W W W . D I N
S
L A W . C O M
IT Contracting Tips and Considerations
July 16, 2009
Harvey Jay Cohen, Esq.
Geoffrey L. Oberhaus, Esq.
Dinsmore & Shohl LLP
255 East Fifth Street
Ste. 1900
Cincinnati, Ohio 45202
Contracting Procedures
Legal Department involvement
IT Steering Committee
Proactive Strategic Use of IT Professionals
Long-Term Planning
Scaleability
Interface with Security Function
Managing Access
RFP/SOWs Generally
RFP should be as detailed as possible as to all software (programs, versions and configuration),
services, specifications and pricing (milestones). Less detail = provider advantage
RFP should focus on Implementation (scope and timing), Training, Support and Maintenance
and Post-Termination Transition and fees for all of these
Response to RFP should carry little weight as a contract document, except for specified
portions excerpted and attached to the contract as part of the SOW, i.e., promised specs, time
frames, etc.
SOWs attached to the contract should not include language affecting provisions in the body of
the contract; i.e.
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Warranties
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Exceptions to warranties or indemnities, limitations on liability, credits
RFP Provisions (For Later Contract)
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Reporting
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Provider vs. Customer responsibilities
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Limitations on liability
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IP Ownership
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What is “in scope,” out-of-scope?
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Change orders
RFP Provisions (For Later Contract) Cont’d
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Turnaround process on acceptance
RFP Provisions (For Later Contract) Cont’d
Services to be performed – Cost
Deviation from Estimates or Response to RFP discussed in Agreement
RFPs/Responses
Other required third party licenses or hardware required?
Require in RFP that these items be listed explicitly in the response.
–
Can be a significant expense
–
Identify every configuration, software, hardware, training, installation, support and maintenance
cost
Does the software provider get a preferred license discount?
RFPs/Responses Cont’d
Cost Containment
If prices decline? The CPI might decline. Which CPI?
MFN
Change Orders
–
Require to be written and signed by CIO or other person in charge of project
Changes are inevitable – but written change orders at least help keep
management informed. Number sequentially. Detail, detail, detail
Travel Expenses
–
Set policy. Consider cap that requires written approval in advance for any
RFPs/Responses Cont’d
Deliverables
Timeline and milestones
–
Tie payments to milestones. Limit up front payments (10-15%)
without milestone acceptance. Go-Live Sign-Off
–
Hold back % for x days post acceptance/Go-Live is key. 10% 90
RFPs/Responses Cont’d
Timeline of Deliverables Cont’d
Testing and Acceptance
–
Who is responsible for testing and reporting errors. How test?
Which Environment? What Data? No “deemed acceptance” if
do not reject in x days
–
Turn around time frames
–
Maintenance and down time around financial reporting periods?
RFPs/Implementation/SOWs
Installation and Training
Who will perform? Where? Is it included in the license fee?
Train the trainer?
Post RFP Contracting Process, Example
ASP Projects, Learnings
Ensure that the Schedules and Specifications are specific enough to enforce what is bargained for, including
operations and services
Minimize upfront payment; payment for acceptance of milestones, maximize holdback and holdback period
IP Ownership, particularly of improvements/developed materials; Interfaces
Termination for cause (SLAs and warranties) and convenience
Transition – the ability to exit if the arrangement is not working, while assuring that services will be provided
during any transition. Are you wedded to the vendor?
Indemnification and Limitations on liabilities – including, what to indemnify for/against (i.e. limiting
patent/trademark/copyright to U.S. or insisting on worldwide). Often the last point agreed
Confidentiality – what is covered and how long does it last? Perpetual until an exception is satisfied. Delete
Post RFP Contracting Process, Example Cont’d
ASP Project Learnings
Safe maintenance of data; return of data, data loss
Approved subcontractors and subcontractor Confidentiality Agreement
Information Security Standards/Audit (SAS 70, etc.)/Disaster Recovery. ISO
standard
Use by Affiliates, divested entities. Need for a Transition Services
Agreement
Timely information necessary to meet reporting obligations
Consistent Provider-trained personnel
IP Ownership in General
Everything we do (improvements, developments)
Interfaces
Everything done specifically for us (subject to some
IP Ownership
Services & Custom Developments
–
You hire software company to develop certain functionality, interfaces;
consultants and contractors
May want to prevent software company from offering same functionality to
IP Indemnification
Include at least patent and copyright indemnification
Should be excepted out of any limitation of liabilities
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Average patent litigation cost is between $1-3 Million!!
