HU-103 Professional

Practices
 COMPUTER CONTRACTS

 Contracts set out the agreement between the

parties: they set out the aims of the parties; provide
for matters arising while the contract is running,
ways of terminating the contract and the
consequences of termination.
 Where there are gaps in the agreement because the
parties have failed to examine a particular issue, it is
a function of contract law to fill them,
 for example by implying terms; also contract law
provides rules for the termination of the contract if
performance becomes impossible; and sometimes,
although fairly rarely, it sets aside contracts which
are too harsh or unacceptable.

Computer Contracts 2
 COMPUTER CONTRACTS

 There are almost never disputes over contracts which run

perfectly.
 An similarity can be made with a good marriage, where there
is no need for the law to intervene.
 But, if things go wrong, in a contract or in a marriage, the law
provides a framework for the settlement of points of
disagreement, and for the termination of the relationship.

Computer Contracts 3
 COMPUTER CONTRACTS

 Contract law since its has handled disputes. An example can

be given of a inception(start) ship chartered to carry a cargo,
where, for instance, the cargo rots before reaching port, or
the ship sinks, or the ship and its cargo are
impounded(restrict) in the course of a war.
 What are the rights and remedies of the parties to the charter
agreement?
 Is there a contract of insurance covering the loss of the goods
or the ship, and is liability for any matter excluded under the
insurance contract, such as loss caused through warfare?
 Agreements for the provision of goods and services etc.
connected with computing present no impossible problems for
a set of laws which has been regulating commercial dealings
and handling disputes for many hundreds of years.

Computer Contracts 4
 COMPUTER CONTRACTS

 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.

Computer Contracts 5
 COMPUTER CONTRACTS

 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 . legal protection for encrypted services in the internal market;
2. electronic signatures;
3. electronic commerce;
4. distance contracts;
5. distance selling of financial services.

Computer Contracts 6
 COMPUTER CONTRACTS

 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 special words or expressions used by a profession
known almost only to themselves, the difficulties are
compounded.
 These difficulties are however receding, for more lawyers are
becoming familiar with computing through use of computers at
home and in work; there are more lawyers specializing in this
area of the law; and many books have been written describing
the framework of computer contracts, and providing model
contracts or precedents, which lawyers can adapt to the needs of
their clients.
 Let us hope that more computer scientists will become familiar
with the law.

Computer Contracts 7
 COMPUTER CONTRACTS

 Hilary Pearson 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 ef fort to negotiate.
 Resolving potential and theoretical points of dif ficulty may
just be seen as time-wasting by the client.

Computer Contracts 8
 COMPUTER CONTRACTS

 It is possible to avoid formal written contracts for the supply of

goods or ser vices, and to work on a basis of oral discussions
only, or on the basis of a set of loosely draf ted heads of
agreement, but for the security of all parties to the deal, it is
much better to set out clearly the terms on which each is to
work , and to provide for such matters as the method of payment;
what happens if there is a defect in the goods, sof tware or
services provided.
 It is also advisable to settle the appropriate methods of
terminating the agreement—for instance, the length of notice
required to terminate the agreement; and whether the length of
notice should vary at different times in the course of the
agreement, or on the occurrence of certain events.
 Drafting a document which sets out all of these matters takes
time, but in many cases it is better to pause and think it out in
advance, than it is to face difficulties later, when commercial
and other factors may change and when all may not appear to be
as clear-cut or financially beneficial as was originally thought.

Computer Contracts 9
 COMPUTER CONTRACTS

 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,
ef fort and therefore money, in resolving the matter.
 This is the last thing that the parties to a commercial
agreement need and want.

Computer Contracts 10
 COMPUTER CONTRACTS

 As stated earlier, it is much better to avoid the problems

initially by careful preparation and drafting.
 However, if there is a dispute, and often these are
unavoidable because they are caused by circumstances
beyond the control of the contracting parties, it is again
important that the contract is properly drawn up, for at this
stage it will be interpreted by outsiders,
 For example by lawyers and judges, or maybe by accountants;
and outsiders, even more than the contracting parties
themselves, will need to be able to predict and understand
the complexity of the deal, and will require clarity and
consistency in the documentation.

Computer Contracts 11
 COMPUTER CONTRACTS

 In the course of their work, software engineers are likely to

come across many dif ferent types of contract—insurance
contracts, contracts of employment, contracts with hardware
suppliers, consultancy contracts and so on.
 In this lecture we shall concentrate on contracts which are
relevant to the development and supply of software ; in
particular, we shall describe in some detail the elements
which go to make up contracts for the supply of software
which is to be custom-built for a client for a fixed price, for
this illustrates most of the issues which are likely to arise in
contracts regarding the provision of software and related
services.

