This article on the key legal issues with IT contracts was written by Simon Halberstam, head of technology law at Hill Hofstetter.
As a techlaw dinosaur, I have acted for thousands of tech providers and procurers. Most people are blasé or, to put it kindly, uninformed about the legal issues with IT contracts when buying IT software or services.
Usually nothing goes wrong but when it does, it can be very problematic and costly.
Based on 27 years in this field, negotiating IT contracts, I have distilled the most common problems I have unearthed with contracts drafted by other lawyers.
7 key legal issues with IT contracts
1.Transfer of Intellectual Property Rights (‘IPR’)
If the software (or a website) is being developed or customised for you, make sure you get the IPR assigned to you. You’ll also need to verify that the party purporting to assign the rights to you is the actual owner.
2. Licence Flexibility
Software licences are prescriptive, meaning you are only allowed to do what they expressly permit. You need to make sure that you can move the software to a different server and location, that a third party, for example an outsourcer, can use it on your behalf and that you can transfer the licence to a third party.
3. Service Level Agreement (SLA)
Nowadays, software is often provided as a service, notably Software as a Service (SaaS). These services each depend on the internet as a backbone. You will have deadlines to meet and the internet is subject to glitches. To protect yourself, you will need to agree an SLA which provides the appropriate guarantees in terms of uptime, backups, disaster recovery and business continuity and may provide service credits to you in the event of breach.
4. IPR Indemnity
If a third party alleges that the software that has been provided to you either under licence, by way of SaaS or otherwise, actually belongs to it (and not the supplier who provided it to you), you may well face a claim for unlicensed use or copyright infringement. Furthermore, you may be prevented from making any further use of the software.
With this in mind, you need to ensure that the contract contains a comprehensive IPR warranty and indemnity from the original provider.
Most standard software licences and IT services agreements contracts contain extensive exclusions and limitations of liability. This may mean that even if the provider is in breach of the contract, your recourse is very limited. These clauses need to be negotiated carefully so that you are not left in the proverbial lurch.
6. Source Code Escrow
Often, even if you are investing considerable sums in a software licence, your rights are limited to object code. This will generally mean that if the supplier goes bust, you will no longer be able to have the software maintained or modified. You should therefore consider inserting provisions into the contract to secure access to the source code of the software. This is usually done via an ‘escrow agreement’ with an independent third party.