Beyond the Caricature: Dealing with the Issues

March 22, 2011

Paul Berwin and Claire Armer give an excellent x-ray of the real issues that lawyers and their clients must get stuck into with Software Licence-cum-Maintenance agreements.

But their experience on the supplier side has here and there coloured their detailed arguments. A Dickensian caricature will not serve to explain just where a large customer’s legitimate interests lie.

I make my comments, as I believe Paul and Claire did theirs, in the spirit of the SCL mission statement (second half): To provide ‘thought leadership, best practice, education and standards’.

Whose Contract?

There is a bewildering, though not infinite, variety of business models available to software suppliers. It is always worth exploring whether a particular supplier has made a rational choice among them and incorporated the result in his standard texts, whether he has just picked up on a paradigm which was familiar to him from his past industry experience or, worse, whether he uses a template created by a lawyer with an overhang of theory over practice.

The large customer will have met many different suppliers’ business models, and will have had to conceptualise them to judge their effect on his systems implementations.

Therefore, a rational plan for the large customer is to set up a standard procurement contract which allows a modular choice of license parameters (perpetual vs. subscription; enterprise vs. single legal entity, quantitative limitations vs. unlimited use etc) and which fully expresses the contractual logic for each of the choices.

The same applies for maintenance parameters: first, support and response times, second, the support of back versions, and third, the inclusion of upgrades and successor products in the maintenance fee. Again, having a pre-worded text addressing all parameters is a far better starting point, also for the discussion of the commercials, than the supplier’s standard text (which is likely to be unacceptable) or a contractual vacuum.

The terms should be made the basis of the customer’s Requests for Proposal to potential suppliers.

A final point, briefly touched on by Paul and Claire, is the need of the large organisation to have quite detailed up-front rules about what happens when acquisitions and disposals occur in the course of the contract. Again, a fully worded text will be a better starting point than one that does not attempt to address the customer’s concerns.

Conversely, the customer may quite legitimately need a get-out in case the supplier, or his product, is taken over and the product is then strangled to death by the new owners – a sadly frequent occurrence.

Ownership of Rights

The ownership of pre-existing rights is usually not contentious. And as far as customisation and further developments are concerned, these can often be handled via licensing rather than ownership. But this does not address the commercial issue. If the customer pays full value for development work, it stands to reason he should be partly or wholly compensated if the code is later integrated in the standard product or re-used for other customers. If the development gives the owner a competitive edge in his industry, he may have an interest not to have it used with competitors. These arguments have even more force if the developments could have been legitimately carried out by an independent third party developer instead of the supplier himself.

The basic attitude of the large customer towards IPR warranty and indemnity is to want to secure continuity of use. As long as he is not precluded, eg by an injunction, from going on using the code, he will happily leave the proceedings to the supplier. However, it would be less than wise for the customer to accept a clause which allows the supplier to order him to discontinue use, or to be hamstrung if an injunction is sought by the third party (in fact, a rare occurrence). In such situations, direct dealings of the customer with the third party are likely to be the only option, and must be permissible.

Limits of Liability; Escrow

Suppliers’ liability for infringement of IPR should be unlimited; other liability limits have to be substantial. Clearly, for small suppliers, insurance cover is crucial, and the customer may want to have sight of the policies as part of his due diligence.

The smaller the supplier, the larger the customer’s interest in having a source code escrow deposit, preferably on release terms he has negotiated directly with the escrow agent.

Warranties and Acceptance

What Paul and Claire portray as the standard attitude to functional specifications is sadly accurate. Without one, both acceptance and warranty hang in the air.

But the lack of an appropriate spec should certainly not be the customer’s problem: on no account should he accept contract language which results in an impairment of his remedies due to a missing or unsatisfactory specification.

Getting to Win-Win

I fully agree with Paul and Claire’s basic premise that things can be made negotiable – with the aim of a win-win outcome – if they are discussable. Making them discussable requires, as per the SCL mission statement (first half): ‘Lawyers who understand IT and the related legal and business practice issues.’ Will the time come when SCL members will habitually be drafting and negotiating for their clients, suppliers and customers alike, all willing and able to engage in a meaningful discourse on the Real Issues? 

Georg Briner has been in IT law since 1981, when he became European in-house counsel for Hewlett-Packard. He now advises international suppliers and customers of IT products and services through his firm, International Legal Advisors LLP.