Computer Contracts 12
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
STRUCTURE OF THE CONTRACT
 Producing a good contract costs a lot of money; good
commercial lawyers are not cheap.
 For this reason, software suppliers try to use what are known
as standard form contracts, which are used or intended to be
used many times over.
 Such a contract might consist of:
• a short introductory section, which specifies, among other
things, the names of the parties to the contract;
• a set of standard terms and conditions;
• a set of appendices or annexes.
 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.

Computer Contracts 13
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -THE
INTRODUCTORY SECTION
 The fir st par t of the contract is brief; it states that it is an agreement
between the par ties whose names and registered addresses are given.
 It is dated and signed by authorized representatives of the par ties.
 It of ten begins with a set of definitions of terms used in the cour se of
the agreement, set out either in alphabetical order, like a dictionar y, or
in the order in which they appear in the rest of the contract.
 These definitions explain precisely what the par ties mean by cer tain
words or phrases. Once the term is defined, its use elsewhere in the
contract should conform only to that definition, thereby ensuring
consistency and avoiding ambiguity.
 Definitions are also useful in cutting down descriptions elsewhere and
avoiding the need to change the standard terms and conditions.
 For example, the definitions section will tell us that Company X Ltd, the
sof tware house, is to be referred to throughout the contract as “The
Company”, and Company Y Ltd, which has commissioned the work , is to
be known throughout as “The Client”.

Computer Contracts 14
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -THE
INTRODUCTORY SECTION
 It is also important that the introductory section states that
the contract consists of the introductory section itself, the
standard terms and conditions, the annexes, together with any
documents listed in the annexes, such as the requirements
specification and nothing else.
 This is to avoid, for example, the situation in which
statements made by concerned salesman while trying to win
the business are claimed by the client to constitute part of
the contract.
 The following subsections discuss the issues which must be
addressed by the standard terms and conditions.

Computer Contracts 15
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -WHAT IS
TO BE PRODUCED
 It is clearly necessary that the contract states what is to be
produced. There are usually two levels of reference here: the
standard terms and conditions refer to an annex and the
annex then refers to a separate document which constitutes
the requirements specification.
 It is important that the reference to the requirements
specification identifies that document uniquely; normally this
will mean quoting a date and issue number.

Computer Contracts 16
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -WHAT IS
TO BE PRODUCED
 Sof tware engi neer s will b e familiar wit h the problems of producing
requirements specifications .
 A spe cifi cati o n sets out the detailed requirements of the client . Ideally, the
specifi cati on should b e complete, consi stent and accurate and set out all
that the client wants to be done in the per formance of the contract .
 Unfor tunatel y, we know that it i s ver y dif ficult to achi eve thi s ideal
standard and, even if we succeed, the requirements of the client may
evol ve as the contract pro ceeds, and sometimes the changes may be
substantial .
 How are these changes to be accommodated by a contract whic h, in a
sense, freezes the requirem ents of the par ties to those at one par ti cular
time by incorporati ng the original specification into the contract?
 The answer is that the contract should provide a procedure for making
variati ons to the specifi cati on or j ob descripti on, then foll ow thi s thro ugh
by provi ding a method of calculating payment for work done to facilitate
the c hanges , and al so perhaps provide for a variati o n of the level of
anticipated per formance, and maybe also var y the method of acceptance
testing.
 In other words, once again, the contract should anti ci pate events and
provide an agreed formula for modification .

Computer Contracts 17
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE :- 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.
 It is important, therefore, that the contract states (usually in an
annex) what precisely is to be provided.
 The following is a non-in-depth list of possibilities:
• source code;
• command files for building the executable code from the source
and for installing it;
• documentation of the design and of the code;
• reference manuals, training manuals and operations manuals;
• software tools to help maintain the code;
• user training;
• training for the client’s maintenance staff;
• test data and test results.

Computer Contracts 18
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
OWNERSHIP OF RIGHTS
 It is important that the 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, present more problems As we shall see there, software
is potentially protectable by a number of intellectual property
rights, such as copyright, design rights, confidentiality and
trade marks.
 It is important for the contract to state precisely who is to
own these rights.
 Do they pass to the client or are they retained by the software
house?

