Irish Software Innovation Network

Technology Contracting – Should Innovative products and services require

innovative contracts?

(AKA a discussion of the good, bad and the ugly of technology contracting)

Pearse Ryan, Arthur Cox

30 September 2015

18626008.1

Introduction

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Introduction

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• Overall – frequent disconnect between T&C of technology contracts and the goods/services being delivered

• Technology has advanced hugely in last 20 years but are the contracts in use now all that different from those used to procure fax machines?

• Q: should they / do they need to differ?

• Q: is the law the law and technology the technology and never shall contracts and subject matter meet?

• A: they should meet

Software Licence

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Software Licence

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• Based on IP law – grant of licence / authorisation • Frequently overlooked but devil in detail • Typical issue – scope of licence

– Location restriction – No. of users / other restrictions – Server specific – Subject matter specific

• Some examples: – Public sector – “enterprise wide licence” – Private sector – billing mediation s/w

• Possible to resell software licences? – Software as goods capable of sale – exhaustion of right of distribution of owner – 2012 UsedSoft v Oracle (Case C128/11 2012)

Warranty Clause

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Warranty Clause

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• Legislation – Sale of Goods and Supply of Services Act 1893 and 1980

• Implied Terms – common law • XX does not warrant uninterrupted or error-free

operation of any Service or that XX will correct any defects. This disclaimer does not effect the Customer rights to receive Service Level Credits. XX provides Materials, non-XX products, and non-XX services, on an “as-is” basis without warranties or indemnities of any kind. However, non-XX manufacturers, suppliers or publishers may provide their own warranties or indemnities to Customer

Intellectual Property

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Intellectual Property - Ownership

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• Who owns essential subject matter of contract – software, hardware – typically adequately stated

• Who owns service outputs/deliverables? – Problems can arise

– Distinguish between background IP and foreground IP i.e. service deliverables

– Can licence use of background IP in conjunction with use of foreground IP (only)

– Regarding foreground IP can either: • Licence use

• Assign IP

Intellectual Property – Ownership contd.

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– Foreground IP licence should be clear

– Be careful assigning IP in foreground IP

• Understand exactly what is assigned

• Understand licensed use of background IP support and uses of the customer owned foreground IP now and in the future?

– Consider scope of IP indemnity granted regarding background IP and foreground IP

Intellectual Property – Copyright Infringement & Quantum of Damage?

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• What is quantum of damage for P / possible € exposure for D?

• Test – qualitative not quantitative - % of code replicated need not be major and Q of consequences of use

• Assess quantum for copyright infringement:

– Enquiry as to damages

– Account for profits

Intellectual Property - Indemnity

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• What is IP indemnity and why grant

• Scope and wording are everything

• Example narrow scope: “[XX] will defend the Customer against that claim at [XX] expense and pay all costs, damages and attorneys fees that a court finally awards or that are included in a settlement approved by [XX] …”

Intellectual Property – Indemnity contd.

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• Example broad scope: “Each Party shall provide the other Party with the following indemnity:

– each Party (the “Indemnifier”) shall indemnify the other Party (the “Indemnified”) in respect of any third party (the “Claimant”) claim, demand, or action, for the infringement of Intellectual Property Rights: (i) in respect of the Supplier, in the Supplier Software, Hardware, Configured Software, Project Materials, the Supplier Infrastructure and generally in the Supplier information technology infrastructure used in the provision of the Solution, together with the aggregate supply of the Solution to Customer; and (ii) in respect of Customer, in Customer Infrastructure used in the receipt of the Solution, (in either event the “Indemnified Matters”);

Intellectual Property – Indemnity contd.

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– subject always to the Indemnified’s proper observance of its obligations under this Clause 10.1, the Indemnifier shall indemnify the Indemnified, against all costs, damages and/or expenses (including but not limited to full legal costs and disbursements on a solicitor and client basis), that may be incurred by the Indemnified, whether: (i) awarded in favour of the Indemnified against the Indemnifier or awarded in favour of the Claimant against the Indemnified; or (ii) agreed to be paid within a settlement between a Claimant and the Indemnified, subject to prior consent of the Indemnifier, AND, arising from or incurred by reason of any infringement or alleged infringement (including but not limited to the defence of such alleged infringement) of any Intellectual Property Rights, enforceable in Ireland, in the Indemnified Matters;”

Intellectual Property – Indemnity contd.

