What you need to know about entering into a computer contract- Surviving a computer contract

LET’S ASSUME that you are at the stage
of upgrading or renewing your business’
computer system which probably means
that you are also purchasing software,
hardware and services. Software contracts
usually include provision for consultants to
continue the customisation of the software
and fine-tune the system in the months
following the purchase.

You want to go ahead and the supplier
gives you a draft contract for you to review
and sign. What do you do with that draft
contract? You read it and give it to a lawyer,
who specialises in reviewing software
contracts. Only kidding you hate lawyers.
You sign it and put your copy in a draw.
Without or preferably with a solicitor,
there are seven points that you should be
looking for in a computer contract:

1. The exclusion clause:
Somewhere in the contract you will find the
exclusion clause. This limits the liability of
the supplier as software suppliers tend to
exclude liability for as much as they can. A
common limitation is to cap the amount of
any claim that you may make in court to be
no more than the price that you paid for the
software, which can leave you very much out
of pocket.

2. Damages
What is the amount of damages
(compensation) you will get if the contract
goes wrong i.e. the supplier makes a mess
of it?
‘Direct’ losses. These are losses which
directly flow from the breach of contract;
they are the price paid, cost of putting it
right, any reasonably incurred emergency
short-term fixes and directly lost profits.
‘Consequential’ losses. These are indirect
losses which do not directly flow from the
breach of contract but there is a limit on
what you can claim, damages cannot be
too remote. This is a complicated area of law and
what you need to know is - don’t allow
the supplier to exclude direct losses but
expect the supplier to exclude
consequential loss.

3. Can you transfer it?
Can you let another company use the
software? Can you sell your rights in it to
another company? The supplier should
give a licence that allows you to act as
freely as your business requires in using
the software.

4. Who is going to use the software?
Make sure the contract contains the
correct company/employee name/s and
that the licence is appropriate for the
requirements of your business. A licence
to use the software at one office will cost
you a further payment if you open a
branch office. If you put it in the name of
one company but in fact another
company also owned by you uses it, you
can be charged extra. However, it does
not need to be like this if you insist upon
the right type of licence for your business there are about 12 different types.

5. Escrow agreement
What happens if the software vendor
becomes insolvent, or is unable or
unwilling to keep up with commitments?
The buyer will need to get access to
the software to remedy errors and keep
the system up to date, which is usually
achieved by an escrow agreement. Here
the source code is held by a third party
and released to the buyer on specified
events, such as insolvency or failure to
support. The terms are fairly standard;
Companies in the computer industry go
bust, or the people behind them lose
interest with great frequency.

6. Termination
If things are going wrong, you will be
reluctant to continue paying the supplier
until they put things right. The contract
may provide that if you do not hand over
the money when due, the supplier will tell
you not to use the system until the
installment is paid. If you cannot use the
software your business could suffer. It is
best not to leave a consideration of these
issues until the problem arises. The
contract will deal with what happens on
termination or if the matter is going badly

7. Selling your business
When a company buys your business
they want to know what they are getting.
This check of the business assets is
called due diligence. Part of the assets to
be checked is the ownership of software.
The buyer relies on warranties; these
are personal promises usually by the
directors that they own the software. A
problem for the seller company is that
directors are personally liable.
The problem for the buyer company is
that suing on the warranty costs money
it is better to get it right in the first place.
So am I exaggerating about the extent
of trouble you can get into when dealing
with computer contracts? Well, no. The
computer industry has a word for users
being ripped off. It is called ‘stiffing’. An
example is a company which purchased
an existing business including expensive
essential software. After the purchase
they were contacted by the software
publisher (a US multi-national) as their use
of the software was inconsistent with the
licence. The bill was substantial“ equal to
a new software system. They learnt about
stiffing the hard way. So be warned.

(c) Paul Brennan 2009. All rights reserved. 

This article first appeared in My Business magazine.

Paul Brennan, lawyer

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