Computer Contracts

Introduction
• An agreement between two or more parties for the doing or not
doing of something specified
• Contracts serve the following purpose:
1. Contracts set out the agreement between the parties
2. they set out the aims of the parties;
3. provide for matters arising while the contract is running,
4. ways of terminating the contract and the consequences of
termination
Introduction

• If contracts are too harsh or unfair causing any issue between parties
to be unresolved, it is the responsibility of the contract laws to
contemplate according to the rules.
• contract law provides rules for the termination of the contract if
performance becomes impossible
• it sets aside contracts which are too harsh or
unconscionable(unreasonable)
Introduction
• There are almost never disputes over contracts which run perfectly
e.g marriage
• Example: ship to carry a cargo
• In order to avoid disputes and future difficulties it is better to draft a
document which sets out:
1. The terms on which both parties is to work.
2. Methods of payment.
3. Appropriate ways to terminate the contract-notice required.
Introduction
• One noticeable growth area is e-commerce. However, again the law is able
to cope, sometimes with minor modifications, e.g. relating to electronic
signatures to documents exchanged over the Net. Since the advent of the
Internet, the market has globalized to a far greater extent than ever
before, and there is greater need for international harmonization of laws.
The EU has therefore been very active in line with its policy of removing
distortions of trade within the internal market and also in facilitating trade
by EU businesses. There are therefore directives and proposals for
directives on:
1. electronic signatures;
2. electronic commerce;
3. distance contracts;
4. distance selling of financial services.
Introduction
• One of the problems with computing contracts is that many lawyers are
still not familiar with the technology. But, on the other hand, even fewer
computer scientists are familiar with the law; and as both lawyers and
computer scientists use jargon known almost only to themselves, the
difficulties are compounded.
• Hilary Pearson 1 made a very telling statement when she said that, while
optimists make the best deal makers, pessimists make the best contract
writers.
• When it comes to drafting a contract, lawyers in particular are born
pessimists. This often gives rise to frustration on the part of a business
client who is excited by the possibilities of a deal which may have taken
considerable time and effort to negotiate. Resolving potential and
hypothetical points of difficulty may just be seen as time-wasting by the
client.
Introduction
• Contract should be clear, consistent and concise. It is important that a
contract is set out in a clear and logical manner and that it is
complete and consistent
• There should be no ambiguity and the parties to the agreement
should be left in no doubt as to their rights and duties.
• Ambiguity and doubts can lead to performance which is viewed as
unsatisfactory.
• This can lead to disagreement and the expenditure of time, effort and
therefore money, in resolving the matter
Introduction
• software engineers are likely to come across many different types of
contract—insurance contracts, contracts of employment, contracts
with hardware suppliers, consultancy contracts.
• we shall concentrate on contracts which are relevant to the
development and supply of software
Contracts for the supply of custom-built
software at a fixed price
• Producing a good contract costs a lot of money;
• good commercial lawyers are not cheap.
• software suppliers try to use what are known as standard form contracts,
which are used or intended to be used many times over
Structure of the contract
1. a short introductory section which specifies, among other things the
names of the parties to the contract;
2. a set of standard terms and conditions;
3. a set of appendices or annexes. (an addition to a document.)
The standard terms and conditions do not change from one project to
another; they contain references to the annexes, which contain all the
project specific material.
Issues dealt with standard terms and
conditions
• What is to be produced ?
• What is to be delivered?
• Ownership of rights
• Payment terms
• Calculating payments for delays and changes
• Penalty clauses
• Obligations o f the client
Issues dealt with standard terms and
conditions
• Standards and method of working
• Progress meetings
• Project managers
• Acceptance procedure
• Warranty and maintenance
• Termination of the contract
What is to be produced
• contract states what is to be produced.
• the standard terms and conditions refer to an annex and the annex then refers to
a separate document which constitutes the requirements specification
• reference to the requirements specification identifies that document uniquely
• A specification sets out the detailed requirements of the client. Ideally, the
specification should be complete, consistent and accurate and set out all that the
client wants to be done in the performance of the contract.
• Unfortunately, we know that it is very difficult to achieve this ideal standard and,
even if we succeed, the requirements of the client may evolve as the contract
proceeds, and sometimes the changes may be substantial.
• Solution ?
What is to be delivered
• Producing software for a client is not, usually, a matter of simply handing over the text of
a program which does what is required.
• contract states what precisely is to be provided
• list of possibilities:
1. source code;
2. command files for building the executable code from the source and for installing it;
3. documentation of the design and of the code;
4. reference manuals, training manuals and operations manuals;
5. software tools to help maintain the code;
6. user training;
7. training for the client’s maintenance staff;
8. test data and test results.
