Technology Contracts: Creative Relationships Require Creative Agreements

Olivia Whitcroft casts her eyes over standard terms and suggests a better way forward. She offers a mercurial warning: ‘If all you have is standard terms, everything looks like a fax machine’

Picture the scene: it is 1993 and the forward-thinking Telecommunications Manager at Big Industry Ltd has decided that e-mail communication (never before used at Big Industry) will be good for business. He clears it with the Operations Director and before long they have selected a provider. Initially, e-mail will be set up on one computer for one user but, if all goes well, the intention is to expand across other company computers. Practicalities such as phone lines and modems are discussed, fees and set-up dates are agreed, and then the small matter of a contract is raised. The company requires all providers to sign up to its standard terms, and it is explained to the provider that a few additional provisions are needed for these types of services, including responsibilities for the BT line and so on. The contract is drawn up and sent (by post) to the provider for review.

Casting his (or his lawyer's) eye over the contract, it soon becomes clear to the provider that he has been presented with a contract for fax machine maintenance. It details response times for fixing hardware faults, paper and ink cartridge replacement, and refers to all machines in use across the business. He raises these concerns with Big Industry and is told that they will accept a few tweaks, but there is no time for lengthy negotiations or for a new contract to be drawn up. It is only a trial period at the moment anyway (even though the contract actually specifies a minimum term of two years for the provider). The provider therefore signs the contract and the parties move forth into the unknown territory of providing e-mail within a framework of fixing fax machines.

This is not (necessarily) a true story! However, it represents the frequent disconnect between the terms of technology contracts and the services which are actually being provided. This has been emphasised in recent years by the rapid development of technology, presenting new environments for delivering services and new opportunities for commercial collaborations. Small providers are often first on the scene with innovative ideas, and inspired individuals within larger companies decide to give them a try, perhaps as an early customer or maybe to assist them with service delivery.

Unfortunately, given the uncertainties, there is insufficient investment of time and resources at this stage to produce (or consider) a bespoke contract. The provider, often with less bargaining power and limited experience of contracts, is presented with a 'standard' contract. This is generally used for more established methods of service delivery, but is felt most appropriately to match the context. These contracts range from slightly inappropriate terms to complete nonsense! As in my example above, it can be the difference between provision of email (née 'e-mail') services and fax machine maintenance. There is certainly some connection in that they are both communications services, but the practical differences are significant.

Some more up-to-date examples include contracts for face-to-face or web delivery of services, where in reality they are being provided over a mobile app, and end-user agreements for technology services, where in practice the services are being resold.  Software development agreements often do not reflect intended models for use of intellectual property, for example terms giving one party complete control over source code, where the other party will be passing that source code to its customers, or where third-party components are being used. Contracts governing use of customer data are also frequently unsuitable: terms imposing extensive responsibilities for management of data on a provider contributing technology but with no access to data; data sharing agreements appointing a party as a data processor, when it is clearly acting as an independent data controller; or promises to keep data on a fixed server in the UK, when it is being entrusted to a sub-contracted cloud provider.

Purpose of a written agreement

Bringing it back to basics, the purpose of a written agreement is to document the terms of the relationship to reflect the intention of both parties. It sets out rights and obligations, addresses risks and apportions liabilities. It has many benefits, including acting as a guide to the parties' actions during the relationship (such as delivery of services and payment), protecting certain assets (such as intellectual property) and giving a clear basis for legal recourse in case something goes wrong. 

If the actual intention is something very far removed from what is documented then the purpose and the benefits of the contract for both parties are defeated. Specifically, the terms do not reflect the parties' relationship, are unlikely appropriately to address risks or protect assets, do not guide the parties' actions and create a confusing legal position in the event of a dispute. The most they may do is meet internal administrative requirements.

Impact of inappropriate terms

The parties may well carry on their relationship in harmony regardless of the written terms. In a lot of cases, therefore, all may be well. However, inappropriate terms come to light when a party wants (or does not want) something to be done and refers to the agreement, only to discover that it does not clearly assist them with their goal. Alternatively, a party may have already done (or not done) something which the other party dislikes (to put it mildly), but the agreement does not obviously back them up. The terms may say something different, may not cover the issue, or may be difficult to make sense of in context. Or perhaps an outside event occurs, such as a data breach or an acquisition, and a subsequent review of the terms reveals problematic defects. 