Computer Contracts 19
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
OWNERSHIP OF RIGHTS
 Copyright is owned by the author of a work , which in the case of a literar y
work , or a computer program which is not computer generated, is the
per son who creates it.
 But if the per son who creates the program is an employee acting in the
course of employment, then under Section 11 of the Copyright, Patents and
Designs Act 1988, the copyright belongs to the employer.
 Therefore, if a sof tware house employs a programmer, copyright in the
programs belongs to the sof tware house.
 On the other hand, if a program is written for a sof tware house by an
outside consultant or independent contractor, who is not one of their
employees, Section 11 will not apply, and, as is explained in later, the
consultant owns the copyright. Ownership in copyright passes only by
written assignment or transfer.
 If the consultant owns the copyright, the sof tware house should consider
whether it wants owner ship of the copyright either in order to retain it
itself, or in order to pass it on to the client.
 If owner ship of the copyright is to pass from the consultant to the sof tware
house, a term to that ef fect should be inser ted into a written contract
between the consultant and the sof tware house.
 An oral agreement to transfer the proper ty right is insuf ficient .
Computer Contracts 20
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
OWNERSHIP OF RIGHTS
 The next decision to be taken is whether the copyright in the
program should pass from the software house to the
commissioning client; or whether it should remain with the
software house.
 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.

Computer Contracts 21
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
OWNERSHIP OF RIGHTS
 I f a c o mm e rc i a l fi r m c o m m i s s i o n s a s o f t w ar e ho u s e to w r i te a p ro g r am es p ec i a l l y fo r i t ,
t h e c l i e n t w i l l o f te n w a n t ex c l us i v i t y.
 T h i s c a n b e a c h i ev e d i n a v a r i e t y o f w ay s .
 No r m al l y t h e c l ie n t w i l l wa nt to b e t h e o ut r i g ht ow n er o f t h e c o py r i g ht , s o t h a t ot h er s
c a n b e p r ev e n te d f r o m u s i n g i t .
 A n ot h er w ay to ac hi ev e exc l us i v i t y i s to a s k fo r a n excl us i v e l i c e nc e to u s e t h e
c o py r ig h t , o w n e r s h i p o f w h i c h r e m a i n s i n t h e s o f t wa r e h o u s e .
 I f t h e c l i e nt h as a n exc l us i v e l i c e nc e to us e t h e s o f t w ar e , i t i s t h e o nl y o r g an i z at i o n
e n t i t l e d to u s e i t .
 I f t h e c l i e nt t ake s ow n e r s hi p o f t h e s o f t w ar e o r h a s a n exclu s i v e r i g ht to us e i t , t h e
s o f t wa r e h o u s e c a n n o t m a ke m o n ey f r o m t h e s o f t wa r e b y l i c e n s i n g o t h e r s to u s e i t .
 T h e s o f t w ar e ho u s e m ust t h er e fo r e m a ke i t s e n t i r e p ro fi t o n t h e wo r k f ro m t h at
p a r t i c ula r d e a l .
 T h e c o s t to t h e c l i e n t i s t h e r e f o r e a t i t s h i g h e s t .
 I f , howev er, t h e s o f t war e ho us e r et ai n s t h e r i g ht to al l ow ot h er s to u s e i t , t h e c o s t s ar e
s p r e a d m o r e w i d el y a n d t h e c o s t to t h e c o m m i s s i o n i n g c l i e n t m ay b e d i m in i s h e d .
 I n t h e s e c a s e s , ow n e r s hi p i n t h e c o py r i g ht i n t h e s o f t w ar e r em ai n s w i t h t h e s o f t war e
h o u s e a n d t h e c o m mi s s i o n i ng c l i e n t i s g i v e n a n o n - exc l us i v e l i c e n c e .
 T h e c o mm i s s i o ni ng c l i e nt m ay s t i ll r et ai n s o me c o nt ro l ov er t h e ex te nt to w hi c h t h e
s o f t war e i s di st r i buted to ot h e r s by r et ai ni ng a r i g ht to v eto t h e g r a nt o f l i c en c es to
others.
 C ar e m u s t , howev er, b e t a ke n a s t h e v eto c o ul d b e u s ed to s m ot h er c o m p et it i o n and
m ay f a l l f o ul o f c o m p et it i o n l aw s .

Computer Contracts 22
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
OWNERSHIP OF RIGHTS
Where the client is granted a licence, the following matter s 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 cer tain events, common terminating
events being death, or insolvency;
 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 par ticular
computer, or can the sof tware 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 other s in the group also benefit from the licence?
 4. confidentiality: the licence will of ten seek to restrain the licensee
from allowing anyone other than company employees to become
familiar with the use of the sof tware.
 This can be an embarrassment for educational establishments who
wish to purchase the sof tware for use by their students.

Computer Contracts 23
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
OWNERSHIP OF RIGHTS
 If the supplier retains the copyright, major problems can arise
for the client if the supplier goes into liquidation or otherwise
stops 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 dif ficulty is for the contract to specify that,
af ter 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.
 The escrow copy(Neutral 3rd party source code escrow solutions)
is replaced whenever the software is updated.