Consider right to participate at Licensee cost
Current Version vs. Past Version
IP Indemnification
Narrow Licensor’s ability to remedy infringement or to refund a small portion
of license fees
Supplier may at its sole option and expense: (i) procure the right to continue
using such Product as provided hereunder; (ii) modify such Product so that
it is no longer infringing; or (iii) replace the Product with another product
with equal or superior functional capability. If none of the foregoing is in
Supplier’s determination commercially reasonable, Supplier shall have the
right to terminate any and all licenses and sublicenses to such Products
granted hereunder. If Supplier terminates any of the licenses as described
above, (x) Supplier shall refund the applicable license fees paid therefor,
prorated over a straight-line three year period and (y) Licensee shall
immediately deliver to Supplier all copies of the Products in its possession
or control
Confidentiality
Protect any confidential information that Licensor may
learn – especially when the Licensor or their
subcontractors will be present at your facility for
installation, service or repair
Privacy Concerns
–
HIPAA, EU Data Directive, etc.
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Competition
Confidentiality
Employees and Contractors Exhibit – IP Ownership, confidentiality and
No Copy Provision:
Back-up/Disaster Recovery License
Consider including language which allows software to run on back-up server
for testing environments, disaster recovery and training
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Complex software and systems can impact other software and systems
SLAs/Warranties
The more detail the better
The broader the better: Functionality, Scaleability/Capacity/Stress
Tests, Laws, Professional and Workmanlike Manner, Defects in
Material and Workmanship, Operate to Specifications, Configuration,
No interference with rest of systems, Industry Standards; No viruses
The fewer exceptions the better
What is the remedy and is it commercially realistic?
Time is of the Essence
SLAs/Warranties
Standards of Performance
Can the software deliver what was in the brochure or RFP
response? To specifications? Attach specs
Services rendered to what standards? Industry standard?
Other specifications?
Comply with Federal and State laws
See exceptions on handout
SLAs/Warranties
Viruses
SLAs/Warranties
Service Levels – Maintenance Agreements
Severity Levels and Response Times
What happens when the software or hardware fails? How long to respond, fix? What does fix
mean? When must vendor physically come on site? Test with what data?
Source Code Ramifications; Need to operate/modify?
Re-performance as sole remedy is unacceptable. Almost every
damage is “consequential” so do NOT permit this standard
clause. Agree on a liability cap
Do Not permit re-performance or a small refund to be the Sole
and Exclusive Remedy
SLAs/Warranties
The Stick!
Penalties for missing response times
Exclusive Remedy? A breach? X failures in Y months is a breach
Include as trigger for source code escrow release/updates/updated documentation/production
environment?
SLAs/Warranties
SLAs/Warranties
SLAs/Warranties
SLAs/Warranties
SLAs/Warranties
Warranty Disclaimers
Narrow them
Need real warranties and effective remedies
Infringement Warranty? Or rely on Infringement Indemnity? Market = indemnity only.
Indemnification narrowed to Registered IP? US Registered IP? Patents? Why not all
third-party IP?
Except as warranted by the preceding three sentences, the software is licensed as is, and
no warranty of any kind, express, implied or statutory, whether in relation to
merchantability, hidden defects, fitness for particular purpose, course of performance,
course of dealing, usage of trade, non-infringement, that the software’s operation shall be
error free or uninterrupted, or otherwise is given by licensor to licensee or any other party
SLAs/Warranties
Data Loss
Disclaimed?
