Case Study: Best Practice for Contract Risk Management€¦ · 2 March 2016 Case Study: Best Practice for Contract Risk Management Dr Sam De Silva, FCIPS Partner –Head of IT & Outsourcing

eWorld Procurement & Supply

2 March 2016

Case Study: Best

Practice for Contract

Risk Management

Dr Sam De Silva, FCIPS

Partner – Head of IT & Outsourcing Group

Penningtons Manches LLP

Former CIPS GBT

General considerations

Quality

Remedies

Intellectual Property Rights

Confidentiality and Data Protection

Limitations and exclusions of liability

Indemnities

Term and termination

Exit plans

Boilerplate

Outline

Are the supplier's obligations clearly set out?

For absolute commitments, avoid using terms such as

"best endeavours“ or "reasonable endeavours"

Carry out (some) due diligence of the supplier

Check the definitions carefully, especially with respect to

the description of the services or goods and the address

to which the services or goods will be delivered

General Considerations (1)

If there is a conflict between the main body of the

agreement and the schedules, which terms are to

prevail?

Ensure that the supplier holds any necessary licences or

consents needed to be able to supply the services and

provide for warranties if appropriate.

Avoid allowing the supplier exclusivity; you may want to

acquire the services from elsewhere if they are not being

performed or delivered properly or at all

Avoid “battle of the forms”

General Considerations (2)

Ensure that the usual typical warranties are expressly included and resist

any attempts by the supplier to exclude the statutory implied warranties

– Services should be performed using reasonable skill and care, in

accordance with the agreement and specification, in accordance with all

applicable laws and regulations, in compliance with your reasonable

instructions and using properly qualified staff.

– Goods should be fit for purpose, of satisfactory quality and conform with

your requirements

Ensure that the supplier does not set any artificial time limits on your ability

to make claims that the services or goods are inadequate or fit for purpose

Quality (1)

The agreement should provide that any goods or

deliverables will not infringe third-party rights and an

indemnity should be sought from the supplier in the

event that they do

Are acceptance tests needed? What will happen if the

acceptance tests are failed, either once, or repeatedly?

Consider whether the agreement provides for suitable

remedies for non-performance or poor performance and

ensure that the remedies are not restricted

Quality & Remedies (2)

Remedies could include:

– repairing or replacing goods

– offering a refund,

– re-performing the services

– rejecting the goods or services

– requiring the supplier to take steps to improve its future

service delivery

Step-in rights

Service credits

Obtaining the services from a third party and

charging the cost of doing so to the supplier

Remedies for Poor Quality (3)

Ensure that you retain IPRs of any specifications you have provided

Do you need the IPR in the goods or other deliverables?

Do you need the IPR of the supplier or third parties? If so, does the

agreement provide for the appropriate licences?

Joint ownership of IPR

IPR indemnity wording

Intellectual Property Rights (IPR)

The Supplier shall defend, indemnify and hold harmless the

Customer against all Losses arising out of or in connection

with the Customer's Use of the Services and/or Goods,

provided that the Customer will: (a) promptly notify the

Supplier of the claim and furnish it with a copy of each

communication relating to the claim; (b) give the Supplier

sole authority, at its expense, to defend or settle the claim

and to conduct any negotiations related to it; and (c) give

the Supplier such assistance and information as may be

reasonably necessary to defend or settle the claim.

IPR Indemnity Wording

Ensure that the clause covers the scope of the agreement properly

– Do you want to include a no-announcements clause in sensitive

arrangements?

– Have you disclosed materials which you want the supplier to keep

confidential?

Are the confidentiality arrangements mutual?

Consider appropriate carve-outs to permit parties to use confidential

information in connection with the agreement or to disclose to a regulatory

body or court

Does the agreement need to deal with data protection?

– Value of wording “the Supplier shall comply with the Data Protection

Act”

– Does the supplier have access to personal data?

– Consider whether data processing clauses are required and consider

the security of the personal data.