Computer Contracts 24
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE : -
CONFIDENTIALIT Y
 A second area of intellectual property law which should be
considered in a software contract is confidentiality.
 The commissioning client may well have to pass confidential
information about its business operations to the software
house.
 On the other side of the coin, the software house may not
want the client to divulge(disclosure) to others details of the
program content or other information gleaned (obtain) about
its operations by the client.
 It is usual in these circumstances for each party to promise to
maintain the confidentiality of the other’s secrets, and for
express terms to that ef fect to be included in the contract.
 Confidentiality is discussed in the chapter on intellectual
property rights, to which reference should be made.

Computer Contracts 25
 CONTRACTS FOR THE SUPPLY OF
CUSTOM-BUILT SOFTWARE AT A FIXED
PRICE :- PAYMENT TERMS
 The standard terms and conditions will specify the payment
conditions, that is something along the lines that: 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.

Computer Contracts 26
 CONTRACTS FOR THE SUPPLY OF
CUSTOM-BUILT SOFTWARE AT A FIXED
PRICE :- PAYMENT TERMS
 It would be unusual, in a project of any significant length, for
all payment to be delayed until the work is complete and
accepted.
 An annex will usually specify a pattern of payments like the
following:
 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.

Computer Contracts 27
 CONTRACTS FOR THE SUPPLY OF
CUSTOM-BUILT SOFTWARE AT A FIXED
PRICE :- PAYMENT TERMS
 Such a pattern has advantages for the supplier in that it
reduces the financial risk arising from possible insolvency of
the client or from default for other reasons and it reduces
possible cash flow dif ficulties.
 If the client is not prepared to accept a payment pattern of
this type, the supplier is likely to demand a premium to cover
the increased risk and the costs of financing the
development.
 In negotiating the payment pattern, the supplier will usually
seek to have the stage payments becoming due on fixed
calendar dates while the client will try to have them tied to
the achievement of specific project milestones, e.g. approval
of the design specification.

Computer Contracts 28
 CONTRACTS FOR THE SUPPLY OF CUSTOM -BUILT
SOFT WARE AT A FIXED PRICE:- CALCULATING
PAYMENTS FOR DELAYS AND CHANGES

 It happens not infrequently that progress on the development

of a piece of software is delayed by the failure of the client to
meet obligations on time.
 While the supplier will be expected to use its best attempt to
rearrange activities so as to avoid wasting effort, this is not
always possible.
 The contract should therefore make provision for payments to
compensate for the wasted ef fort, suf fered, for example,
when the client fails to provide information on a due date or
when changes are requested which result in extra work.

Computer Contracts 29
 CONTRACTS FOR THE SUPPLY OF CUSTOM -BUILT
SOFT WARE AT A FIXED PRICE:- CALCULATING
PAYMENTS FOR DELAYS AND CHANGES

 The contract must specify the process by which these extra

payments are to be calculated.
 Typically, an annex will include daily charging rates for each
grade of staf f employed on the contract and the amount of
extra ef fort to be paid for will be agreed at progress meetings.

Computer Contracts 30
 CONTRACTS FOR THE SUPPLY OF CUSTOM -BUILT
SOFT WARE AT A FIXED PRICE:- CALCULATING
PAYMENTS FOR DELAYS AND CHANGES

 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—the construction industry is
a notorious example.
 One reason for this is that competitive bidding for fixed price
contracts often means that the profit margin on the original
contract is very low so that companies seek to make their
profit on these additional payments.

Computer Contracts 31
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: - PENALT Y
CLAUSES
 The previous subsection split with compensation for delays
caused by the client; delays caused by the supplier are
handled dif ferently.
 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.
 Thus, on a contract of value £1 million, the penalty might be
specified as £5,000 per week up to a maximum of £100,000.

Computer Contracts 32
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: - PENALT Y
CLAUSES
 Delays in delivering working sof tware are notoriously common; it
might therefore be expected that contracts for the supply of
software would normally include such a penalty clause.
 Unexpectedly, such provision is comparatively rare.
 There are three reasons for this:
 Suppliers are very reluctant to accept penalty clauses and
anything stronger than the example quoted above is likely to
lead to reputable suppliers refusing to bid.
 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 sof tware 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.

Computer Contracts 33
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: - PENALT Y
CLAUSES
 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 dif ficulties (or incompetence!) rather than lack of
motivation.

Computer Contracts 34
 CONTRACTS FOR THE SUPPLY OF CUSTOM -BUILT
SOFT WARE AT A FIXED PRICE: -
OBLIGATIONS/REQUIREMENTS OF THE CLIENT
 In almost all cases where work is being carried out for a specific client,
the client will have to fulfil cer tain obligations/requirements if the
contract is to be completed successfully.
 The following is a (non-complete) list of possibilities :
• provide documentation on aspects of the client’s activities or the
environment in which
the system will run;
• provide access to appropriate members of staf f;
• provide machine facilities for development and testing;
• provide accommodation, telephone and secretarial facilities for the
company’s staf f
when working on the client’s premises;
• provide data communications facilities to the site.
 The general terms and conditions will normally state that a list of
specific obligations and the dates at which they will be required is
given in an annex.
 It will also state that failure to meet these obligations may render the
client liable for delay payments.

