Businesses and individuals are increasingly reliant on technology contracts to define relationships and manage services exchanged between one another.
Whether it’s a simple subscription agreement or a master services agreement outlining the terms of a complex digital transformation, technology and software contracting has infiltrated nearly every aspect of our personal and professional lives. These contracts often describe and support the formation of business-critical relationships for organizations of all types and sizes.
However, even with the best intentions, disputes over technology contracts often arise because of different views as to the rights and obligations of the parties involved. Pursuing and responding to contract disputes is often a costly and complex process. Avoiding such disputes – or having processes in place to resolve disputes quickly when they arise – can reduce the risk to your organization of incurring substantial expenses or bad publicity.
The following are some best practices that organizations can rely upon to mitigate these risks and to avoid or resolve technology contract disputes.
Disputes are a nuisance
Contract disputes are expensive, even if you are in the right. Litigation, arbitration and other alternative dispute resolution methods can require significant time and resources. A non-performing party can make this worse by dragging out the dispute process to increase their negotiating power. Ways to reduce the nuisance created by disputes include a well-drafted contract, adopting dispute resolution procedures that minimize costs and conducting thorough due diligence on potential contractual partners before signing a contract. Often the best way to avoid disputes is to include good joint provider/customer governance processes in your contract and implement those processes. This can help identify and resolve issues before they become disputes.
The importance of a good contract
Too often technology disputes arise or are made worse because of poorly drafted contracts. Common issues in contracts are vague or ambiguous obligations, a lack of clear performance metrics and unclear payment terms. Some specific examples of these include vague or undefined license metrics (for example, who meets the definition of a “user”), lack of reasonable price controls, overly broad confidentiality obligations that impact a party’s intellectual property rights, and an absence of available remedies if there is a service level failure. In contrast, well-drafted technology contracts have:
- Clear rights and obligations: If a contract appropriately details each party’s contractual rights and obligations, it is easier for a Court or arbitrator to enforce expectations or assign blame in a dispute. It is key for implementation contracts to include a well-defined scope of work that includes each party’s role and responsibilities, project plan and key milestones for payments.
- Resolution procedures: When problems arise, it helps if there is a structured (often multi-tiered) path that moves the issue to higher levels of management before a dispute escalates to litigation/arbitration.
- Governance process: For technology projects, joint governance processes are important to keep the project on track. Levels of governance can include joint working, strategic and technical committees. Supporting internal governance and decision-making processes are equally important to keep the contract on track and to resolve issues before they become disputes.
- Self–help remedies: These provisions allow parties to take action when the other party fails to meet their obligations. For example, withholding payment until services are adequately performed or suspending performance of services until late payments are made can be effective mechanisms to keep the contract on track.
Understanding the contract
One common pitfall that many parties succumb to is not fully understanding their rights and obligations under their technology contracts. Many of these contracts provide a wide range of remedies and avenues for recourse that go unused because parties are unaware of their availability. For example, some contracts provide rights of termination in the event of a material decrease in functionality of the service or software or the right for a provider to suspend a specific user’s access in the event their use poses a risk to the functionality or security of the service, platform or solution. An in-depth understanding of your technology contract, including each party’s available contractual rights and obligations, creates a strong foundation for avoiding and resolving disputes.
Keeping records
Documentation is critical when involved in a contract dispute. Technology contract disputes in particular, often involve extensive documentation and are factually intensive and technically complex. Failure to document performance expectations or address issues in writing can complicate the enforcement of rights when the time comes to formally resolve a dispute. For example, in cases of non-performance, written notice to the breaching party is often required to preserve the right to claim a breach of the contract. This written communication may also trigger other dispute resolution processes.
Alternative dispute resolution
Alternative dispute resolution processes, such as mediation and arbitration, are often practical tools to reduce the costs of resolving technology disputes. These alternative processes also provide the benefits of resolving the dispute outside of the public eye. It is important to consider the jurisdiction or location where any arbitration or mediation will be held or where disputes will be resolved.
Technology contract disputes are an unfortunate reality, but with careful planning and proactive measures, organizations can reduce the likelihood of disputes and better manage them when they do arise. A well-drafted contract, clear communication, appropriate governance processes, and thoughtful dispute resolution mechanisms are key to avoiding costly litigation and maintaining successful business relationships.
For more information on technology contracting, please contact the Technology, Intellectual Property and Privacy group at MLT Aikins.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.