27 February 2019

A quick guide to your most frequently negotiated clauses

Do you supply IT software or services? If so, this is for you – we look here at a couple of the contractual clauses which we, at HCR, see most frequently negotiated by customers, as well as giving some guidance on how, in our experience, these negotiations resolve.

 

Limiting liability

 

Since the introduction of the GDPR and the hefty new potential fines, it has become common for customers to ask suppliers to have unlimited liability for breaches of data protection clauses, or ‘Data Protection Laws’. This is often accompanied by a wide-reaching indemnity in the customer’s favour.

However, it is also common for suppliers to successfully resist both the indemnity and uncapped liability. In any event, the way that breaches of the GDPR are investigated and responsibility apportioned by the Information Commissioner’s Office (ICO), weakens the argument for including this kind of indemnity: if a data breach was the supplier’s fault and the customer can prove this, the ICO will apportion responsibility for the breach accordingly.

A common compromise we see in these circumstances is for the supplier’s liability cap to be expressed as a percentage of fees paid in a defined contract period (e.g. 125 or 500 per cent of the total annual charges in a 12-month contract period). The most frequent range we find is between 150 and 300 per cent, although the market has yet to fully settle on this point, and it may be susceptible to change as rulings from the ICO materialise over the coming years.

Termination for convenience

 

Customers frequently ask IT suppliers for the ability to terminate their contracts at any time, for any reason. There is some logic to this – businesses increasingly have fluid, complex, multi-vendor IT infrastructures, and require flexibility to react to their own growth.

However, that’s not to say that as a supplier you should give in to this argument immediately. Firstly, having customers who receive ongoing services but who can terminate for any reason hardly gives you any short or long term financial certainty.

Secondly, customers do not always appreciate the significant level of costs often involved in providing various sorts of IT services, whether this is purchasing software licences, equipment hire, or lining up specialist third party contractors. Having committed to such costs in line with your instructions, you should not be left out of pocket if your customer decides to go elsewhere.

You may try dealing with this by tying the customer in for a year, and allowing them to terminate for convenience beyond this. However, this may still leave you with the same problem of having incurred costs at the point of termination beyond the first year of the contract.

A compromise that we find works for both parties is to allow the customer to terminate for convenience, provided they cover an element of the supplier’s costs at the point of termination. Whilst you are unlikely to be successful in requiring the customer to recompense you for any lost opportunity, we commonly see provisions allowing the supplier to keep any up-front payments, and even requiring the customer to recompense other costs incurred by the supplier, provided they are reasonable and can be evidenced in writing. The latter can be hard to win, but it is worth pushing for, as it will ensure that you are not left footing the bill left by flighty customers you have sought to placate.

These are just two of the many clauses we see negotiated time and again. It is important to stress that, just because something may be what is happening in the market, it may not necessarily be the ideal position. However, providing insight on market norms is an important part of the service we provide, and can give you confidence in your position when faced with customers insisting that no other supplier is rejecting their position on a particular term.

For more information or advice on this, please contact Ed Kilner at ekilner@hcrlaw.com or on 01905 746 495.

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About the Author
Robert Capper, Partner, Head of Commercial Team and Sectors
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