Negotiating tech contracts into a well-oiled machine: Part 2.

16 September 2020 | Reading time: 2 minutes

Part 2 – Running like clockwork

In part 1 of our series on negotiating IT services agreement, we focussed on the importance of clearly defining the parties’ primary responsibilities in IT projects.

In part 2, we now focus on other key pitfalls that may ‘make or break’ your IT project.

1. Intellectual property – the most vital cog in the machine.

When negotiating an IT services agreement, parties often overlook the importance of intellectual property rights. This oversight can be costly.

Parties should carefully consider access to, and ownership of, intellectual property and document the agreement properly. This includes newly developed intellectual property.

Points for discussion include:

  • who owns the software?
  • will the source code be provided to the customer?
  • what are the terms of the software licence surrounding permitted use?

As the most important cog in the machine, intellectual property considerations are essential when crafting IT services agreements.

2. Data, security and avoiding loose screws.

There is increased scrutiny on how businesses handle personal information. Customers are increasingly mindful of how their data is dealt with by the service provider. This includes compliance with privacy laws, including the GDPR, given the financial ramifications of non-compliance.

When negotiating an IT services agreement, it is paramount that customers understand how the service provider can use, aggregate, and manipulate their data. Customers should understand where their data physically sits (locally or overseas), who has access to the data, and how they can retrieve the data in the event the arrangement ends.

Customers should clearly identify its requirements for the service provider to protect the security and confidentiality of the data. Well thought through data policies and procedures, including in relation to security, testing and back-ups, are crucial to keep those screws tight.

3. Liability limitations.

From a risk mitigation perspective, a key provision in any IT services agreement is the limitation of liability regime. Limitation of liability provisions will apply in the event of a claim between the parties.

A good limitation of liability provision will strike the right balance between the potential losses the customer may incur and the risk the service provider is willing to take given the project’s projected revenue.

It is common to negotiate a liability cap, which may include carve outs for certain categories of claims that cannot be capped or excluded. The underlying circumstances of these carve outs may be less likely to occur, but can be significantly more costly (eg indemnity obligations, confidentiality and fraud).

 In our next and final instalment in this series, we will discuss key provisions surrounding default and disputes in IT services agreement. Stay tuned.