At our recent workshop – "When they go low, we go high tech: protecting value when tech contracts go wrong" – tech specialists from our corporate and disputes teams unpacked current trends, common pitfalls and key avoidance and mitigation measures for tech clients. With thanks to Clarissa Coleman, Tim Ryan, Lucy Grivvell, Alistair Cooper, Alexander Bradley-Sitch and Jamie Tomlinson, here are our top takeaways for clients navigating the complex world of tech contracting.
1. Your contract is your playbook, not something to put in a drawer
A business relationship requires careful and constant attention and the execution of a contract is just the start of that relationship.
All too often we see a big push to get a contract signed before it is put in a drawer, and quickly forgotten. Parties might know what is expected of them at the start of a relationship, but years on, with key stakeholders having since left the business, who is managing success and ensuring compliance? It is not uncommon for contractual obligations to be forgotten over time which can lead to costly inadvertent breaches. Avoid viewing contract signing as the end, rather than the start, of the business relationship.
Top tip: Use the contract to manage the relationship, not just to litigate it. Define contractual obligations clearly and appoint someone to manage ongoing performance.
2. Define deliverables, don’t rely on initial goodwill
Technology business are, rightly, more focused on implementing products and services than getting bogged down in contractual definitions. Diligent contractors who insist on having all loose ends tied up before starting work are often viewed as blockers of progress. There is an important balance to be struck, however, between delivery and avoiding disputes.
Most disputes in the sector stem from ambiguity: vague or absent definitions around scope, deliverables, and timelines. A promise to deliver an MVP, with limited detail of what that might look like, can often result in disappointment. Where your expectations are not clearly defined, slippages occur, milestones are missed and costs spiral. While this risk is mitigated to an extent with waterfall, as opposed to agile, development workflows, failing to set out clearly what is to be delivered and when may leave you without a remedy if the worst does happen.
Top tip: Document deliverables clearly. Consider a discovery phase to refine requirements before full-scale implementation.
3. Bridge the sales–delivery gap
When disputes arise, a common theme is a disconnect between those negotiating the contract and those actually delivering it. Programmers and product specialists are often not told in sufficient detail what their salespeople have signed them up for. Bespoke solutions in particular often involve such a disconnect, where delivery teams are not even shown the contract they are supposed to be performing. Delays, under-delivery and frustration for both parties invariably ensue.
Top tip: Consult your development/implementation team on what is possible before signing a contract. Keep a feedback loop open between the delivery team and decision-makers, or appoint a go-between.
4. Plan for change, don't just hope for the best
Where promises have been made that can't be kept (often for valid reasons), contracts are often silent on what happens next. What is the point of having an SLA if it can't be enforced?
Your contract should be future-proofed and include robust change control procedures, remediation processes and remedies for minor faults (withholding interim payments, or the provision for service credits, for example). Even where your contract is silent on what to do when performance issues arise, work with your counterparty to make the best of a bad lot. Be open to varying your contract to avoid an avoidable dispute, but beware that variations by email can have legal effect.
Top tip: Stress test foreseeable obstacles at the negotiation stage, and contract for de-escalation when issues crop up. Provide robust exit management provisions. See your contract as a framework for collaboration, not just a legal safety net.
5. IP ownership: retain your rights
Intellectual property (IP) is often see as the "crown jewels" in tech deals. IP (including copyright, design rights, confidential information and domain know-how) is worth its weight in gold to software providers, particularly where it can be licensed to multiple parties, and ought to be protected accordingly. Disputes often arise in cases where parties lack clarity on who owns what after contracts are signed and a new product has been integrated.
Carefully defining "Background IP" (that which a party developed independently before the contract) and "Foreground IP" (created as a result of the services provided under the contract) is often a good start. Assuming Foreground IP is being transferred to the customer (not always necessarily the case) technology suppliers should be cautious not to define Foreground IP too broadly, for fear of losing ownership over IP on which a buyer had only minimal involvement. Sometimes even copying Party B into an email chain on which an idea is developed by Party A can result in ownership being transferred, confidentiality being lost, and the right of Party A to resell that concept being compromised.
Top tip: Spell out who owns what, and in what circumstances that might change. Don't be afraid to include (non-exhaustive) examples of IP in your contract.
6. Do I have a right to terminate? Be sure before "going nuclear"
Termination rights are one of the most difficult parts of a contract to negotiate. Suppliers typically want long lock-ins; customers typically favour flexibility. The intention of any party, however, should be clarity around when, why and how it can terminate when things go wrong. Terminating prematurely or without proper cause invariably leads to a more complicated and expensive dispute than was already playing out, with allegations of wrongful termination thrown in.
Take advice early and carefully consider the following questions: Is the relationship unsalveageable? Have I informed the other party about my grievance and given them an opportunity to rectify? Have I exhausted all contractual remedies first? Does the contract give me a right to terminate for this type of breach? Am I being deprived of materially the whole benefit of the contract (i.e. is the other side committing a "repudiatory breach")? What are my losses, and am I trying to mitigate them? Am I at fault in any way, and can I take steps to remedy that fault (e.g. making sure all outstanding invoices are paid) before terminating?
Top tip: Keep an open dialogue with the other party when issues arise (and, importantly, a paper trail). Set out grievances clearly in written correspondence (or take notes of phone calls). Documentary evidence might be extremely valuable in due course.
7. Dispute resolution clauses: give some thought to forum
Dispute resolution clauses are notoriously under-considered. Businesses understandably would rather negotiate substantive terms than face the reality that things might go wrong, or what the legal practicalities may be if they do. That said, even when you are presented with a standard-form agreement, take a quick glance to ensure the proposed dispute resolution procedure would work for you. At an absolute minimum, check to see whether the arbitral institution your dispute would be referred to actually still exists (trust us – we've seen it happen).
Litigation (before a national court system) and arbitration (before a hand-picked panel of arbitrators) each have their advantages. Litigation might suit a party who foresees a need to publicise its counterparty's poor behaviour; arbitration is typically a confidential process. Arbitration offers greater flexibility and is often the sensible choice for contracts with an international element. Providing for a mediation or early neutral evaluation before things get too contentious can be a useful option – the latter may even help get your contract back on track.
Top tip: Contracting for litigation and arbitration will not double your chances of a fair result: it will only create confusion and increase costs. Pick one (and hope never to need it).
8. Artificial intelligence, confidentiality and privilege
AI – the buzzword du jour – is never far from any conversation about technology contracting. Whether or not they are selling or buying AI capability, tech businesses ought to have a working knowledge of the advantages and drawbacks of using AI tools to enhance their offering.
Software developers, in particular, should know not to use public, open large language models (e.g. ChatGPT's default mode) to write code. Even where that code is subject to strict contractual protections, it may cease to be "confidential" if uploaded onto a tool which is trained on user data. Once confidentiality is lost, protecting it may be almost impossible.
Even where chatbots are used for less technical purposes, beware the risk of having to disclose AI's responses in future litigation. A chatbot is (for the time being, anyway) not a lawyer, so its output will not be protected by legal advice privilege. Seeking advice from AI about issues with a contractual counterparty may prove embarrassing at best, or seriously prejudicial at worst, if those issues turn into a full-blown dispute in future.
Top tip: Embrace AI to build efficiencies into your business, but use it with caution. Remember that anything you put in or get out is potentially disclosable.
If you want to learn more about our capabilities within this space, get in touch with one of the team below.
