Key Negotiation Aspects in Technology Contracts

In Depth

Key Negotiation Aspects in Technology Contracts

Abhishek Mathur | April 2015

INTRODUCTION

This article is written for supplier-side technology business managers, legal advisers and commercial contracts managers with the view to outline certain special characteristics of technology services and products contracts. In the outline, certain topics are briefly described so that the key points during contract negotiation with the customer are addressed properly. The larger intention is to establish a robust contracting practice in the company in order to produce relatively risk-free contracts.

HANDLING LIMITATIONS OF LIABILITY:
Customers ideally would like to include an unlimited liability for the Supplier making this area a big risk area for the Supplier. During negotiations, all care should be taken to exclude any and all forms of indirect damages and concentrate on accepting only direct damages and tat too in a mutual fashion. The most important point however is to clearly limit to a measurable amount, the aggregate liabilities. The amount could vary as per services and products supplied but in way should exceed the amounts actually and to limit the number of liability claims. If not negotiated properly, the claims in most countries may put the Supplier at the risk of an unlimited liability with the potential of finishing off the whole company.
NEGOTIATING INDEMNITY
Indemnity entails making goodor compensating the losses suffered by the Indemnitee. The Indemnitor, which in most likely scenarios, is the Supplier, must therefore be very careful as in may clauses, indemnities ride over and above the Limitations of Liability which is to say that indemnities are framed in such a way so that they become exceptions. These exceptions are the key negotiation points and while it is a good advice not to actually accept breach of contract indemnities, at the same time, indemnities for intellectual property right breach and for gross negligence are a sort of industry standard. The key point here is to have a look at the contract in entirety and build enough mutual protection and risk cover and limiting indemnities to actual third party claims only. For contract breach claims, the most appropriate suggested forum is the dispute resolution process, and not indemnity claims.
RATIONALIZING LIQUIDATED DAMAGES
This clause becomes the bane of many a contract because of its dynamic nature and the fact that there are many subsequent statements of work in which the liquidated damages clause might slip in, despite the legal and contracts team’s best efforts. It should be made clear to the customer that while liquidated damages might act as a deterrent for a Supplier not meeting service level agreement, anything beyond a certain percentage is likely to actually find its way in the subsequent price/quote by the Supplier. It is a good practice to negotiate liquidated damages clause limit in the main agreement rather than each individual statement of work to have a better risk control.
ACCEPTING WARRANTY
The negotiation priority for a warranty clause differs whether the supplier is into services or products. In case of products, the strategy will be different in case the Supplier is an original equipment manufacturer or a reseller. In the former, there could be customer’s reluctance to accept the
GRANTING INTELLECTUAL PROPERTY (IP) RIGHTS
Customer will always want the right to “own” the IP which has been created by the Supplier. While it is an accepted practice to transfer all IP which is created as work for hire,and there are some clear laws stating the ownership of the IP created, it must be borne inmind that all IP clauses must be linked to the timely payments. Suppliers who do not link the IP transfer to payments are sitting at a huge risk. Also, the Supplier should negotiate properly the definitions of pre-existing IP and residual IP. Negotiating IP rights should make an exclusion for Supplier granting perpetual licences or commercial use, both of which can potentially empower the Customer to use Supplier’s IP and render the Supplier’s IP rights practically useless.
SUBMISSION TO A PARTICULAR JURISDICTION
Supplier should keep mind that this clause, though, mostly not invoked, can actually make or mar its chances of success in the case of a dispute. While many Suppliers traditionally take a view that it is only natural to opt for a jurisdiction where the Customer is headquartered or where the services are rendered. While this view is not completely wrong or legally incorrect, negotiation should happen if those places are out of reach of the Supplier, whether financially or for practical reasons. Dispute resolution in an expensive and unknown jurisdiction is as bad as losing the contract money because the time and efforts spent in an unsuitable jurisdiction might eat away into the Supplier’s profits no matter the final outcome given by the adjudicating body.
DISCUSSING OTHER IMPORTANT CLAUSES:
There are other clauses too, which actually need the same negotiation-emphasisand the list of clauses above, is by no means an exhaustive list. For instance, the Termination Rights clause should be negotiated properly lest it should allow the Customer to abruptly end the contract. Termination should be linked to proper Payments clause and in case of a partial termination by the Customer, there should be penalty provision inserted in the contract. Even termination due to breach should be linked to timely payments. Payments in turn should be made as per the standard company practices and late payments must attract an interest in accordance with permissible
RESPONDING TO NO-DEVIATION BIDS
All negotiations actually come to a standstill upon the mention of the clause which says something like “No deviations permitted. Any deviations will make the Supplier’s bid liable to rejection”. One of the ways this can be approached is to prepare a key points deviations-list and alternative-clause document and present it at the time of submission of the bid. Remember that invitation to bid is not an invitation to contract so there is a fair chance that if the Customer zeroes in on the Supplier, there is again going to be an opportunity to discuss and negotiate those key clauses. There are certain government tenders where no deviations allowed and for those tenders, the company has to take an informed decision, based on its strategy, delivery capacity and risk taking ability. Contracts are much more flexible in the private enterprise scenario and all efforts must be taken to mitigate risks through proper negotiation

CONCLUSION

A good negotiation around key clauses can make a huge difference in the company’s profits, credibility and market value. Prioritisation of clauses to be negotiated and conveying their real intent to the Customer makes the business go stronger and relatively risk-free.

About Author

Abhishek Mathur

Based in the New Delhi office, Abhishek Mathur is a Junior Associate in the Litigation Team of Dhir & Dhir Associates. He has completed his LLB from Symbiosis International University in the year 2019 and holds a diploma in Competition Law from National Law University, Delhi. His area of interest and expertise lie in Banking and Insolvency Laws, Intellectual Property Law and Competition Law. He regularly represents clients in an array of matters before various Courts and Tribunals including DRT, DRAT, NCLT, NCLAT, High Courts and the Supreme Court.