CUSTOMER CONTRACTS IN IT & ITES ORGANIZATIONS IMPORTANT ASPECTS

By A.Srinivasan
Research Scholar, Department of Public Administration, Presidency College, Chennai 600 005 Mobile No. 98408-00487, ta_sriniv@yahoo.co.uk

Illakiya
Research Scholar, Department of Public Administration, Presidency College, Chennai 600 005 Mobile No. 99624- 40052, illakiya87@gmail.com

Information

Technology

(IT)

and

Information

Technology

Enabled

(ITES)

Organizations Contracts are specialized Contracts. These are executed by them with their Customers for providing the required Services which includes Software Development Contracts, Business Process Outsourcing Contracts including Knowledge Process Outsourcing Contracts. These Contracts mostly are entered with their Customer

Organizations situated in countries like United States of America (USA), Europe and UK. These Contracts are different from other normal Contracts. In addition to the terms and conditions of the Contract, the Law as applicable in the Clients Geography will also apply to these Contracts. Therefore it may be necessary to have fair knowledge of Laws, Rules and Regulations as applicable in that Geography. Every day there is a new development and necessary care has to be taken to factor these ever changing requirements from both technical as well as regulatory point of view. These Contracts itself have become a Specialty and because of its importance many IT & ITES organizations today have constituted Customer Contract Management Cell for drafting, execution and management of Customer Contracts in their organizations. This special nature of IT & ITES Customer Contracts is different from Commercial Contracts. This paper would attempt to discuss such clauses that are essentially required

and no compromise made on the same. Customer Contracts are mostly executed between two entities situated in two different International Geographies wherein the Laws of the Foreign Land usually applies. This is

because Customer Contracts are signed at a place where the Customer resides and the laws governed in that Country would be applicable.

If the Contractual Terms are unreasonable and does not protect the IT & ITES - Supplier / Vendor the same could be serious and may prove disastrous in case of a conflict. In order to maintain a good and everlasting business relationship it has become necessary for the Vendor to manage these Customer Contracts carefully and ensure compliance of the terms and conditions.
What is a Contract ?

Contracts are Agreement enforceable by Law.

All Contracts are Agreement but all

Agreements are not Contract. Only an Agreement which is enforceable by Law is a Contract. A legally enforceable contract need not always be in writing. A well drafted contract protects both the parties; provides clarity and minimizes disputes. Contract is also a game of words and every word, punctuations play a vital role. In addition, all Capitalized Word in a Contract should be properly checked. These are generally defined terms (US Contracts) which are ought to be checked.

Essentials of a Valid Contract A Contract in order to be valid and enforceable in the eyes of Law, should be preceded by a Lawful Offer and succeeded by a Lawful Acceptance. The Contract needs to be supported by a Lawful Consideration and the Contract should have a lawful object. A contract should be capable of performance. The consent of the parties should be obtained free and should not be bereft of Fraud, Coercion and Undue influence. Further the parties of the Contract should be capable to enter into a contract and there should be identity of mind. The Object of Contract should not be declared void by any law of the Country. Key Clauses in IT & ITES Customer Contracts: Warranty: Warranties are stipulations collateral to the main purpose of the Contract. Companies must be careful while listing down warranties. Generally a Contract for Services would not have warranties except personnel providing services in professional and workmanlike manner. For Software Services Contract, warranty should commence immediately after

acceptance/deemed acceptance of the software by the customer and not beyond this. Warranty under Software Contracts should be related to compliance with agreed

specifications. Implied Warranties of Merchantability and Fitness for a particular purpose should be clearly excluded for Software Contracts. Intellectual Property Rights (IP): Intellectual Property Rights are intangible property created out of human intellect. It is necessary to retain and protect the proprietary rights except in works that have been created specifically for the customer work made for hire. Without the consent of the customer no pre-existing IP of the Company is embedded into the software developed for the customer. All the Company IP embedded in software deliverables are only licensed to customer. Assignment of title/ownership to client should be subject to payment obligations. Most Favored Customer (MFC): The concept of MFC is favoring the Customer by reduction in the Contracted rates. This has major business and financial implications and should be strongly resisted. It should be maintained that Pricing is based on various criteria viz. volume, geography, skill, technology, industry, type of work, language. MFC has to be linked to minimum business guarantee by customer. This is difficult to monitor by the Vendor Company and may affect procuring business with new customers. This clause has a retrospective effect and therefore affects revenue recognition Non-Compete: This refers to restrictions in getting into similar business of the Customer during the Contract and after the completion of the Contract. Generally Non-compete clauses would be relating to Key personnel of Companywide. Company-wide non-compete clauses should be strongly disagreed as it would affect the business growth of the Company. Key personnel related noncompete clauses can be agreed with a cooling off period. Limit cooling off to key employees, should be limited generally for a period between (3 to 6 months) Non-Hire/Non-solicitation: This refers to restriction on hiring the employees of the Vendor Company. Hiring the required specialized talent is not an easy task these days. Customers would surely have interest on a talented employee and would try to own them. Hence, to safeguard the Companys talent, it is pivotal to have Non Solicit/Non Hire clauses in an Agreement. The

