Smarter Contracting In Challenging Times

Smarter Contracting in Challenging Times Legal Aspects John O’Connor, Yvonne Cunnane and Mark Rasdale Technology and Commercial Contracts Group 12 May 2009

Introduction  Matheson Ormsby Prentice  leading Irish full service corporate law firm  550 people including 76 partners and tax principals  Irish law firm of the Year 2009 – Chambers Europe Awards

 Our Technology and Commercial Contracts Group  our practice  our clients  our approach

Some Trends  Increasing tendency to see (and use) written contracts as risk management and business tools  not merely a ‘fall back’ but a useable document that describes and defines performance  one size fits all approach seen for its limitations  part of corporate governance

 Customer’s perspective:  underwriting good (precise) performance  ensuring value for money / cost savings /

Some Trends contd…/  Supplier’s perspective:     

managing risk and reward / managing its liability knowing what is “in scope” and “out of scope” knowing what performance means documenting change management managing termination events

 However, some bad habits also prevalent:  contract doesn't work, rushed or inappropriate  contractual terms forgotten / course of dealing changed  no written contract

Overview

2. Too Keen to Sell? 3. Performance Regimes 4. Liability Perspectives Questions & Answers

1. Too Keen to Sell?

Too Keen To Sell?  “Can we start work before we sign a contract? No. Services must not begin before signing a contract…In exceptional circumstances, where we begin the work for client before the final contract is signed, a Stop Gap Agreement or standard Instructions to Proceed which refers to [standard terms] must be signed….”

Too Keen To Sell?

Too Keen To Sell?  Scenarios with varying degrees of risk:  Proceed based on an ‘informal’ letter of engagement  Subject to contract negotiations almost complete, work starts but formal document not signed  Written terms sufficient to cover initial piece of work and agreement to agree remaining terms in good faith later

Too Keen To Sell? “If one party is a company with a [legal adviser], he may whisper words of caution but the managing director will tell him that it is the task of lawyers to solve problems, not to create them”

Staughton LJ: Corson v Rhudlan Borough Council.

Too Keen To Sell?  Has everything intended to be covered by the agreement been either expressly or impliedly agreed?  The words ‘subject to contract’ are inconsistent with a concluded contract  Normal inference will be that parties will not be bound until they sign an anticipated formal document  The common law does not recognise a general duty to negotiate in good faith  Net Effect = UNCERTAINTY !!

Too Keen To Sell?  “If you cut too many corners building a square, you will end up with a circle”  Key risks… For the Supplier

For the Customer

Scope creep

Price creep

Potential unlimited liability

More difficult to prove liability No certainty of ownership or licence rights

IPR Risk Tied in to a bad deal

Financial consequences of exit

Too Keen To Sell?  Commercial principles document;  Prudent use of standard terms:  Risk mitigation language;  Stop gap document to avoid legals becoming an obstacle to the deal.  If you can’t document what is in, ensure you always document what is out!

Too Keen To Sell?  ‘We have significant experience of successfully delivering this type of system in the retail sector’  Incorrect ‘fag packet’ estimate of a critical one-off expense item in accounts of a seller’s business  In the first year you will, based on previous deals, achieve [x] turnover, [y] profit and [z] savings

Too Keen To Sell?  Fraudulent Misrepresentation     

a representation; made knowingly or recklessly; intended to be relied on or induce; was acted on; and person relying suffered damage as a result.

 Critical points:  intent/motive is not the only determining factor;  cannot limit or exclude liability for fraud.

Too Keen To Sell?  Risk Mitigation Approach For the Supplier

For the Customer

Joined up sales teams and commercial/legal teams

Communicate key business requirements and build these into contractual discussions Challenge sales statements

Avoid exaggerated claims about goods or services Encourage customers to conduct their own investigations Use a properly structured limitation of liability and entire agreement clause

and look for supporting documentation Conduct due diligence and ensure contract is drafted to address key risks and gaps Take a strategic approach to limitation and exclusion of liability provisions

2. Performance Regimes

Performance Regimes  Increased frequency / utilisation of performance regimes in outsourcing and large services agreements  Service Level Agreements “SLAs” / “KPIs”  need to be distinguished from liquidated damages regimes  adjustment in charges to reflect failure to meet SLA  service credits (and debits)  they describe the standard of performance not the substance of performance  clarity and objectivity is vital and service

Performance Regimes contd…/  Customer’s perspective: driving value and continuous monitoring / reporting  Supplier’s perspective: helping to add clarity to what performance means and managing failure to meet service levels  Typically used in IT and business process outsourcing and managed services agreements

