deliverables to the customer or its alternative service provider, or a flexible change procedure that allows parties to move on to newer, alternative technologies. Alternatively, even after a supplier has been terminated, the customer may still need the continued provision of support or maintenance services until an alternative service provider or technology is sourced, and the contract should provide for this.

As can be seen from the above, IT contracts are, by their very nature, a very separate and special type of contract that requires special care and expertise. For this reason, having lawyers or legal advisors with background or experience in the relevant technical area is a real advantage, as it will ensure that the technical professionals receive relevant, useful and accurate advice that enable them to understand the contractual touch-points and effectively cover legal risk in respect of technical specifications, technical standards, and even acceptance criterion.

To this end, we hope that we have provided you with some pointers as to some of the issues of legal risk to be flagged the next time you receive an IT contract.

The author, Tsung Wei Wong, is a Legal Consultant with DLA Piper's Technology, Media and Commercial Group in Dubai.

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