restriction on hiring should be limited to 12months to 24 months period with an exception to hiring by way of paper advertisements which are not specifically targeting the employees. Liquidated Damages (LD) LD are damages which are construed to be a reasonable pre-estimate of losses mutually agreed between the parties. LDs are generally triggered upon a failure in achieving the deadline by the Vendor Company. LD should be agreed to be the sole and exclusive remedy for the failure to achieve milestones/timelines. The cap for LD generally agreeable in the market is 5% of the invoice value. Indemnification: Indemnification is nothing but making good the losses of another. This is also considered to be a vital clause in a contract. The general indemnities to which a Company can agree includes (a). IP infringement (b) Injury and Death (c) Property Damage (d) Breach of Law (e) Breach of Confidentiality Obligations. Limitation of Liability: This is the most important clause in any contract and toughest clause to convince the customers and is largely negotiated. Sometimes may be a deal breaker. Direct Damages Company generally includes a monetary cap on its liabilities for direct damages and disclaims liability for indirect damages as provided below. Indirect Damages - Companies will generally exclude special, exemplary, indirect, incidental, consequential or punitive damages of any kind or nature whatsoever (including, without limitation, lost revenues, profits, savings or business, or contribution or indemnity in respect of any claim against the party) or loss of records or data. Exclusions from Limitation of Liability - Companies generally agrees with Customers for unlimited liability on the claims arising out of IP infringement, Confidentiality breach, Gross negligence, Willful misconduct and Personal injury or death Confidentiality: Confidential Information of a Company is its wealth. A Company should be very careful while reviewing the confidentiality clause and should have a check based on the whether the confidentiality obligations are one way or two way and the exceptions to confidential information and/or disclosure obligations should be properly listed. Jurisdiction and Governing Law

Governing laws are to be agreed based on the service location and jurisdiction. For Indian Customers India, APAC Customers Singapore, European Union Customers UK and for US Customers USA . Other important clauses in a Customer Contract: Acceptance & Deemed Acceptance Acceptance in a software contract is the confirmation by the Customer that the software is in conformance with his specification. If within the specific duration, generally known as acceptance testing period, an identified defect should be communicated to the Company. If no defect is communicated by the customer within such period the software deliverable should be deemed to be accepted by the Customer. Audit All audit provisions in a contract should be with the limitations as to that audits should be conducted by the customer/its auditors only upon prior written notice of conduct of such audit. Costing information cannot be shared and all auditors shall comply with Companys confidential and security requirements Benchmarking This is the provision through which Customers attempts to reduce the cost of the services visa- vis increase in the service levels. If the Customer wants to impose Benchmarking then the Vendor may impose conditions that the comparison should be made only between other companies providing similar services and terms, in the same geography, skills, SLA, liabilities and risks, etc. Data protection: This is very important since the very sensitive information is with the Service Provider or the Vendor. Date Protection shall apply where personal data of any EU citizen is transferred outside EU. This is a statutory requirement under the EU regulations; Dispute resolution Generally, dispute resolutions process should be multilayered before being taken up with Court of Law. First escalation of the dispute should be made within the Parties senior management and in the event of failure in resolution the same needs to be referred to mediation, if mediation is also failed the dispute should be referred to arbitration and the

composition of the arbitrators shall be mutually agreed between the parties., legal proceedings must be a last resort. Insurance: All the Companies would have global insurance policies to appropriately cover and safeguard the Company during contingencies. Payment terms: Credit period of 30 to 45 days from the date of receipt of invoice for services rendered and nominal interest charged for delayed payments. Service level Credit: It is nothing but a penalty for service level breach. It is always advisable to have the credit amount not more than 5% of the total monthly invoice under which such breach arose. Service credits should always be sole remedy for service failures; no further damages should be claimed. Termination: Termination of a contract for any material breach of the shall only be made upon providing reasonable time period (normally 30 days) to cure such breach and in the event of failure to cure such breach. In case of termination (for any reason), all charges for the services performed up to the effective date (including for the work in progress) has to be paid by Customer. Parties Name and Address must be clearly specified. Acts of Gods and other unforeseen circumstances should be clearly stated in force majeure clause. No Bribes or Commission paid declaration. . Escrow Clause: It is necessary for the Supplier Company to enter into an Escrow Agreement for Deposit of Source Code, Assignment Agreement etc. with an Escrow Agent. Sharing of Costs has to be mentioned. Customer Contracts has become very critical to the Indian IT & ITES Organization. By incorporating the above safe guards in the IT & ITES Contracts the IT & ITES organizations

can safe guard itself from the risks and mitigate itself. This will help to realize the required top line and the resultant bottom line growth.