If both parties agree to amend the contract to fix the issue, or otherwise find a practical way forward, then this may resolve matters between them (although it may not fix all retrospective issues – discussed below). However, if the parties themselves remain in disagreement, they will want to rely on the existing terms of the contract in order to protect or defend their position. Unfortunately, the legal position with regard to those terms may be extremely hazy!

Taking one extreme, there is a risk that the agreement will be enforceable as it stands; in other words the parties will need to comply with the terms as written notwithstanding that they had something else in mind. This may be the case where the contract is very disadvantageous for a party, but is not completely divergent from the core intention. For example, in Fujitsu Services v IBM [2014] EWHC 752 (TCC), the parties were taken to have meant what they said in the contract, even though Fujitsu argued that alternative effects were intended.

At the other extreme, the agreement as a whole may be void or ineffective for mistake or lack of certainty. For example, in Fairstate v General Enterprise Management [2010] EWHC 3072 (QB), the High Court considered that the mistakes in a guarantee form were so fundamental and extensive that the document was ineffective as a whole. This will generally not be helpful for either party, but may result in one party being put at a greater disadvantage, depending on the context. If the written agreement falls away, there may exist a collateral contract based on the actual intentions or dealings of the parties, but this again presents difficulties in working out the precise terms.

Other solutions may involve creative interpretation or rectification of the terms as written. Where possible, a court will try to construe the words used in a contract in a way that the parties intended, or may imply terms to give effect to that intention. Even where the wording of a clause appears to provide an obvious meaning, if the result of it is very unreasonable, the court may give the clause a less obvious interpretation. Further, if a party can show that there has been a mistake (either common to the parties, or unilateral but with the other party's knowledge), and provide evidence of the actual intention, a court could order the contract to be rectified to meet that intention. These remedies could assist, for example, if the word 'fax' has been used instead of 'email' and it is clear that the parties intended to use the word 'email' in context.

However, giving new meaning to the terms through construction or rectification is unlikely to be feasible if:

·        the terms can reasonably be given their ordinary meaning. In Fujitsu Services v IBM, the judge emphasised that a court cannot re-write the parties' chosen wording simply because it is 'somewhat unexpected, a little unreasonable, or not commercially very wise'; or

·        the terms are very far removed from reality; in which case it is unlikely that a party will be able to provide evidence of completely different terms having being agreed. In Fairstate v General Enterprise Management, the judge stated that 'the sheer length of the catalogue of corrections and additions that [he] should have to make' would not be interpreting the contract as intended but creating an entirely new contract.

The principles described above may apply to the contract as a whole, or to individual provisions on which a party is seeking to rely. In relation to standard terms of one party, unreasonable terms could also be deemed unfair and therefore unenforceable under the Unfair Contract Terms Act 1977.

In addition to disagreements between the parties, inappropriate terms may give rise to other problems, either at law or due to third-party relationships. For example, a party may have data protection liability for failing to impose security obligations on a service provider, or ineffective assignments of intellectual property may mean onward (purported) licences to a third party may be ineffective or unlawful.

Resolving the consequences of inappropriate terms can be time-consuming and costly, and even then may not achieve the desired result for one or both parties. It is therefore usually better for both parties to get the terms right to start with!

How to avoid inappropriate terms

The overall message is not new: a contract needs to be tailored to the context of the intended relationship between the parties. As new technology inspires creative services and methods of service delivery, the parties also need to be creative with the terms governing their relationships.  Standard terms can be useful for the basic provisions, but must always be thought through in context and adapted as needed.

The argument against this approach is also not new.  Getting external lawyers involved can be costly; getting in-house lawyers involved for each project can be time-consuming. Standard terms and procedures help to keep control of legal risks within available resources and budget. In particular, where a provider is being appointed for a trial period, this may not justify the internal procedures and costs involved in drafting and signing off a 'perfect' contract.

However, this does not mean that some middle ground cannot be reached, and the following paragraphs set out a few ideas on how to achieve this. A central need is for organisations to show some flexibility in their contracting approach, and accept some input from new providers (be they big or small), who are likely to understand their offerings better than anyone else.

