Negotiating IT contracts in the current Covid-19 setting
Share
This article discusses what needs to be done differently given the current issues surrounding buyers and suppliers of IT good and services
Our clients have asked us recently what they should do if they are negotiating a critical new IT contract in light of the uncertainty around Covid-19. Naturally, most of our clients are looking to reduce capital expenditure for the foreseeable future but some have carried on procuring IT goods and services due to the efficiency and long term cost savings that new and innovative IT solutions can offer.
Here are some tips about how to approach such negotiations at this time.
Here are some tips about how to approach such negotiations at this time.
- Consider the impact of Covid-19 on the specific project. No IT contract is the same and they will usually include a combination of hardware, software, services and support. If hardware is being procured, what is being used and where it is sourced from must be considered. If the hardware is stored at the contractor's premises locally then it will be easier to source and deliver on time as opposed to transporting it from abroad where there may now be substantial lead times and delivery delays.
- Consider whether the contractor's personnel are required to undertake work at any of your premises as this may be challenging. However, this is unlikely to be an issue if you are procuring a cloud based solution and will largely depend on what current restrictions are in place in your local area.
- Consider the impact on the contractor's own systems and resources. For example, the support services being sold may be on a 24/7 365 day's basis. Nevertheless you will want to evaluate the impact of Covid-19 on the contractor's resources and assess whether the availability being offered is still possible under the circumstances. Likewise, it would be prudent for you to assess and request evidence of the strength of the contractor's and any of its subcontractor's solvency to ride out these times of uncertainty. This is particularly important if you are being asked to pay any proportion of fees up-front on signing a new IT contract. If the contractor or any of its sub-contractors become insolvent recovering any fees paid in advance can be a long and challenging process and there is always the ultimate risk that nothing can be recovered.
Given the above, you may want to add additional provisions relating to the current situation and below are some suggestions.
Applicable Events/Force Majeure
You may wish to include a definition which specifically covers the Covid-19 pandemic and its affects. Possibly include a new Applicable Event(s) definition to cover any delays in delivery to your premises of hardware and/or any delays in implementing the IT solution etc. to the extent they are caused by a coronavirus outbreak (locally or anywhere in the world). Alternatively, you may prefer to expressly exclude the Covid-19 pandemic as a possible force majeure event. Put simply, this would prohibit the contractor from relying on force majeure if, due to a coronavirus outbreak, the contractor fails to perform any of its obligations under the IT contract (e.g. deliver the hardware on time, perform the services in accordance with SLAs etc.). In any event, whether the Covid-19 pandemic is regarded as a force majeure event or not, consider if payment obligations should stop if the contractor's performance is delayed or prevented? This point is often unclear in force majeure provisions so a prudent customer should make sure payment obligations stop if a force majeure event occurs and the contractor's performance is prevented. This could help avoid any payment disputes later down the line.
You may wish to include a definition which specifically covers the Covid-19 pandemic and its affects. Possibly include a new Applicable Event(s) definition to cover any delays in delivery to your premises of hardware and/or any delays in implementing the IT solution etc. to the extent they are caused by a coronavirus outbreak (locally or anywhere in the world). Alternatively, you may prefer to expressly exclude the Covid-19 pandemic as a possible force majeure event. Put simply, this would prohibit the contractor from relying on force majeure if, due to a coronavirus outbreak, the contractor fails to perform any of its obligations under the IT contract (e.g. deliver the hardware on time, perform the services in accordance with SLAs etc.). In any event, whether the Covid-19 pandemic is regarded as a force majeure event or not, consider if payment obligations should stop if the contractor's performance is delayed or prevented? This point is often unclear in force majeure provisions so a prudent customer should make sure payment obligations stop if a force majeure event occurs and the contractor's performance is prevented. This could help avoid any payment disputes later down the line.
Remedies
Another area that you should consider (pre-signing) in times of uncertainty is the scope and strength of your contractual remedies under the IT contract. For example, what remedies should you have if the contractor is delayed or unable to deliver its products or services by the due date? Likewise, what happens if the contractor is failing to deliver the services in accordance with service levels? With these issues in mind, consider if the IT contract should include a right for you (or any third party you appoint) to "step in" and take over the requisite management and supply of goods and services under the IT contract. Another option is to include (pre-agreed) liquidated damages in the IT agreement so that you have some contractual comfort that if there is a delay the business will receive [X] amount each day until the relevant delay is satisfied (e.g. the goods/services are delivered or the IT solution is successfully implemented). Arguably the contractor will be incentivised to ensure deadlines are met on time if remedies (such as the above) are included in the IT contract.
