An Information Technology (IT) Contract is an Agreement under which one of the parties, acting as the Service Provider, provides an element of, or services relating to, the IT systems, to the other party, i.e., the Purchaser of such services. Therefore, there are certain essential Clauses that must be incorporated in IT Contracts so as to avoid any contractual disputes that may arise in the future.
Part II of the Series on IT Contracts discusses in detail the common Clauses and practices followed by the parties while drafting an IT Contract.
COMMON CLAUSES IN AN IT CONTRACT
1. Intellectual Property Rights
In most IT Contracts, the technology deployed by the Service Provider is, in and of itself, an intellectual property that may or may not be directly protected under the law. Such a situation demands the need for a Clause which lists out the restrictions imposed on the Purchaser with respect to using the technology and/or any intellectual property.
For instance, when it comes to Software Licensing Contracts, the Service Provider may restrict the Purchaser of the services from making copies of the Service Provider’s technology and/or modifying or creating derivative works of/from such technology.
The crucial nature of the necessity of clearly setting out such conditions in the IT Contract cannot be over-emphasized, since most of the Software Licensing and Service Contracts and Cloud Service Contracts provide remote access to the Service Provider’s technology and/or other intellectual property via the Internet rather than through the physical access to such technology.
2. Limited Liability
A Limited Liability Clause is, perhaps, one of the most essential but also a disputed clause of an IT Contract. This Clause limits the liability of the parties with respect to the extent of the unforeseeable damages that can occur.
Most contracts usually deal with the Limited Liability Clause in either of two ways – either the contract can explicitly state the maximum liability limit up to which the Service Provider can be held liable in case of breach of contract and/or loss due to unforeseeable circumstances, or the parties can negotiate an exclusion of liability which ensures that the Service Provider will not be held liable for damages other than those mentioned.
The Limited Liability Clause, thus, helps in holding the party, who is responsible for the breach, accountable; while at the same time ensuring that the quantum and extent of such liability imposed is justified.
3. Force Majeure
A Force Majeure Clause is an extraordinary provision which waives the obligations of the party invoking it. The Clause is available for circumstances which could not have been foreseen – such as an Act of God – and which the parties took all possible measures to avoid.
The inclusion of such a Clause has been a common practice for most Agreements, however, ascertaining the existence of an actual Force Majeure event can be a tricky process, even more so after the Covid-19 pandemic.
Therefore, the scope and ambit of the same should be explained explicitly in order to avoid ambiguity. Another important aspect of this Clause is the process of invocation of the same, which should be set out in clear and unambiguous terms.
4. Audit and Regulatory Compliance
IT Contracts make use of the Audit and Regulatory Compliance to ensure that the technology deployed and the performance thereof are in alignment with the actual goals of the organization. Inclusion of such a Clause also ensures that adequate and updated security measures are in place to safeguard the data in possession of the organization.
5. Liquidated Damages
A Liquidated Damages Clause in an IT Contract safeguards the Purchaser against the constraints of deadlines by ensuring that the Service Provider is burdened with a day-to-day or period-to-period rate of liquidated damages. Such a Clause can be triggered in cases of inadequate deliverables, defects, major bugs and functionality issues, etc.
The Indemnity Clause protects the Service Provider against Third-Party Claims in the event of a breach of the contract. The Purchaser undertakes to indemnify and defend the Service Provider and not hold the Service Provider liable for any breach of the contract.
7. Escrow Provisions
IT Contracts may also make use of an Escrow Clause, which is essentially a three-way agreement, inclusive of an Escrow Agent who is responsible for the code of the software. The main idea behind the inclusion of an Escrow Clause is to safeguard the Purchaser against any breach of or malfunction with respect to the terms and conditions agreed upon between the parties. In the event of such a situation, the Purchaser is given the code to tackle the breach.
This Clause also safeguards the interest of the Service Providers by not sharing the code with the Purchaser, with the only exception being a case of a breach of the terms and conditions of the contract.
8. Confidential Information
Non-Disclosure Agreements (NDAs) and Confidentiality Clauses have always been a significant part of contracts. However, an IT Contract needs more than just an NDA or a Confidentiality Clause.
Since data can freely move from one Service Provider to another, through the purchaser in particular, and is not bound by jurisdiction; an IT Contract, in order to be exhaustive enough to safeguard the rights of the Service Provider, would require a more target-oriented clause that addresses such free movement of the data and its unique concerns.
A Data Protection Clause must also be embedded in IT contracts since NDAs only protect against unauthorized disclosure of trade secrets. After all, a lot of the information involves third parties and therefore, there must be specific provisions in place in order to safeguard against Third-Party Claims.
Further, another common practice is also to include a Jurisdiction Clause and clearly set out the rights of the parties to seek injunction as well as to prevent the other party from committing a breach of contract.
Warranty Clauses are also of crucial importance in IT Contracts. Ideally, the Warranty
Clause must be a result of precise negotiations between the parties. This Clause relates to the performance of the software and/or technology being deployed by Service Provider as well as the claims made by the Service Provider as to the functions, performance and efficacy of the same. However, since there are a number of factors at play which can potentially affect such performance, this clause is crucial for safeguarding the interests of the Service Provider.
The common practice is to incorporate a Warranty Clause which includes the following three parts:
- ‘Title’ which talks about the ownership of the technology;
- ‘Performance’ which specifies the capabilities of the software and/or technology and finally;
- ‘Virus’ which helps safeguard the Service Provider from claims pertaining to any defects or harmful codes.
10. Secure Destruction of Consumer Data upon Termination
This Clause, usually included in Cloud Service Contracts, calls for the complete and secure destruction or return of the consumer data that was used by and/or is in possession of the Service Provider. This Clause is an essential part of IT Contracts in order to safeguard the parties against Third-Party Claims and to process personal data in the correct manner.
Another important Clause in a Cloud Computing/Cloud Service Contract is the Fee Clause, which sets out the fee to be charged depending on the storage of data on an hourly basis. This amount must be negotiated upon and prescribed in the contract so as to avoid potential disputes arising with regard to this in the future.
12. Regulatory Law
As most IT Contracts deal with the processing of personal information, the contract must clearly state the legal framework under which such processing must be carried out.
13. Acceptance Fees
The Acceptance Fees Clause in IT Contracts help to safeguard the Service Provider against the Purchaser in case of disagreement while making the payment. It can also happen that due to discrepancies in the software/technology delivered, the Purchaser may refuse to make payment. This Clause is, thus, essential to safeguard both parties from potential disputes in the future, and must be carefully negotiated in such light.
IT Contracts are executed by parties with regards to the usage of IT products or services. Depending upon the various categories of technology laws, the IT Contract shall contain clauses to suit the needs of the parties and usage of the particular IT product.
Drafting of an IT Contract requires utmost care and attention, so as to ensure that no ambiguity exists in the clauses of the IT Contracts. Comprehensive and brief clauses should be incorporated in IT Contracts, keeping in mind that the risk and liability associated with such Contracts is to be minimized.
As IT Contracts are entered into for a range of technology products, each IT Contract should be drafted in a manner to specifically cater to the issues arising from the usage of that IT product.
The best practices to be undertaken while drafting of IT Contracts shall be discussed in Part III of the Series on IT Contracts.