Computer Contracts 35
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
STANDARDS AND METHODS OF WORKING
 The 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 and
may require that these be obeyed to.
 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.

Computer Contracts 36
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
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.
 The minutes of progress meetings, duly approved and signed,
should have contractual significance in that they constitute
evidence that milestones have been reached (so that stage
payments become due) and that delay payments have been
agreed.

Computer Contracts 37
 CONTRACTS FOR THE SUPPLY OF CUSTOM-
BUILT SOFT WARE AT A FIXED PRICE: - PROJECT
MANAGERS
 Each party needs to know who, of the other party’s staf f, has
day -to-day responsibility for the work and what the limits of
that person’s authority are.
 The standard terms and conditions should therefore require
each party to nominate, in writing, a Project Manager.
 The Project Managers must have at least the authority
necessary to fulfil the obligations which the contract places
on them.
 It is particularly important that the limits of their financial
authority are explicitly stated, i.e. the extent to which they
can authorize changes to the cost of the contract.

Computer Contracts 38
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
ACCEPTANCE PROCEDURE
 Acceptance procedures are a critical part of any fixed price
contract for they provide the criteria by which successful
completion of the contract is judged.
 The essence of the acceptance procedure is that the client
should provide a fixed set of acceptance tests and expected
results and that successful per formance of these tests shall
constitute acceptance of the system.
 The tests must be provided at or before the start of the
acceptance procedure; within reason, there may be as many
tests as the client wishes but extra tests cannot be added once
the test set has been handed over.
 The purpose of this restriction is to ensure that the acceptance
procedure can be completed in reasonable time.
 Other points to be addressed under this heading include who
shall be present when the tests are carried out and what
happens if the tests are not completed successfully.

Computer Contracts 39
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
WARRANT Y AND MAINTENANCE
 Once the product has been accepted, it is common practice to
of fer 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 and prolonging the period will increase it.

Computer Contracts 40
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
WARRANT Y AND MAINTENANCE
 Once the warranty period is over, the supplier may of fer, or
the client demand, that maintenance will continue to be
available on request.
 Since such maintenance is likely to involve enhancement of
the software rather than simply correction of faults, the
resources required are unpredictable—the client almost
certainly does not know what enhancements will be required
in two years’ time.
 For this reason, a fixed price for the maintenance will not be
appropriate.
 Maintenance will therefore usually be charged on a time and
materials basis; the client may possibly be required to commit
to taking a fixed number of days of ef fort each year in order
to compensate the supplier for the need to retain knowledge
of the system.

Computer Contracts 41
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
INDEMNIT Y
 It could happen that, as a result of the client’s instructions,
the supplier is led accidentally to violate the intellectual
property rights of a third party or that, through carelessness
or dishonesty, the supplier provides a system which violate
such rights—perhaps through using proprietary software as a
component of the system delivered.
 For this reason, it is advisable to include a clause under which
each party indemnifies the other for liability arising from its
own faults in this respect.

Computer Contracts 42
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
TERMINATION OF THE CONTRACT
 There are many reasons why it may become necessary to
terminate a contract before it has been completed.
 It is not uncommon, for example, for 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.
 It is essential, therefore, that the contract make provision for
terminating the work in an amicable manner.
 This usually means that the supplier is to be paid for all the work
 carried out up to the point where the contract is terminated,
together with some compensation for the time needed to
redeploy staff on other revenue-earning work.
 The question of ownership of the work so far carried out must
also be addressed.

Computer Contracts 43
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
ARBITRATION
 Court action to resolve a contractual dispute is likely to be
expensive.
 For this reason, 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.
 Provision is usually made for the arbitrator to be appointed
either by the President of the 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.

Computer Contracts 44
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
ARBITRATION
 An arbitration clause will usually state that, if arbitration is
required, it will take place in accordance with the Arbitration
Act 1996.
 This Act of Parliament lays down a set of rules for arbitration
that cover many eventualities and reference to it avoids the
need to spell these out in detail; most of the provisions of the
Act are optional, in the sense that they come into ef fect only
if the contract contains no alternative provision.
 Some organizations may be unwilling to accept an arbitration
clause because they feel that they are signing away some of
their legal rights.

Computer Contracts 45
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
INFLATION
 In lengthy projects or projects where there is a commitment to
long term maintenance, the supplier will wish to ensure
protection against the ef fects of unpredictable inflation.
 To handle this problem, it is customary to include a clause
which allows charges to be increased in accordance with the
rise in costs.
 The Government publishes several dif ferent financial indices;
the Retail Price Index is the most widely known but the most
appropriate one for the purposes of this type of contract is
the Business Costs Index.
 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.