Clauses relating to postponement and remobilisation
To the extent not already addressed by the contract, consider including a right for you to suspend the services at any time on [seven] days' notice for a period of [X] months for any reason relating to coronavirus or Applicable Event. Following such suspension, include an obligation on the contractor to remobilise within [seven] days of your notice, and a clause dealing with the remobilisation costs but [potentially] excluding any additional entitlement to claims for delay costs, delay damages, breach of contract, loss of profit, loss of reputation or otherwise.
To the extent not already addressed by the contract, consider including a right for you to suspend the services at any time on [seven] days' notice for a period of [X] months for any reason relating to coronavirus or Applicable Event. Following such suspension, include an obligation on the contractor to remobilise within [seven] days of your notice, and a clause dealing with the remobilisation costs but [potentially] excluding any additional entitlement to claims for delay costs, delay damages, breach of contract, loss of profit, loss of reputation or otherwise.
Insurance
Check if the type/amount of insurance cover offered by the contractor is appropriate and acceptable to your risk team. Insurance products exist for business interruption, supply chain losses, event cancellation, and exposure liabilities. However, does the contractor's policy cover the coronavirus pandemic? Perhaps add a warranty to ensure the contractor's insurance covers the possible risks and business disruptions associated with the coronavirus or Applicable Event.
Post Covid-19 contracts
There has been a lot said about force majeure or its equivalent applying to IT contracts entered into after the coronavirus outbreak. Most will agree that the parties already knew of its existence hence its outbreak is not "unforeseeable" and therefore may fall outside of clauses drafted in these terms. Alternatively, if taking a more balanced approach the parties may agree to allocate coronavirus-related delay risks (via a contract amendment or variation) or, where appropriate, rely on the extension of time provision which allows the IT contractor additional time to complete the services if the government or a local authority exercises any legal authority which directly affects the execution of the services. Please note that this is an exercise of a government's legal power as opposed to the government issuing advice or best practice guidance.
There has been a lot said about force majeure or its equivalent applying to IT contracts entered into after the coronavirus outbreak. Most will agree that the parties already knew of its existence hence its outbreak is not "unforeseeable" and therefore may fall outside of clauses drafted in these terms. Alternatively, if taking a more balanced approach the parties may agree to allocate coronavirus-related delay risks (via a contract amendment or variation) or, where appropriate, rely on the extension of time provision which allows the IT contractor additional time to complete the services if the government or a local authority exercises any legal authority which directly affects the execution of the services. Please note that this is an exercise of a government's legal power as opposed to the government issuing advice or best practice guidance.
Keep records
You will need to have a flawless contract management system and processes to record all delays, disruptions and any extra costs incurred by the business and to serve appropriate notices. As a starting point, we would also recommend regular calls to monitor the contractor's progress/performance and ensure you take minutes and distribute them straight after any virtual call.
You will need to have a flawless contract management system and processes to record all delays, disruptions and any extra costs incurred by the business and to serve appropriate notices. As a starting point, we would also recommend regular calls to monitor the contractor's progress/performance and ensure you take minutes and distribute them straight after any virtual call.
Applicable Event Support
Most IT contracts will often oblige IT contractors to ensure that plans are maintained to safeguard continuation of services in the event of an emergency so far as is reasonably practicable to ensure the force majeure clause is not relied on. This usually relates to a reduction in functions or availability. For example, if the standard contract stipulates 24/7 support, the emergency cover may be restricted to 8 hours a day. The parties may wish to agree such a schedule to demonstrate preparedness for disruption during the ongoing coronavirus outbreak.
Most IT contracts will often oblige IT contractors to ensure that plans are maintained to safeguard continuation of services in the event of an emergency so far as is reasonably practicable to ensure the force majeure clause is not relied on. This usually relates to a reduction in functions or availability. For example, if the standard contract stipulates 24/7 support, the emergency cover may be restricted to 8 hours a day. The parties may wish to agree such a schedule to demonstrate preparedness for disruption during the ongoing coronavirus outbreak.
Both buyers and suppliers will agree that it may be tough to set a clear end date currently as to when the lockdown will completely end because of the phased approach suggested by most Governments hence it makes sense for both parties to negotiate a document which reflects this uncertainty.