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Blog: Nine ways to reduce risk in tech firm contracts

contract-draft

Technology firms thrive in fast-paced environments. But more time spent on customer contract T&Cs would be time well spent, says Travelers Europe’s Toby Harris

The contract is the foundation of the relationship between a technology company and its customer. Formulating contract terms carefully not only helps regulate the relationship; it is also a risk management tool. By crystallising the rights and obligations of the parties involved, contracts can considerably reduce the scope for future disputes. Even where a dispute is unavoidable, contracts can still help by defining a dispute resolution process that may avoid costly and time-consuming litigation.

A technology supply contract should include these nine elements to best manage its risks:

1. Specification: 

Clearly specify the product to be supplied. An accurate and technical description of the subject of the contract formalises what may have been only loosely discussed during negotiations.

2. Entire agreement clauses:

The contract should supersede all prior statements and agreements, written and oral, so the insured is protected when questions arise as to promises made during the sale or negotiation, versus what was delivered.

3. Exclusion and limitation clauses:

Clauses that exclude or limit the liability of the supplier are fundamental to any contract. They limit the total financial liability that may result from a breach of contract (or from events beyond the control of the parties) and will also seek to exclude liability for financial losses, particularly loss of profits.

4. Limitation of liability for consequential damages:

This provision disclaims liability for indirect (consequential) damages. Indirect damages may occur, for example, when the customer loses customers due to the insured’s failure to provide product to specification. The lack of a cap on liability or disclaimer would reduce the insurer’s ability to successfully defend the insured.

5. Customer obligations:

While the focus of any technology contract is the supply itself, it is equally important for the contract to address customer obligations. Clearly define the customer’s role in the implementation of the contract to avoid gaps in expectations.

6. Exclusive remedy:

The insured may agree to correct or replace faulty product that doesn’t perform according to specifications. A good exclusive remedy provides alternatives – such as repairing or replacing defective product at the discretion of the insured or customer.

7. Acceptance testing:

Once a customer has accepted a product, they can no longer reject it. Contract provisions addressing acceptance testing should set an appropriate timetable and the elements of functionality and performance that the customer requires.

8. Warranties:

Customers will seek to secure warranties covering the performance of the products supplied. Connect them to specific aspects of functionality or specification, with clear provisions that enable compliance.

9. Subrogation waivers and hold-harmless agreements:

These should only be agreed to after legal consultation. A subrogation waiver removes the right of the insured to have their insurer recover damages on their behalf. Similarly, a hold-harmless agreement releases one or more parties from legal liability. Higher premiums and deductibles can result from both.

By formulating a contract with clear specifications, referring to it throughout a project, documenting changes, noting clauses that can help limit your liability, and creating a dispute resolution process, you can more effectively govern your relationships with customers and prevent a claim from escalating unnecessarily.

Toby Harris is technology practice leader at Travelers Europe.

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