Computer Contracts 46
 CONTRACTS FOR THE SUPPLY OF CUSTOM -
BUILT SOFT WARE AT A FIXED PRICE: -
APPLICABLE LAW
 Where the supplier and the client have their registered of fices
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.

Computer Contracts 47
 OTHER T YPES OF SOFTWARE SERVICES
CONTRACT
 There are four types of contractual arrangement which are
widely used in connection with the provision of software
services:
• contract hire;
• time and materials;
• consultancy;
• fixed price, as described in the previous section.

Computer Contracts 48
 CONTRACT HIRE

 Under a contract hire agreement, the supplier agrees to

provide the services of one or more staff to work for the
client; the staf f 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 staf f.
 Contract hire is sometimes referred to disparagingly as “body
shopping”.
 Closely related are the freelance agreements under which
individuals sell their own services to clients on a basis similar
to contract hire.

Computer Contracts 49
 CONTRACT HIRE

 Contract hire agreements are very much simpler than fixed

price contracts because the supplier’s involvement and
responsibility are so much less.
 Issues such as delay payments, acceptance tests and many
others simply do not arise; however, as mentioned earlier,
ownership of intellectual property rights generated in the
course of the work must be addressed.

Computer Contracts 50
 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 labour
charged in the same way as for contract hire.
 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.
 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.

Computer Contracts 51
 TIME AND MATERIALS

 It may be wondered why any client sho uld prefer a time and materials
contract to a fixed pri ce co ntract—surely it i s better to have a contract
which guarantees per formance for a fi xed pri ce rather than one i n which
the price is indeterminate and there is no guarantee of completion?
 In the fir st pl ace, i t of ten happens that the work to be carried out i s not
suf fi cientl y well specified for any supplier to b e prepared to of fer a fi xed
price; par t of the supplier’s task will b e to discover what is require d and to
specify it in detail.
 Secondl y, a supplier alway s l oads a fi xed price contract with a contingency
allowance, to allow for the risk that unexpected factor s will cause the
project to require m ore resources than o riginally estimated . If all goes
well, the supplier makes an extra profit; this is the reward for risk taken.
 By accepting a time and materials contract, this ri sk and the possibility of
extra profit (i n the form of a l ower cost) are ef fecti vely transferred to the
client , who also avoi ds the danger s of having to pay excessi ve sums to
have minor changes incorporated into the specification .
 All this having been said, it remains the case that there i s a strong
m ovement away from time and materi als towards fi xed price, noticeably in
the defence field.

Computer Contracts 52
 CONSULTANCY CONTRACTS

 The use of consultants is now widespread both in private

industry and in public bodies.
 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.

Computer Contracts 53
 CONSULTANCY CONTRACTS

 There are two reasons for the comparative simplicity of

consultancy contracts.
 First, the sums of money are comparatively small and neither
side stands to lose a great deal.
 Second, while it is possible to demonstrate beyond doubt that
a piece of software does not work correctly and, thus, that the
supplier has failed to fulfil the contract, it is not usually
possible to demonstrate unequivocally that a report fails to
fulfil a contract.
 The client has to rely on the desire of the supplier to maintain
a professional reputation and in practice this usually proves
suf ficient to ensure that the work is of an acceptable
standard.

Computer Contracts 54
 CONSULTANCY CONTRACTS

 It should be obvious that confidentiality is of particular

importance in consultancy contracts.
 It is also important that the contract refers explicitly to the
terms of reference of the consultancy team and, in practice,
these are perhaps the commonest source of disagreements in
consultancy projects.
 As a result of their initial investigations, the consultants may
discover that they need to consider matters which were
outside their original terms of reference but the client may be
unwilling to let this happen for any one of a number of
possible reasons.

Computer Contracts 55
 LIABILIT Y FOR DEFECTIVE SOFTWARE

 The law in this area is complex. It is dealt with only briefly here.
 A fuller discussion is to be found in Reed (ed.): Computer Law
(4th edn.); and in Rowland and Macdonald: Information
Technology Law, both of which are addressed in later lecture.

Computer Contracts 56
 LIABILIT Y FOR DEFECTIVE SOFTWARE

 Firstly we should look at terms implied into a contract by the

law.
 Just which terms are implied will depend on the type of contract
under consideration.
 If it is a contract for the sale of goods, the Sale and Supply of
Goods Act 1994 implies that the goods shall be of satisfactory
quality and fit for their purpose.
 Section 1(2) of the 1994 Act, which amends Section 14 of the
Sale of Goods Act 1979, provides that goods are of satisfactory
quality if they meet the standard that a reasonable person would
regard as satisfactory, taking into account any description of the
goods, the price (if relevant) and all other relevant
circumstances.
 The quality of goods includes their state and condition and the
following (among others) are in appropriate cases aspects of the
quality of the goods:

Computer Contracts 57
 LIABILIT Y FOR DEFECTIVE SOFTWARE

(a) fitness for all the purposes for which goods of the kind in
question are commonly supplied;
(b) appearance and finish;
(c) freedom from minor defects;
(d) safety;
(e) durability.
There is no breach(violation) of the implied term if a matter
which might make the good unsatisfactory is specifically drawn
to the buyer’s attention before the contract is made.