Confidentiality and Data Protection

Framework for a "best practice" liability clause

– Losses which can't be excluded by law

– General financial cap

– Different financial caps for different categories of loss e.g.

damage to property

– Categories of loss where no limit applies e.g. breaches of

confidentiality, data protection breaches, PCI DSS compliance

– Customer's liability to service provider

Indirect / consequential losses – GB Gas Holdings (Centrica) v

Accenture [2010]

Limitations and Exclusions of Liability (1)

Deeming certain categories of loss as direct losses

– Wasted management time

– Compensation paid to customers

– Costs of re-procurement

Ensure exclusion for consequential / indirect losses is appropriate

Consider exclusions carefully e.g. is exclusion of liability for data loss

appropriate?

Limitations and Exclusions of Liability (2)

Exclusions of liability – the devil is in the detail

Example 1

"The Supplier excludes indirect losses, consequential losses,

loss of profit, loss of revenue, loss of business …"

Example 2

"The Supplier excludes indirect losses, consequential losses

including loss of profit, loss of revenue, loss of business …"

Liability Exclusion Wording

Avoid giving as it increases risk/exposure

Scope of indemnity

Subject to cap?

Right to conduct any proceedings at its sole

discretion.

Indemnities

Is there a clear start date for the agreement and for the

commencement of the delivery of the goods and services and is

there a defined term?

Is the agreement clear about whether the agreement expires or

continues at the end of any (fixed) term, and whether renewal or

continuation is automatic or requires some positive action by the

parties?

Consider whether you want to have a right to extend the agreement

on the same terms and conditions

Consider the circumstances in which the supplier should be able to

terminate, or suspend its performance of the agreement.

Term and Termination (1)

Consider the circumstances in which you should be able to terminate the agreement,

for example:

– non-performance

– insolvency of supplier

– change of control of supplier

– supplier's behaviour affecting the buyer's reputation

– force majeure

– any others circumstances?

Do you want to be able to terminate without cause (i.e. for convenience)? Note that a

supplier may resist this without a reasonable notice period, especially where longer-

term services or provision of goods are concerned.

Consider notice periods for termination. Are they clearly set out? Many disputes arise

regarding notice periods so they should be as clearly drafted as possible.

What provisions of the agreement will survive termination?

Term and Termination (2)

Return of your property

Know-how transfer

Data migration

Seamless transfer back in-house or to a

replacement service provider

Consider non-compete and non-solicitation clauses

Exit Plans

Are you part of a corporate group?

– Ensure that all buyer companies which might suffer loss or need

to rely on the agreement are named as parties to the agreement

or expressly have the benefit of the agreement under the

Contracts (Rights of Third Parties) Act 1999 (TP Act)

– Otherwise, the agreement should state that the TP Act will not

apply

Assignment

– Do you want to prohibit assignment by the supplier?

– Do you need the right to assign intra-group without consent?

Boilerplate (1)

Subcontracting

Do you want to retain control over the subcontractors of the

supplier?

If the supplier is able to subcontract, the agreement needs to say

that the supplier will remain liable for the acts and omissions of

the service provider

Change of control

Do you have concerns if the supplier undergoes a change of

control?

Is the supplier seeking a change of control clause in respect of

your business? If so, it should be resisted or revised so that it

only applies in certain circumstances, such as if the new owner

is a competitor or the new ownership could have a negative

impact on the services

Boilerplate (2)

Force majeure– Try to have the force majeure clause restricted to circumstances which are genuinely outside

the supplier's control

– Ensure that the clause requires the supplier to inform you immediately of any force majeure

event and to take steps to overcome the circumstances as far as possible.

– Does the supplier have adequate disaster recovery procedures in place?

– Is a process needed to devise a disaster recovery plan?

Jurisdiction, choice of law and dispute resolution– Consider alternative dispute resolution mechanisms, such as escalation and then mediation

or arbitration

– Is the supplier based overseas, in which case it may be advisable to seek local law advice?

– If the supplier is based overseas consider whether a UK court judgment would be

enforceable in the supplier's country.

Ensure that the terms of the agreement cannot be varied without the prior

written agreement of the parties

Boilerplate (3)

Is there an entire agreement clause?

– If so, is everything set out in the agreement that you need

to be able to rely on?

– Has the supplier made representations at the pre-contract

stage which you need to be able to rely on?

Do you want the supplier to keep records and do

you require audit rights?

Boilerplate (4)

Questions?