Typical terms of a contract

In a textbook such as this, it is not possible to describe all the necessary content of contracts for IT goods or services. It is possible, however to outline some of the major areas of concern.

Definitions

The terminology used in the contract document may need to be defined, for example, who is meant by the words 'client' and 'supplier'.

Form of agreement

For example, is it a contact of sale, a lease, or a licence? Also, can the subject of the contract, such as a licence to use a software application, be transferred to another party?

Goods and services to be supplied

Equipment and software to be supplied This includes an actual list of the individual pieces of equipment to be delivered, complete with the specific model numbers.

Services to be provided This covers such things as:

• documentation;

• installation;

• conversion of existing files;

• maintenance agreements;

• transitional insurance arrangements.

Ownership of the software

Who has ownership of the software? There are two key issues here: firstly, whether the customer can sell the software to others and, secondly, whether the supplier can sell the software to others. Where off-the-shelf software is concerned, the supplier often simply grants a license for you to use the software. Where the software is being written specially for a customer, then that customer will normally wish to ensure exclusive use of the software - they may object to software which they hoped would give them a competitive edge being sold to their rivals. They could do this by acquiring the copyright to the software outright or by specifying that they should have exclusive use of the software. This would need to be written into the contract. Where a core system has been customized by a supplier, then there is less scope for the customer to insist on exclusive use.

Where software is written by an employee as part of a contract of employment, it is assumed that the copyright belongs to the employer. Where the customer organization has contracted an external supplier to write software, the contract needs to make clear who is going to retain the copyright - it cannot, in this case, be automatically assumed it is the customer. The customer might have decided to take over responsibility for maintenance and further development once the software is delivered and in this case will need access to the source code. In other cases, where the customer does not have an adequate in-house maintenance function, the supplier can retain the source code, and the customer will have to approach the supplier for any further changes. There are many potential dangers with this, not the least being that the supplier could go out of business. An escrow agreement can be included in the contract so that up-to-date copies of the source code are deposited with a third party. In the United Kingdom, the National Computing Centre provide an escrow service.

Environment

Where physical equipment is to be installed, the demarcation line between the supplier's and customer's responsibilities with regard to such matters as accommodation and electrical supply needs to be specified. Where software is being supplied, the compatibility of the software with the existing hardware and operating system platforms would need to be confirmed.

Customer commitments

Even when work is carried out by external contractors, a development project still needs the participation of the customer. The customer will have to provide accommodation for the suppliers and perhaps other facilities such as telephone lines.

Acceptance procedures

Good practice would be to accept a delivered system only after it has undergone user acceptance tests. This part of the contract would specify such details as the time that the customer will have to conduct the tests, deliverables upon which the acceptance tests depend and the procedure for signing off the testing as completed.

Standards

This covers the standards with which the goods and services should comply. For example, a customer can require the supplier to conform to the ISO 12207 standard relating to the software life cycle and its documentation (or, more likely, a customized sub-set of the standard). Within the European Union, government customers with contracts for projects above a certain threshold value must, by law, ensure that the work conforms to certain standards.

Some customers find that specially written or modified software is not thoroughly tested by the supplier before delivery. Some suppliers seem to think that it is cheaper to get the customer to do the testing for them!

Project and quality management

The arrangements for the management of the project must be agreed. Among these would be frequency and nature of progress meetings and the progress information to be supplied to the customer. The contract could require that appropriate ISO 9000-series standards be followed. The ISO 12207 standard provides for the customer to have access to quality documentation generated internally by the supplier, so that the customer can ensure that there is adherence to standards.

Timetable

This provides a schedule of when the key parts of the project should be completed. This timetable will commit both the supplier and the customer. For example, the supplier might be able to install the software on the agreed date only if the customer makes the hardware platform available at that point.

Price and payment method

Obviously the price is very important! What also needs to be agreed is when the payments are to be made. The supplier's desire to be able to meet costs as they are incurred needs to be balanced by the customer's requirement to ensure that goods and services are satisfactory before parting with their money.

Miscellaneous legal requirements

This is the legal small print. Contracts often have clauses that deal with such matters the legal jurisdiction that will apply to the contract, what conditions would apply to the sub-contracting of the work, liability for damage to third parties, and liquidated damages. Liquidated damages are estimates of the financial losses that the customer would suffer if the supplier were to fall short of their obligations. It is worth noting that under English law, the penalties laid down in penalty clauses must reflect the actual losses the customer would suffer and cannot be unrealistic and merely punitive. Even this limitation will not be enough in some cases as far as the supplier is concerned. As computer systems assume increasingly critical roles in many organizations and in safety-critical systems can even be life-threatening in the case of malfunction, the possible consequential damage could be very great. Suppliers will not unnaturally try to limit this kind of liability. The courts (in England and Wales) have tended to look critically at such attempts at limiting liability, so that suppliers will, in the case of major contracts, take out insurance to cover such liabilities.

If there is a dispute, resorting to litigation, while being lucrative to the lawyers involved, is both time-consuming and expensive. An alternative is to agree that disputes be settled by arbitration. This requires that any dispute be referred to an expert third party whose decision as to the facts of the case is binding. Even this procedure is seldom quick and inexpensive and another option is alternative dispute resolution where a third party acts as a mediator who has only an advisory capacity and attempts to broker an agreement between the two sides.

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