Computer Contracts 58
 LIABILIT Y FOR DEFECTIVE SOFTWARE

 A major dif ficulty is whether sof tware constitutes goods for the
purposes of the Sale of Goods Act 1979 and the 1994 Act.
 Goods are defined in Section 61 of the 1979 Act in a way which cover s
physical (tangible) items such as books, discs and hardware but may
well exclude intangible items such as sof tware .
 However, it is arguable that sof tware on a disc, par ticularly mass-
produced sof tware, where the value of the sof tware in itself is not too
great per individual disc, might come within the definition of “goods” in
much the same way as does music on a cassette, the images on a
video tape, or the words in a book .
 It has long been recognized that a book , which has some unprinted
pages or contains pages from another book instead of the one
requested, is a defective item of goods.
 By analogy, a defective piece of sof tware might also be caught by the
legislation.
 But while this argument might apply to mass-produced sof tware such
as computer games and common word-processing packages the
position of bespoke sof tware is probably quite dif ferent.
(custom made)

Computer Contracts 59
 LIABILIT Y FOR DEFECTIVE SOFTWARE

 A contract for the supply of bespoke software is more

appropriately classified as a contract for work and materials.
The work, which has gone into producing the software, in the
form of research and development, is the most important
component of the contract.
 Goods (or materials) supplied, such as tapes, discs or
manuals are subsidiary items.
 The distinction between a contract for the sale of goods and
one for work and materials is essentially one of emphasis.
 The classification of customized software might well be quite
dif ficult.
 However, the legal consequences of the classification are
important, for if the contract is one for work and materials,
the Sale of Goods Act will not apply.

Computer Contracts 60
 LIABILIT Y FOR DEFECTIVE SOFTWARE

 Instead the contract falls under the Supply of Goods and Ser vices Act
1982, and this Act implies into the contract a term that the sof tware
must have been written with reasonable skill and care.
 This is a notoriously vague notion. Only a moment’s thought will show
that it does not accord a great deal of protection for the commissioning
client.
 It in no way guarantees that the sof tware is “bug-free”; only perhaps
that the number of bugs, or the problems caused by the bugs, is no
more than could reasonably be expected from the reasonable sof tware
house producing bespoke sof tware to those specifications at that time.
 Because of the dif ficulty in applying this standard, a contract will of ten
contain an express guarantee, for example to cure defects for a cer tain
length of time af ter deliver y.
 Guarantee clauses should be carefully draf ted for the sof tware house
and carefully construed by the commissioning client, for obviously
much will depend on the precise wording used.

Computer Contracts 61
 LIABILIT Y FOR DEFECTIVE SOFTWARE

 The foregoing account has considered the liability of a sof tware

house in contract law.
 There are of course other ways in which a software house can be
rendered liable for defective sof tware which causes loss or
damage.
 Example:- the tort of negligence, or the law relating to negligent
misstatement might apply.
 These might cover either physical damage or financial loss,
although it is generally more difficult to recover for financial loss
in negligence than it is to recover for physical damage to the
person or to property.
 Also, it is difficult to prove negligence.
 For this reason, and to conform to an EC Directive, a strict
liability regime for property damage and personal injury was
introduced by the Consumer Protection Act 1987 under which it
is not necessary to prove fault in order to establish liability.
 There are, however, difficulties in applying this Act .

Computer Contracts 62
 EXCLUSION OF LIABILIT Y

 The aim of a party drafting a contract will be to minimize liability

under the contract, or to exclude it altogether.
 The law is governed by the Unfair Contract Terms Act 1977.
 Briefly, the 1997 Act provides that liability for death or personal
injury can never be excluded.
 Liability for other forms of damage (such as property damage)
can be excluded, but only in so far as it is reasonable to do so.
 Liability under the terms implied under the Sale of Goods Act
1979 (merchantability or fitness for purpose) or under the Supply
of Goods and Ser vices Act 1982 (to use reasonable skill and
care) to which we referred earlier cannot be excluded in a
consumer sale, but in a non-consumer sale they can be excluded
if the exclusion is reasonable.
 In order for the sale to be a consumer sale, the requirements of
Section 12 must be satisfied.