Its own liability cap? 2x regular cap?
Backup tapes to protect Licensee – practical solutions to
Enhancements/Updates/Upgrades
What do you get – Is a Maintenance Service Agreement
required? All within fee or are there additional fees for
certain releases? Releases vs. Upgrades vs.
Enhancements/Updates/Upgrades
Timing Window to install before losing support
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Your IT department may not be able to immediately install the
Update – need to test before going live on network. Warrant
Support back only 2 versions?
Enhancements/Updates/Upgrades
Renewal & Maintenance Fees
Especially important in Support and Maintenance Fees
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Tie to CPI or define for entire agreement term. Renewals? If
Transition Time Upon Termination
Due to complexity of software, you may not be able to
immediately switch to new software
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Need time to test new software while still relying on old software
Costs and fees for support during transition. Licensee breach
distinguished from Licensor breach or expiration? Licensee
should pay so get good service?
Damages
Consequentials. Refuse and address early to obtain Licensor escalated approvals
Permit or disallow the waiver of consequentials? Punitive damages?
Cap on liability is Licensor’s true protection
Which party is responsible for data loss?
Liquidated damages
Licensor shall not under any circumstances be responsible for any losses or
damages, direct, indirect, special, ordinary, exemplary, consequential or otherwise
(including, but not limited to, loss of data, loss of revenue, profit or use or cost of
capital or of substitute use of performance), arising out of or related in any way to
the transactions contemplated hereunder, even if advised of the possibility of such
damages
Damages
Liability Cap
Licensor’s true protection
Exceptions for confidentiality, IP Infringement, Breach of
Laws
Damages
Liability Cap Cont’d
1x, 2x contract cost?
Last 12 months? 12 months before an event or breach?
Under no circumstances shall licensor’s total liability of all kinds
arising out of or related to this agreement (including but not limited to
any warranty or support-related claims hereunder), regardless of
whether any action or claim is based on contract, strict liability, tort
or otherwise, exceed the total amount paid by licensee to licensor
under the applicable work order (determined as of the date of any
final judgment in such action)
Escrow of Source Code
Vital to have
–
What if the licensor goes out of business, fails to support the program in the
future or can’t remedy a Critical error. Not Licensor’s safe deposit box.
Documentation too. Tape for what production environment? Audit?
Escrow Agents
Fees
Escrow
Triggers for release of source code
Licensor ceases doing business and no successor
assumes Licensor’s support obligations
Licensor declares or is forced into bankruptcy
Licensor no longer offers support for the particular
Licensed Program
Licensor fails to provide a reasonable workaround within X
Other Clauses
Insurance
What types, limits, etc. are acceptable?
$2M per claim/$5M aggregate, “occurrence-based” commercial general liability
Professional Liability/generally E&O
Electronic Data Processors E&O
Employee Dishonesty and Computer Fraud
Employer’s Liability
Workers Compensation
“Claims made” insurance/tail issues
Other Clauses
Change in Control
Do you care? Consequences?
Other Clauses
Competition
Ensure other party with access to Know How and Trade
Other Clauses
Sub-Contracting
IP Ownership and Confidentiality
Indemnity for them
Flow down of prime contract provisions
Direct rights against them
Other Clauses
Contract Precedence
Among Agreement and attachments
RFP > Response to RFP?
Other Clauses
Dispute Resolution
Develop a procedure that will resolve disputes quickly
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Operational level review
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First escalation to executive level
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Provide sufficient time for resolution of the dispute
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If can’t resolve at executive level escalate to formal mediation, arbitration or
litigation
Provide opportunity for injunctive relief (confidentiality, competition and ownership
issues)
Identify location for dispute resolution
Quantify authority of arbitrators
Other Clauses
Transferability / Assignability
Often overlooked clause – but can avoid many headaches.
The Agreement should not be silent on this issue
Need ability to assign/transfer if ownership structure
changes, join or leave consortium etc.
Software companies love to charge a “transfer fee” – or
Other Clauses
Thank You
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