 Ownership of rights
• contract should also state just what legal rights are being passed by the software house to
the client under the contract.
• Ownership in physical items such as books, documents or discs will usually pass from the
software house to the client, but other intangible rights, known as intellectual property
rights should be addressed
• Read page 106,107
• If ownership of copyright passes to the client it is known as a sale or assignment and again
a written agreement is necessary. Furthermore, the agreement will usually provide that
copyright is only to pass to the client when the final payment has been made in full. If
copyright is to remain with the software house and the client is merely given permission
to use the software, this is known as a licence
• If the client has an exclusive licence to use the software, it is the only organization entitled
to use it. If the client takes ownership of the software or has an exclusive right to use it,
the software house cannot make money from the software by licensing others to use it.
Ownership of rights
• Where the client is granted a licence, the following matters should be dealt with in the contract
1. duration of the licence—a licence should be for a fixed period; or there should be some provision
for termination, for example by giving notice, or on the happening of certain events, common
terminating events being death;
2. the licence agreement should state whether the licensee can assign or transfer the licence to
another. If there is no provision giving the licensee the power to transfer the licence to another,
then the licence is probably not assignable;
3. scope of the licence: does the licence cover use on one particular computer, or can the
software be run on other machines. If so, is the licence limited to one site? If the client
is one of a group of companies, can others in the group also benefit from the licence?
4. confidentiality: the licence will often seek to restrain the licensee from allowing
anyone other than company employees to become familiar with the use of the
software. This can be an embarrassment for educational establishments who wish to
purchase the software for use by their students.
Ownership of rights
• If the supplier retains the copyright, major problems can arise for the
client if the supplier goes into liquidation or otherwise ceases to
trade. The supplier is then no longer able to maintain the software
but the client may be unable to obtain copies of the up-to-date
source listings of the programs and any tools used to construct them,
in order to commission maintenance from a third party.
• One way around this difficulty is for the contract to specify that, after
acceptance, a copy of the listings and documentation is placed in
escrow; this means that the copy is placed in the hands of a third
party (usually a lawyer) to be released to the client if and when
certain defined circumstances arise
Confidentiality
• The commissioning client may well have to pass confidential
information about its business operations to the software house.
• software house may not want the client to (disclose sensitive
information) divulge to others details of the program content or
other information
• For each party to promise to maintain the confidentiality of the
other’s secrets, and for express terms to that effect to be included in
the contract.
Payment terms
• Payment shall become due within thirty days of the date of issue of
an invoice.
• If payment is delayed by more than thirty days from the due date,
the Company shall have the right, at its discretion, to terminate the
contract, or to apply a surcharge at an interest rate of 2 per cent
above the bank base lending rate.
• In practice, such clauses are only brought into effect in extreme
cases, since using them is likely to destroy the goodwill between
supplier and client on which the success of the project depends.
Payment terms
• Specify pattern of payments
1. an initial payment of, say, 15 per cent of the contract value
becomes due on signature of the contract;
2. further stage payments become due at various points during the
development, bringing the total up to, say, 65 per cent;
3. a further 25 per cent becomes due on acceptance of the software
4. the final 10 per cent becomes due at the end of the warranty
period.
Calculating payments for delays and changes
• when the client fails to provide information on a due date or when
changes are requested which result in extra work.
• The contract must specify the process by which these extra payments
are to be calculated
• annex will include daily charging rates for each grade of staff
employed on the contract and the amount of extra effort to be paid
for will be agreed at progress meetings.
• Delay payments and payments for variations to the original
requirements are, perhaps, the commonest cause of contractual
disputes, not only in software engineering but in most other
contracting industries
Penalty clauses
• The normal mechanism used is to include a penalty clause which provides that the
sum payable to the supplier is reduced by a specified amount for each week that
acceptance of the product is delayed, up to a certain maximum
• Suppliers are very reluctant to accept penalty clauses
• If the contract is to include penalty clauses, the bid price is likely to be increased
by at least half the maximum value of the penalty.
• If the software is seriously late and penalties approach their maximum, there is
little incentive for the supplier to complete the work since he will already have
received in stage payments as much as he is going to get
• It should be realized that the cost of delays on fixed price contracts is very high,
regardless of penalty payments. Every delay eats into the supplier’s profit margin.
As a result, suppliers are strongly motivated to produce the software on time and
delay is usually the result of genuine technical difficulties (or incompetence!)
rather than lack of motivation.
Obligations of the client
• client will have to fulfil certain obligations if the contract is to be completed
successfully.
• provide documentation on aspects of the client’s activities or the
environment in which the system will run;
• provide access to appropriate members of staff;
• provide machine facilities for development and testing;
• provide accommodation, telephone and secretarial facilities for the
company’s staff when working on the client’s premises;
• provide data communications facilities to the site.