Computer Contracts 63
 EXCLUSION OF LIABILIT Y

 This means that the buyer must be a private person; the buyer
must buy from a seller who is acting in the course of a
business; and the goods must be of a type ordinarily supplied
for private use or consumption.
 If I buy a computer game from W.H.Smith to play at home on
my microcomputer, Section 12 is satisfied, and under the
1977 Act the implied terms cannot be excluded.
 However, where the client commissions bespoke software
from a software house in order to use it in the course of
business, this is not a consumer sale, and the implied terms
can be excluded if it is reasonable to do so.
 Reasonableness is ascertained by reference to guidelines laid
down in Schedule 2 to the Unfair Contract Terms Act.

Computer Contracts 64
 EXCLUSION OF LIABILIT Y

 Matters to which the court would have regard in assessing

whether it is reasonable for a supplier to exclude liability
include:
• the relative bargaining powers of the parties;
• opportunities to contract with others who do not use the
same exclusionary terms;
• whether the customer knew or ought reasonably to have
known of the existence and extent of the term (note here that in
practice contracting parties should always read all contracts
before entering into them and should seek advice on matters
such as the extent of any exclusion clause or clause seeking to
limit liability);
• whether the goods were manufactured, processed or adapted
to the special order of the customer.

Computer Contracts 65
 STANDARD FORM CONTRACTS AND
LIMITATION OF LIABILIT Y
 If a standard form contract limits liability in damages to a
fixed or determinable sum, Section 11(4) applies.
 This provides that: Where by reference to a contract term…a
person seeks to restrict liability to a specified sum of money,
and the question arises (under this or under any other Act)
whether the term or notice satisfies the requirement of
reasonableness, regard shall be had in particular…to
(a) the resources which he could expect to have available to him
for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.

Computer Contracts 66
 STANDARD FORM CONTRACTS AND
LIMITATION OF LIABILIT Y
 Standard form contracts do therefore have their drawbacks.
Unfortunately the Act gives no guidance about when a
contract, which is used several times, becomes “standard
form”.
 It is, however, at least arguable that standard terms offered
by one party to another for purchases over the Internet are
standard form

Computer Contracts 67
 STANDARD FORM CONTRACTS AND
LIMITATION OF LIABILIT Y
 There are a number of cases on the Unfair Contract Terms Act and on
the requirement of reasonableness .
 The cases must, however, be treated with caution for the decision in
each turns on its facts and just because one case is decided one way it
does not mean that all other s will follow.
 One example is St Albans City and District Council v International
Computers Ltd [1996] 4 All ER 481 .
 The facts were that the council had ordered a computer system from
ICL to enable them to compute the Community Charge for the
for thcoming year.
 ICL insisted on using its standard terms and conditions which stated
that its liability “will not exceed the price or charge payable for the
item of Equipment, Program or Ser vice in respect of which liability
arises or £100,000 (whichever is the lesser)…”.
 Error s in the sof tware and incorrect advice from ICL’s project manager
resulted in an overestimate of the population of the area, an
undercharge of residents and a loss to the council of £1 .3 million.

Computer Contracts 68
 STANDARD FORM CONTRACTS AND
LIMITATION OF LIABILIT Y
 The judge at the initial hearing, Scott Baker J. found that the sof tware
was not fit for the purpose for which it was provided and that ICL’s
project manager had been negligent.
 ICL were therefore in breach of contract .
 As ICL had dealt on the basis of their standard terms and conditions,
Section 3 of the Unfair Contract Terms Act 1977 applied and the clause
limiting liability had to be measured against the requirement of
reasonableness .
 Applying the factor s listed in Section 11(4) and Schedule 2 (above), the
judge noted that ICL were a substantial organization with world wide
product liability insurance of £50 million; that all potential supplier s of
the system dealt on similar standard terms; that the council was under
pressure to install the system before the Community Charge was
introduced; that although the council was a business and not a
consumer, that it did not usually operate in the same commercial field
as a normal business and that it would be impractical for it to insure
against commercial risks.

Computer Contracts 69
 STANDARD FORM CONTRACTS AND
LIMITATION OF LIABILIT Y
 On balance, the judge found that the clause limiting liability to
£100,000 was not reasonable and was therefore ineffective.
 ICL appealed, but the Court of Appeal agreed with the decision
of Mr Justice Scott Baker.
 However, as stated above, whatever the final outcome in this
case, its value as a precedent will be limited, for each case turns
on its facts.
 It cannot be concluded that henceforth no limitation of liability
clause in a contract for the supply of a computer system will be
valid.
 It does, however, show the pitfalls surrounding contract
negotiation and a need to tailor such clauses to the
circumstances.
 Dogged reliance on standard terms and conditions can prove
expensive.

Computer Contracts 70
Thanks
Computer Contracts 71