Man and woman talking Home | News & events | Legal updates | IT contracts: Friend or foe? Key considerations

IT contracts: Friend or foe? Key considerations

22 March 2010

Whether on the receiving end of poor performance or the party in breach of an IT contract, identifying objectives from the outset is essential.

Do the parties wish to continue their relationship and is it simply a case of finding ways to improve performance? Is termination or an agreed exit the ultimate aim, or, indeed the only option? It may even be the case that there is no breach, but an exit is still required for reasons outside the agreement.

There are key provisions to scrutinise in IT contracts when a potential dispute arises; whether that dispute is an outsourcing IT related dispute, a software supply and licensing issue, or a flawed design or system implementation issue.

Check the provisions on breach. Once a breach has been identified, notice may be required and an opportunity given to remedy the breach.

If termination is on the cards, check carefully the termination provisions. These usually stipulate the grounds for termination, any notice period, and how and where notice is to be served - and they must be complied with.

If the termination provisions are not followed, a party may find itself on the receiving end of a claim for losses suffered as a result of wrongful termination. Such a claim is often based on the loss of projected profits for the remainder of the term.

Where a party believes it has a right to terminate, it should take care not to prejudice that right. For example, the party should not take steps that may be seen as 'affirming' the contract. This does not even have to be a positive act. Allowing the party in breach to continue performing the contract in itself could be sufficient.

Other rights and remedies - including indemnities, which generally allow for an easier recovery of loss than a damages claim - may be stipulated in IT contracts. These may be preferable, or may be the sole remedy available to you because termination might not be an option.

Or there may be a claim outside the contractual framework (certainly in cases where the contract is filled with limitation provisions or exclusion clauses), such as BSkyB's claim in deceit brought against EDS. For further details of the issues raised by this case please see our earlier legal update.

Parties may need to comply with dispute resolution clauses, which may prescribe certain steps to be taken in short timeframes.

Alternative Dispute Resolution (ADR) - mediation, executive mini trial or expert determination - should be considered.

Many companies choose ADR to resolve their disputes as it provides certainty, control, flexibility and confidentiality. The prospects for parties to continue working together can be better if some form of ADR is used to resolve the dispute, which could be crucial for parties to a long term IT contract.

If contemplating termination, plan for post-termination. If IT services are being provided, does hardware need to be transferred? Do licences/assignments need to take place in relation to software, or do you need to make provision for access to the source code? Are 'transition services' required?

What does this mean?

Claims arising from IT contracts may prove difficult. Contracts can be complex, the subject matter can be challenging, and as services are often business critical, a quick resolution may be needed.

Future co-operation may be required, so the relationship must be preserved, if possible, to enable obligations to continue to be performed, or so that post-termination issues do not become a headache.

What should you do?

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

Get in touch

Helen Pickford

Associate
T: 03700 86 4189
I: +44 (0)121 625 4189
E: helen.pickford@shoosmiths.co.uk