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TRANSCRIPT
eWorld Procurement & Supply
2 March 2016
Case Study: Best
Practice for Contract
Risk Management
Dr Sam De Silva, FCIPS
Partner – Head of IT & Outsourcing Group
Penningtons Manches LLP
Former CIPS GBT
General considerations
Quality
Remedies
Intellectual Property Rights
Confidentiality and Data Protection
Limitations and exclusions of liability
Indemnities
Term and termination
Exit plans
Boilerplate
Outline
Are the supplier's obligations clearly set out?
For absolute commitments, avoid using terms such as
"best endeavours“ or "reasonable endeavours"
Carry out (some) due diligence of the supplier
Check the definitions carefully, especially with respect to
the description of the services or goods and the address
to which the services or goods will be delivered
General Considerations (1)
If there is a conflict between the main body of the
agreement and the schedules, which terms are to
prevail?
Ensure that the supplier holds any necessary licences or
consents needed to be able to supply the services and
provide for warranties if appropriate.
Avoid allowing the supplier exclusivity; you may want to
acquire the services from elsewhere if they are not being
performed or delivered properly or at all
Avoid “battle of the forms”
General Considerations (2)
Ensure that the usual typical warranties are expressly included and resist
any attempts by the supplier to exclude the statutory implied warranties
– Services should be performed using reasonable skill and care, in
accordance with the agreement and specification, in accordance with all
applicable laws and regulations, in compliance with your reasonable
instructions and using properly qualified staff.
– Goods should be fit for purpose, of satisfactory quality and conform with
your requirements
Ensure that the supplier does not set any artificial time limits on your ability
to make claims that the services or goods are inadequate or fit for purpose
Quality (1)
The agreement should provide that any goods or
deliverables will not infringe third-party rights and an
indemnity should be sought from the supplier in the
event that they do
Are acceptance tests needed? What will happen if the
acceptance tests are failed, either once, or repeatedly?
Consider whether the agreement provides for suitable
remedies for non-performance or poor performance and
ensure that the remedies are not restricted
Quality & Remedies (2)
Remedies could include:
– repairing or replacing goods
– offering a refund,
– re-performing the services
– rejecting the goods or services
– requiring the supplier to take steps to improve its future
service delivery
Step-in rights
Service credits
Obtaining the services from a third party and
charging the cost of doing so to the supplier
Remedies for Poor Quality (3)
Ensure that you retain IPRs of any specifications you have provided
Do you need the IPR in the goods or other deliverables?
Do you need the IPR of the supplier or third parties? If so, does the
agreement provide for the appropriate licences?
Joint ownership of IPR
IPR indemnity wording
Intellectual Property Rights (IPR)
The Supplier shall defend, indemnify and hold harmless the
Customer against all Losses arising out of or in connection
with the Customer's Use of the Services and/or Goods,
provided that the Customer will: (a) promptly notify the
Supplier of the claim and furnish it with a copy of each
communication relating to the claim; (b) give the Supplier
sole authority, at its expense, to defend or settle the claim
and to conduct any negotiations related to it; and (c) give
the Supplier such assistance and information as may be
reasonably necessary to defend or settle the claim.
IPR Indemnity Wording
Ensure that the clause covers the scope of the agreement properly
– Do you want to include a no-announcements clause in sensitive
arrangements?
– Have you disclosed materials which you want the supplier to keep
confidential?
Are the confidentiality arrangements mutual?
Consider appropriate carve-outs to permit parties to use confidential
information in connection with the agreement or to disclose to a regulatory
body or court
Does the agreement need to deal with data protection?
– Value of wording “the Supplier shall comply with the Data Protection
Act”
– Does the supplier have access to personal data?
– Consider whether data processing clauses are required and consider
the security of the personal data.