• failure to meet the obligations may render the client liable for delay
payments
Standards and methods of working
• supplier is likely to have company standards, methods of working,
quality assurance procedures, etc. and will normally prefer to use
these
• More sophisticated clients will have their own procedures
• In some cases, the supplier may be required to allow the client to
apply quality control procedures to the project.
• The contract must specify which is to apply.
Progress meetings, Project Managers,
Acceptance procedure
• Progress meetings: Regular progress meetings are essential to the
successful completion of a fixed price contract and it is advisable that
standard terms and conditions require them to be held.
• Project Managers: The Project Managers must have at least the
authority necessary to fulfil the obligations which the contract places
on them.
• Acceptance procedure: critical part of any fixed price contract,
successful completion of the contract is judged, client should provide
a fixed set of acceptance tests and expected results and that
successful performance of these tests shall constitute acceptance of
the system
Warranty and maintenance
• Once the product has been accepted, it is common practice to offer a
warranty period of, typically, 90 days.
• Any errors found in the software and reported within this period will
be corrected free of charge.
• This clause is, of course, subject to negotiation; reducing or
eliminating the warranty period will reduce the overall cost of the
contract prolonging the period will increase it.
• Once the warranty period is over, the supplier may offer, or the client
demand, that maintenance will continue to be available on request.
Termination of the contract
• Termination of the contract:
1. the client to be taken over by another company which already has a
system of the type being developed, or for a change in policy on the
part of the client to mean that the system is no longer relevant to
its needs.
2. supplier is to be paid for all the work carried out up to the point
3. together with some compensation for the time needed to redeploy
staff on other revenue-earning work.
4. The question of ownership of the work so far carried out must also
be addressed.
Arbitration
• Court action to resolve a contractual dispute is likely to be expensive.
• It is common practice for contracts to include a statement that, in the
event of a dispute that cannot be resolved by the parties themselves,
they agree to accept the decision of an independent arbitrator.
• British Computer Society or by the President of the Institution of
Electrical Engineers both bodies maintain lists of qualified arbitrators
who have the necessary technical understanding.
• Some organizations may be unwilling to accept an arbitration clause
because they feel that they are signing away some of their legal
rights.
Inflation
• commitment to long term maintenance, the supplier will wish to
ensure protection against the effects of unpredictable inflation
• include a clause which allows charges to be increased in accordance
with the rise in costs
• The clause should state how often (once a year, twice a year) charges
can be increased and how the effect on the overall price is to be
calculated
• Applicable law: Where the supplier and the client have their
registered offices in different legal jurisdictions or performance of the
contract involves more than one jurisdiction, it is necessary to state
under which laws the contract is to be interpreted
Other types of software services contract
• There are four types of contractual arrangement which are widely
used in connection with the provision of software services:
1. contract hire;
2. time and materials;
3. consultancy;
contract hire
• the supplier agrees to provide the services of one or more staff to
work for the client;
• staff work under the direction of the client and the supplier’s
responsibility is limited to providing suitably competent people and
replacing them if they become unavailable or are adjudged unsuitable
by the client
• Payment is on the basis of a fixed rate for each man day worked; the
rate depends on the experience and qualifications of the staff
• Issues such as delay payments, acceptance tests and many others
simply do not arise
Time and materials
• A time and materials contract (often referred to as a “cost plus” contract) is
somewhere between a contract hire agreement and a fixed price contract.
• The supplier agrees to undertake the development of the software in much the
same way as in a fixed price contract but payment is made on the basis of the
costs incurred, with labor charged in the same way as for contract hire
• This is a type of contract that pays the contractor for the materials he or she uses
as well as the amount of time spent to finish the job.
• A time and materials contract usually signals to the customer that there is risk
involved. The project could cost more than initially anticipated.
• The supplier is not committed to completing the work for a fixed price, although a
maximum payment may be fixed beyond which the project may be reviewed
Time and materials
• Many of the complications of fixed price contracts still occur with
time and materials contracts—ownership of rights, facilities to be
provided by the client, progress monitoring arrangements, for
instance—but others,
• such as delay payments and acceptance testing do not;
• this is not to say that no acceptance testing is done, only that it has
no contractual significance since nothing contractual depends on its
outcome
• Time materials or fixed price, which one would you prefer ?
Consultancy contract
• You hire team of consultants
• Consultants are typically used to assess some aspect of an
organization and to make proposals for improvements.
• The end product of a consultancy project is therefore usually a report
or other document
• Consultancy projects are usually undertaken for a fixed price but the
form of contract is very much simpler than the fixed price contracts
so far described