Performance Regimes contd…/  Example SLA: software support and maintenance agreement  service levels - eg the following “Service Availability” calculation:  the actual level of service provided by the Supplier shall be measured by comparing the Actual Service Hours during a calendar month with the Service Level Hours for that month. Actual Service Hours For the purposes of this Schedule, Service Availability = * 100% the ratio Service Level Hours Actual Service Hours to Service Level Hours shall be called the “Service Availability” and shall be defined as follows:

Performance Regimes contd…/  Response and resolution times: Priority

Business Impact

Example

Resolution (fix) service level

Critical

Critical

Impacts on business performance

High

Potentially Critical

Threatens to impact on business performance

4 hours

Medium

Eventual

Causes disruption to efficient working

8 hours

Low

Low

No business impact (e.g. change request)

5 [Working] Days

1 hour

Performance Regimes contd…/  Remedies for failure to meet SLA  service credits  re-performance (where appropriate)  termination (where negotiated)  persistent breach  material breach

Performance Regimes contd…/  Service Levels - Practicalities and Tips testing of suitability of SLA response times versus resolution (fix) times reporting/measurement of service levels audit rights to back up/check reporting? what strength of obligation is included in the agreement?  how / when are service credits payable?  exclusive remedies ?  use of SLAs and intentional and inadvertent waiver     

Performance Regimes contd…/  Driving value from contracts:  performance regimes  benchmarking to maintain value in long term deals  indexation – up and down with CPI?  process re-engineering and gain-sharing  volume (combined) purchasing  disaster recovery and business continuity  technology re-fresh

 Often part of tender process but sometimes inadvertently fall away at contract stage

3. Liability Perspectives

Liability Perspectives

 Unfortunate but unavoidable fact – some projects will fail  Clarity of commercial understanding is of critical importance  Suppliers unwilling to accept unlimited liability + customers seeking to realise value may equate to unrealistic expectation in relation to what the parties should be liable for

Liability Perspectives contd…/

 [x.1] Nothing in this Agreement shall exclude or limit the Supplier’s liability for fraud, gross negligence or for death or personal injury caused by its negligence or the negligence of its employees, sub-contractors or agents.

Liability Perspectives contd…/  Imported templates and use of concepts not recognised under Irish law  Lack of legal certainty as to the precise meaning of the such terms  If the customer is insistent on retaining these provisions – define

Liability Perspectives contd…/  [x.2] The Supplier shall not be liable under this Agreement for indirect or consequential loss or  for loss of profits;  loss of anticipated savings; or  loss of data whether such losses listed are direct, indirect, consequential or otherwise

Liability Perspectives contd…/  Suppliers exclusion of liability clauses becoming more sophisticated  Examine the purpose of the contract and the commercial background in deciding how to categorise any particular head of loss  Consider classifying certain losses as a direct loss in the contract  If such clauses are ambiguous - will be construed against the person trying to rely on them.

Liability Perspectives contd…/  Is unlimited liability ever appropriate  mandated under law  negotiated

Liability Perspectives contd…/

 Supplier ideal -v- customer ideal – commercially unrealistic  Appropriate use of standard terms  Important to tie together all contractual limitation and exclusion of liability provision in order to avoid uncertainty or ambiguity in the contract  The relationship between service credits / liquidated damages and limitation of liability provisions should be clarified

QUESTIONS AND ANSWERS

Contact details John O’Connor Matheson Ormsby Prentice 70 Sir John Rogerson’s Quay Dublin 2 D: +353 1 232 2150 T: +353 1 232 2000 F: +353 1 232 3333 E: [email protected] W: www.mop.ie Yvonne Cunnane Matheson Ormsby Prentice 70 Sir John Rogerson’s Quay Dublin 2 D: +353 1 232 2152 T: +353 1 232 2000 F: +353 1 232 3333 E: [email protected] W: www.mop.ie

Mark Rasdale Matheson Ormsby Prentice 70 Sir John Rogerson’s Quay Dublin 2 D: +353 1 232 2012 T: +353 1 232 2000 F: +353 1 232 3333 E: [email protected] W: www.mop.ie

Disclaimer 

The information contained in this document is for general interest purposes only. The application and impact of laws can vary widely based on the specific facts involved. Accordingly, the information in this document does not constitute legal advice and should not be relied upon in any way. Before making any decision or taking any action, you should consult Matheson Ormsby Prentice or another law firm of your choice.



Matheson Ormsby Prentice is not responsible for any errors or omissions, or for the results obtained from the use of the information in this document. All information in this document is provided "as is“ and without warranty of any kind, express or implied, including, but not limited to warranties of completeness, accuracy or merchantability. In no event will Matheson Ormsby Prentice or the partners, agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any direct or consequential or indirect or similar losses, even if advised of the possibility of such losses.