Technology Supply Contracts: Some Key Issues to Consider

For technology supply arrangements involving an element of complexity – a possible supplier may pitch to a customer by saying “yes, we can supply your requirements for $X” and then provide a nice, ‘glossy’ sales proposal document.  However, as many know, the ‘devil is in the detail’ and so it pays for both parties to explore a range of potential areas of issue in order to avoid a potential dispute later on.

For larger, more complex technology supply arrangements, which often involve the supply of hardware, software, complex managed services, and the management of important third parties, the item headings below will be important to correctly address.   Many of these issues can also be ‘scaled down’ for assessment within smaller or less complex supply arrangements too.

• Scope of supply: Clarity is required for exactly what is being supplied and what is out of scope and will not be supplied.  This will often link with the points below about “Deliverables”.  Often, even small supply arrangements can come ‘unstuck’ due to a lack of precision and clarity on these fundamental issues.
• Assumptions & Dependencies:  If a deliverable and the related price are based on one or more assumptions or dependencies, then (usually the supplier) should gain clarity regarding what happens to price and other contract terms if those specific matters do not play out as anticipated.
• “Deliverables” definition, and related customer “Acceptance” terms:  For deliverables that are known (or even unknown) at commencement, having clear wording around these concepts is important to final outcomes and perhaps to a supplier getting paid.
• Timing of delivery:  Agreeing key dates and related intended milestones for deliverables supply will also be important.
• Price and Payment:  Although these may be obvious, a customer may want these linked with several of the other points in this list before a payment obligation can arise.
• Addressing any particular, known key-risk items:  Sometimes, at the start of a project, key future risks can be identified (e.g. a legacy system losing capacity at a particular future point).  To the extent such risks are identified at the outset, the agreement should address how those risks will be negated or mitigated if they arise.
• Addressing hardware supply, spare parts, software supply, licensing and support: The specifics relating to each of these will be important.
• Key Personnel:  Sometimes, a supplier may present credible and experienced personnel upfront for the sales pitch but then move them on to other projects later in time.  Having the right people involved in the supply at the right times is often a material factor in determining success or failure  – and so this should be considered carefully.
• Relationship Management and Reporting: These key concepts are sometimes overlooked but are often very important to the smooth running and outcome of a complex supply arrangement.
• Change Control:  A process is needed for determining how and when supply scope and related price may change.  This may arise from a customer-requested change, or from an assumption or dependency provision being triggered, or perhaps even by the operation of the force majeure clause.  A supplier will generally not be able to use change control provisions simply because its costs have increased beyond what it had budgeted for.
• Confidentiality / Privacy / Data Protection:  The receipt, processing, use and storage of ‘personal information’ is in a fast-evolving regulatory space in many Countries.  The starting point is to assess what types of personal information is involved, whether they include ‘sensitive’ personal information, who the controllers and processors and sub-processors are, what Countries and locations are involved, what the related privacy terms are between any existing parties, and what Country or region-specific regulations apply.  Encryption and security are important to consider.
• Intellectual Property:  Each party will generally wish to retain ownership of its existing intellectual property.  The issues usually focus on who owns any newly created intellectual property during the course of the project.  This may have an important bearing on whether each party is able to fully commercial that intellectual property following completion of the project.  Much will come down to the scope and terms of supply, the pricing, whether those reflect an intended transfer of intellectual property rights or merely a license to use the same on agreed terms.
• Breach definition, notification and related consequences:  There are different ways of structuring these sorts of clauses and so the focus should be on what is most appropriate for the relevant supply and agreement terms.
• Security for performance: Each party may need to consider whether it wants some sort of security from the other party in support of its contractual obligation to perform.
• Subcontracts and other third-party arrangements: Assessment should be made  as to what will be permitted on these issues, what third parties are involved (e.g. software and data hosting services and related terms), and what is to happen in the event of third party non-performance as intended.
• Support: This can flow both ways in terms of access to personnel, facilities and other items from by a customer, and also from the supplier both pre and post a ‘business as usual’ handover.
• Transition-in & Transition-out issues:  These apply at the beginning and end of the project, or on agreement termination.  Each of these should be carefully thought through, especially ‘transition-out’ in a breach scenario where a handover to a new provider or to the customer is required.
• Business continuity issues: Ensuring business continuity for the customer at all times (if that could be at risk) will be important.
• Regulatory Compliance: Which party will be responsible for which aspects of what regulatory compliance requirement?
• Warranties, Undertakings, Liability and Indemnities:  These often absorb a lot of focus, but if the other key components can be finalised fairly and reasonably, hopefully these issues will not be a problem.
• Force Majeure: Any force majeure clause will generally only ever apply for the supplier’s benefit – normally to relieve it from a delivery timing obligation if an agreed force majeure event is triggered.  Customers will be keen to avoid or limit such provisions.
• Dispute Resolution: Lastly, but in many ways most importantly, having a workable and effective dispute resolution clause is important to assist with managing and resolving the dispute and avoiding or minimising the increased cost that invariably arises if a prompt resolution cannot be agreed.  Having clear and accurate wider contract terms can also assist with a speedy resolution.  Escalation provisions are usually included, and then either or both of mediation and/or arbitration.

Finally, the Statutory overlay of the wider supply arrangement is also important to consider.  For example, just because the parties sign agreement terms does not necessarily mean that a breach of the Fair Trading Act 1986 (for example) might not come back to negatively affect either party (beyond the liability terms too).  This may be especially so for a supplier where it might have an ‘unchecked’ and overzealous salesperson who might be prone to overstating the proposed delivery from the outset.  Training your salespeople appropriately is important