Smarter Contracting in

Challenging Times
Legal Aspects
John O’Connor, Yvonne Cunnane and Mark
Rasdale
Technology and Commercial Contracts Group
12 May 2009
Introduction
 Matheson Ormsby Prentice
 leading Irish full service corporate law firm
 550 people including 76 partners and tax
principals
 Irish law firm of the Year 2009 – Chambers
Europe Awards
 Our Technology and Commercial Contracts
Group
 our practice
 our clients
 our approach
Some Trends
 Increasing tendency to see (and use) written
contracts as risk management and business
tools
 not merely a ‘fall back’ but a useable
document that describes and defines
performance
 one size fits all approach seen for its
limitations
 part of corporate governance

 Customer’s perspective:
 underwriting good (precise) performance
 ensuring value for money / cost savings /
Some Trends contd…/
 Supplier’s perspective:
 managing risk and reward / managing its liability
 knowing what is “in scope” and “out of scope”
 knowing what performance means
 documenting change management
 managing termination events

 However, some bad habits also prevalent:

 contract doesn't work, rushed or inappropriate
 contractual terms forgotten / course of dealing
changed
 no written contract
Overview

2. Too Keen to Sell?

3. Performance Regimes
4. Liability Perspectives
Questions & Answers
1. Too Keen to Sell?
Too Keen To Sell?
 “Can we start work before we sign a
contract?
No. Services must not begin before signing a
contract…In exceptional circumstances,
where we begin the work for client before
the final contract is signed, a Stop Gap
Agreement or standard Instructions to
Proceed which refers to [standard terms]
must be signed….”
Too Keen To Sell?
Too Keen To Sell?

 Scenarios with varying degrees of risk:

 Proceed based on an ‘informal’ letter of
engagement
 Subject to contract negotiations almost
complete, work starts but formal
document not signed
 Written terms sufficient to cover initial
piece of work and agreement to agree
remaining terms in good faith later
Too Keen To Sell?

“If one party is a company with a [legal

adviser], he may whisper words of caution
but the managing director will tell him that it
is the task of lawyers to solve problems, not
to create them”

Staughton LJ: Corson v Rhudlan Borough Council.

Too Keen To Sell?
 Has everything intended to be covered by
the agreement been either expressly or
impliedly agreed?
 The words ‘subject to contract’ are
inconsistent with a concluded contract
 Normal inference will be that parties will not
be bound until they sign an anticipated
formal document
 The common law does not recognise a
general duty to negotiate in good faith
 Net Effect = UNCERTAINTY !!
Too Keen To Sell?
 “If you cut too many corners building a
square, you will end up with a circle”
 Key risks…
For the Supplier For the Customer
Scope creep Price creep
Potential unlimited liability More difficult to prove
liability
IPR Risk No certainty of ownership or
licence rights
Tied in to a bad deal Financial consequences of
exit
Too Keen To Sell?
 Commercial principles document;
 Prudent use of standard terms:
 Risk mitigation language;
 Stop gap document to avoid legals
becoming an obstacle to the deal.
 If you can’t document what is in, ensure you
always document what is out!
Too Keen To Sell?
 ‘We have significant experience of
successfully delivering this type of system in
the retail sector’
 Incorrect ‘fag packet’ estimate of a critical
one-off expense item in accounts of a
seller’s business
 In the first year you will, based on previous
deals, achieve [x] turnover, [y] profit and [z]
savings
Too Keen To Sell?
 Fraudulent Misrepresentation
 a representation;
 made knowingly or recklessly;
 intended to be relied on or induce;
 was acted on; and
 person relying suffered damage as a result.
 Critical points:
 intent/motive is not the only determining
factor;
 cannot limit or exclude liability for fraud.
Too Keen To Sell?
 Risk Mitigation Approach
For the Supplier
Joined up sales teams and
commercial/legal teams
Avoid exaggerated claims
about goods or services
Encourage customers to
conduct their own
investigations
Use a properly structured
limitation of liability and
entire agreement clause
For the Customer
Communicate key business
requirements and build
these into contractual
discussions
Challenge sales statements
and look for supporting
documentation
Conduct due diligence and
ensure contract is drafted
to address key risks and
gaps
Take a strategic approach
to limitation and exclusion
of liability provisions
2. Performance Regimes
Performance Regimes
 Increased frequency / utilisation of
performance regimes in outsourcing and
large services agreements
 Service Level Agreements “SLAs” / “KPIs”
 need to be distinguished from liquidated
damages regimes
 adjustment in charges to reflect failure to
meet SLA
 service credits (and debits)
 they describe the standard of performance
not the substance of performance
 clarity and objectivity is vital and service
Performance Regimes contd…/
 Customer’s perspective: driving value and
continuous monitoring / reporting
 Supplier’s perspective: helping to add clarity
to what performance means and managing
failure to meet service levels
 Typically used in IT and business process
outsourcing and managed services
agreements
Performance Regimes contd…/
 Example SLA: software support and
maintenance agreement
 service levels - eg the following “Service
Availability” calculation:
 the actual level of service provided by the
Supplier shall be measured by comparing the
Actual Service Hours during a calendar month
with the Service Level Hours for that month.
For the
Service purposes
Availability = of
Actual this
Service Schedule,
Hours
Service Level Hours * 100% the ratio
Actual Service Hours to Service Level Hours
shall be called the “Service Availability” and
shall be defined as follows:
Performance Regimes contd…/
 Response and resolution times:

Priority Business Example Resolution (fix)

Impact service level

Impacts on business
Critical Critical performance 1 hour

High Potentially Threatens to impact on 4 hours

Critical business performance

Medium Eventual Causes disruption to efficient 8 hours

working
Low Low No business impact (e.g. change 5 [Working]
request) Days
Performance Regimes contd…/
 Remedies for failure to meet SLA
 service credits
 re-performance (where appropriate)
 termination (where negotiated)
 persistent breach
 material breach
Performance Regimes contd…/
 Service Levels - Practicalities and Tips
 testing of suitability of SLA
 response times versus resolution (fix) times
 reporting/measurement of service levels
 audit rights to back up/check reporting?
 what strength of obligation is included in the
agreement?
 how / when are service credits payable?
 exclusive remedies ?
 use of SLAs and intentional and inadvertent
waiver
Performance Regimes contd…/
 Driving value from contracts:
 performance regimes
 benchmarking to maintain value in long term
deals
 indexation – up and down with CPI?
 process re-engineering and gain-sharing
 volume (combined) purchasing
 disaster recovery and business continuity
 technology re-fresh
 Often part of tender process but sometimes
inadvertently fall away at contract stage
3. Liability Perspectives
Liability Perspectives

 Unfortunate but unavoidable fact – some

projects will fail
 Clarity of commercial understanding is of
critical importance
 Suppliers unwilling to accept unlimited
liability + customers seeking to realise value
may equate to unrealistic expectation in
relation to what the parties should be liable
for
Liability Perspectives contd…/
 [x.1] Nothing in this Agreement shall
exclude or limit the Supplier’s liability
for fraud, gross negligence or for
death or personal injury caused by its
negligence or the negligence of its
employees, sub-contractors or agents.
Liability Perspectives contd…/

 Imported templates and use of concepts

not recognised under Irish law
 Lack of legal certainty as to the precise
meaning of the such terms
 If the customer is insistent on retaining
these provisions – define
Liability Perspectives contd…/

 [x.2] The Supplier shall not be liable under

this Agreement for indirect or consequential
loss or
 for loss of profits;
 loss of anticipated savings; or
 loss of data
whether such losses listed are direct, indirect,
consequential or otherwise
Liability Perspectives contd…/

 Suppliers exclusion of liability clauses

becoming more sophisticated
 Examine the purpose of the contract and
the commercial background in deciding
how to categorise any particular head of
loss
 Consider classifying certain losses as a
direct loss in the contract
 If such clauses are ambiguous - will be
construed against the person trying to
rely on them.
Liability Perspectives contd…/

 Is unlimited liability ever appropriate

 mandated under law
 negotiated
Liability Perspectives contd…/
 Supplier ideal -v- customer ideal –
commercially unrealistic
 Appropriate use of standard terms
 Important to tie together all contractual
limitation and exclusion of liability provision
in order to avoid uncertainty or ambiguity in
the contract
 The relationship between service credits /
liquidated damages and limitation of liability
provisions should be clarified
QUESTIONS AND ANSWERS
Contact details
John O’Connor
Matheson Ormsby Prentice
70 Sir John Rogerson’s Quay
Dublin 2
D: +353 1 232 2150
T: +353 1 232 2000
F: +353 1 232 3333
E: john.oconnor@mop.ie
W: www.mop.ie
Mark Rasdale
Matheson Ormsby Prentice
70 Sir John Rogerson’s Quay
Dublin 2
D: +353 1 232 2012
T: +353 1 232 2000
F: +353 1 232 3333
E: mark.rasdale@mop.ie
W: www.mop.ie

Yvonne Cunnane
Matheson Ormsby Prentice
70 Sir John Rogerson’s Quay
Dublin 2
D: +353 1 232 2152
T: +353 1 232 2000
F: +353 1 232 3333
E: yvonne.cunnane@mop.ie
W: www.mop.ie
Disclaimer
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