Confidentiality and Data Protection
Framework for a "best practice" liability clause
– Losses which can't be excluded by law
– General financial cap
– Different financial caps for different categories of loss e.g.
damage to property
– Categories of loss where no limit applies e.g. breaches of
confidentiality, data protection breaches, PCI DSS compliance
– Customer's liability to service provider
Indirect / consequential losses – GB Gas Holdings (Centrica) v
Accenture [2010]
Limitations and Exclusions of Liability (1)
Deeming certain categories of loss as direct losses
– Wasted management time
– Compensation paid to customers
– Costs of re-procurement
Ensure exclusion for consequential / indirect losses is appropriate
Consider exclusions carefully e.g. is exclusion of liability for data loss
appropriate?
Limitations and Exclusions of Liability (2)
Exclusions of liability – the devil is in the detail
Example 1
"The Supplier excludes indirect losses, consequential losses,
loss of profit, loss of revenue, loss of business …"
Example 2
"The Supplier excludes indirect losses, consequential losses
including loss of profit, loss of revenue, loss of business …"
Liability Exclusion Wording
Avoid giving as it increases risk/exposure
Scope of indemnity
Subject to cap?
Right to conduct any proceedings at its sole
discretion.
Indemnities
Is there a clear start date for the agreement and for the
commencement of the delivery of the goods and services and is
there a defined term?
Is the agreement clear about whether the agreement expires or
continues at the end of any (fixed) term, and whether renewal or
continuation is automatic or requires some positive action by the
parties?
Consider whether you want to have a right to extend the agreement
on the same terms and conditions
Consider the circumstances in which the supplier should be able to
terminate, or suspend its performance of the agreement.
Term and Termination (1)
Consider the circumstances in which you should be able to terminate the agreement,
for example:
– non-performance
– insolvency of supplier
– change of control of supplier
– supplier's behaviour affecting the buyer's reputation
– force majeure
– any others circumstances?
Do you want to be able to terminate without cause (i.e. for convenience)? Note that a
supplier may resist this without a reasonable notice period, especially where longer-
term services or provision of goods are concerned.
Consider notice periods for termination. Are they clearly set out? Many disputes arise
regarding notice periods so they should be as clearly drafted as possible.
What provisions of the agreement will survive termination?
Term and Termination (2)
Return of your property
Know-how transfer
Data migration
Seamless transfer back in-house or to a
replacement service provider
Consider non-compete and non-solicitation clauses
Exit Plans
Are you part of a corporate group?
– Ensure that all buyer companies which might suffer loss or need
to rely on the agreement are named as parties to the agreement
or expressly have the benefit of the agreement under the
Contracts (Rights of Third Parties) Act 1999 (TP Act)
– Otherwise, the agreement should state that the TP Act will not
apply
Assignment
– Do you want to prohibit assignment by the supplier?
– Do you need the right to assign intra-group without consent?
Boilerplate (1)
Subcontracting
Do you want to retain control over the subcontractors of the
supplier?
If the supplier is able to subcontract, the agreement needs to say
that the supplier will remain liable for the acts and omissions of
the service provider
Change of control
Do you have concerns if the supplier undergoes a change of
control?
Is the supplier seeking a change of control clause in respect of
your business? If so, it should be resisted or revised so that it
only applies in certain circumstances, such as if the new owner
is a competitor or the new ownership could have a negative
impact on the services
Boilerplate (2)
Force majeure– Try to have the force majeure clause restricted to circumstances which are genuinely outside
the supplier's control
– Ensure that the clause requires the supplier to inform you immediately of any force majeure
event and to take steps to overcome the circumstances as far as possible.
– Does the supplier have adequate disaster recovery procedures in place?
– Is a process needed to devise a disaster recovery plan?
Jurisdiction, choice of law and dispute resolution– Consider alternative dispute resolution mechanisms, such as escalation and then mediation
or arbitration
– Is the supplier based overseas, in which case it may be advisable to seek local law advice?
– If the supplier is based overseas consider whether a UK court judgment would be
enforceable in the supplier's country.
Ensure that the terms of the agreement cannot be varied without the prior
written agreement of the parties
Boilerplate (3)
Is there an entire agreement clause?
– If so, is everything set out in the agreement that you need
to be able to rely on?
– Has the supplier made representations at the pre-contract
stage which you need to be able to rely on?
Do you want the supplier to keep records and do
you require audit rights?
Boilerplate (4)
Questions?