If there are limited time and resources, a shorter agreement may be an option, setting out the main commercial and legal points, but without addressing every legal scenario. These are likely to be better than long complex terms, which may cover more legal matters but, as highlighted above, are potentially useless in practice. The parties could then look to review these terms and negotiate a more all-encompassing agreement if the relationship is successful. A specific procedure for doing this may assist in ensuring the terms are re-visited rather than letting shorter agreements (which are potentially inadequate for a longer relationship) roll over without further thought.

Contracting parties could also place more emphasis on ensuring that whatever terms are put in place accurately describe what is actually happening, rather than being a mesh of terms which sound good legally but have no clear description of the intended services or relationship. Ideally, all the terms of a contract need to be read and understood by the commercial and technical teams (of both parties) as well as the lawyers. Those teams will be more able to detect and adapt inappropriate provisions if they are written in clear English.

In adapting contracts, the parties should be willing to change terms as well as to add new terms. Some contracts have productively evolved to address new technological issues by the repeated addition of new layers of terms. However, this has been done without removing or changing any of the terms which are already in there. To give an example, in updating a contract to address delivery of digital content, new terms may be added relating to online delivery without adapting or deleting terms which relate to physical delivery. Whilst the intentions are good, the effect is an increasingly complex agreement. By this stage, the simplest route forward may be to rip it up and find a blank piece of paper to start again. 

As well as accepting input from both parties (raised above), the efficient use of direct lawyer-to-lawyer discussions may reduce the time involved in addressing key legal points. Another age-old issue is effective communication within an organisation between the legal teams and the rest of the business. Non-legal teams need to be made aware that contracts are not just an administrative box to tick. The lawyers, for their part, need to have some understanding of the proposed services and relationships. All teams need to appreciate that bashing out some standard terms which can be applied un-amended to all technological scenarios is unlikely to be achievable.

What happened next?

Let us pick up our story from where we left it in the early 1990s with Big Industry starting to use email. There soon followed business networks and web sites, and into the late 1990s e-commerce became the big thing. Search engines became sophisticated, web sites started to interact with customers and digital content became an alternative to physical equivalents. Staff were becoming more mobile; laptops replaced desktops, mobile phones were standard issue, and they could dial-up to the work network from home. Psions and PalmPilots went into pockets or handbags. The 'Tele' was slashed from the Telecommunications Manager's job title. In the noughties, dial-up was soon replaced with broadband and PDAs by Blackberrys to access email on the move. Pretty soon competitors had arrived on the scene offering smartphones and tablets. Moving into the current decade: VoIP, webinars and social media became established business tools; apps started to challenge websites and other traditional methods of service delivery.

Alongside all this, IT services and licensing models were changing. Software downloads were superseding floppy disks and CD-ROMs, and open source was added to the mix in development projects. Alternatives to traditional IT outsourcings were evolving, moving through application service providers and reaching cloud computing in the 2010s. Infrastructure-, platform- and software-as-a-service started being provided using intricate partnership and sub-contracting models.

Just over 20 years down the line from introducing email and Big Industry is now looking into BYOD, big data, the internet of things, 3D printing and augmented reality. Big Industry's relationships with its service providers and business partners continue to evolve to capture these new opportunities. All it has to do is ensure that the contracts governing its relationships continue to evolve as well. Remember: if all you have is standard terms, everything looks like a fax machine.

Olivia Whitcroft is the principal of OBEP (www.obep.co.uk), a law firm specialising in technology contracts, data protection and intellectual property. Contact: olivia.whitcroft@obep.co.uk, @ObepOlivia

 

                                       

Published: 2015-01-27T10:05:52

    1 comments

    • This is the article I've been meaning to write for some years. Ms Whitcroft has done a better job of it than I could have done. In my experience, small, entrepreneurial providers initially tend to underestimate the financial and time cost involved in getting their prospective customer's fax machine maintenance contract (which the customer insists on using in preference to the provider's bespoke T&Cs), but fully appreciate that it has to be done - it's not difficult to direct their attention to clauses that are totally unacceptable. Probably unconsciously, the customer is therefore shifting the cost of getting the documentation in good shape onto the provider, but providers factor this into their pricing eventually. Good for lawyers, clearly, but not good for the businesses of providers or their customers.
      Matthew Duggan, 09:47:27 06/03/2015
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