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• Question: is indemnity subject to contract limitation of liability provisions, subject to separate limitation or unlimited?

Delay and Liquidated Damages

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Delay and Liquidated Damages

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• An anomaly to general hands-off development of common law • What are liquidated damages? The application of financial

compensation / fixed measure of loss in circumstances of a contract party’s (typically supplier) failure to perform contract obligation e.g. delay against contract milestones or surcharge on late payment

• Prohibition on “penalties” for overcompensation – unconscionable under equitable principles – interference in freedom to contract

• Intention – to avoid disputes on damages via applying fixed measure of loss

• Genuine pre-estimate of loss v overcompensation • Liquidated damages are not “time is of the essence”

Delay and Liquidated Damages contd.

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• Liquidated damages typically apply to project engagements, involving professional services – developmental and/or implementation

• Question of size/scope

• Service credits against service level achievement are an example

• What to avoid – “full and final settlement”, “sole and exclusive remedy”

• Q: are liquidated damages a payment reconciliation or limitation of liability and thus subject to liability management clause?

Liability Management

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Liability Management

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• Statutory and common law overlap but in general parties have room to manoeuvre

• Limitation of liability

• Exclusion of liability – Customer Text: “In no event will either Party be liable to the

other Party for any consequential or indirect loss or damage, howsoever arising, under, or in connection with, or in relation to, this Agreement”

– Supplier Text: “in no event will either party be liable to the other for special, incidental, or indirect damages or for any consequential damages or for lost profits or savings, even if they are informed of the possibility ….”

Data Protection

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Data Protection

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• Key issue – who is controller/processor – not a matter for agreement but for clarity

• Then – allocate responsibilities as per DPA • “The parties agree that they will comply with their

respective obligations under statute/DPA” – no good/not great

• Minimum – Section 2(1)(d) – need contract which obliges processor to comply with security measures, including those in S2(c)

• Controller Instructions - Controller to ensure the processor provides sufficient guarantees in re. security (i.e. technical and organisation security). Matter for Controller to ensure the processor meets the sufficient guarantee target

Confidential Information and Data Disclosure

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Confidential Information and Data Disclosure

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• Forthcoming – EU Trade Secret Directive / EU DP Regulation / EU Network and Information Security Directive

• Overall – the stakes are increasing re data security • Disclosure to law enforcement – risk issue for

customers • Example: Supplier reserves request to disclosure CI to

“… law enforcement or other government officials as [XX] in its sole discretion, believes necessary, prudent or appropriate in connection with an investigation of fraud, intellectual property infringements or other activity that is illegal or may expose [XX] to legal liability”

Confidential Information and Data Disclosure contd.

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• The Message: Supplier reserves broad contract right to disclose customer CI to whoever & whenever they decide “necessary, prudent or appropriate in connection with …” a broad range of circumstances

• The foregoing is a contract matter. Some of what supplier states is necessary NOT as a matter of contract BUT as a matter of law AND this supplier sought to deal in contract BUT went further

Confidential Information and Data Disclosure contd.

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• Various countries do have legislative powers to search/view records on individuals activities held by service providers:

– Examples – US, UK & Canada

• US – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 – The US Patriot Act. But Patriot Act amended/strengthened existing laws more than new law & especially re internet

• What to do as customer?

Information Security

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Information Security

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• Difficult to contract for security standards

• Difficult to contract for consequences for security breach

• Third party exposure?

• Q: Suppliers / Sub-contractors

• Who pays for security breach – customer or supplier?

• Case: Frontier Systems Ltd. (t/a VoiceFlex) v Frip Finishing Ltd. (2014) (EWHC 1907 TCC)

Entire / Whole Agreement

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Entire / Whole Agreement

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• Contract statement of extent of parties bargain / contract – what is in and what is out

• For purpose – to avoid threshing through the undergrowth (the negotiations) for a chance remark and thus avoid speculative litigation – a variation on parole evidence rule

• Important if dispute • Frequently drafting issues • Example: “This Agreement contains the entire

agreement between the parties” • Q of liability for misrepresentation? • Case: ●

pearse.ryan@arthurcox.com

Thank you for your time today.

30/09/2015