In the case of technology contracts, I am an advocate for a prenup. Why the difference? Well, as much as you would like – the relationship that a supplier and customer have is not likely to be for life.
We are talking about businesses - businesses don’t have a natural end point. They can go on forever - or end abruptly. And so the relationship between the parties can’t work on the assumption that nature will impose an end point. The parties should go into the arrangement with a view on what is the intended end point, what should be an end point and what happens at the end.
The nature of technology and its usefulness as a business tool is such that often it becomes so integrated into the business that the day to day life of the business depends on it. As such the parties need to take a very pragmatic approach to termination. Termination should not be something that is done lightly – it should be at the point where the technology or the related services have become so problematic that life is more difficult with it than without it.
Given the likely integration of the technology into a business there is little point in a customer having a right to terminate in circumstances where the cost of unwinding or the impact on the customer’s business of not having the service or technology is such that the customer would never exercise that right. Equally, the parties should consider whether there are ways in which these risks can be properly managed.
From a supplier’s perspective, it also makes sense to ensure that the agreement sets out clearly what constitutes sufficiently bad behaviour that the customer wants to end the arrangement and what obligations the supplier has on such a termination. This will give the supplier greater clarity around the expectations of the customer and the likely impact of the supplier’s behaviour on the customer’s business. It will also give the supplier an opportunity to educate the customer as to what is possible.
Termination should not be something that is done lightly – it should be at the point where the technology or the related services have become so problematic that life is more difficult with it than without it.
When considering what the parties need to agree, the following questions should provide a useful basis for the discussion:
1. Should the arrangement terminate on a party experiencing financial difficulty?
a. What kind of financial difficulty is sufficient to justify termination?
b. If it is the customer that is in financial difficulty and payment has already been made then what is the risk for the supplier? Will the termination of the arrangement just speed up the demise of the customer?
c. If the supplier is in financial difficulty does this matter if payment is in arrears? Is there a risk that the customer will be paying for something that it does not receive?
2. At what other point should the parties be able to terminate? What is considered a breach? Should the breaching party have a right to remedy?
3. Should either party have a right to terminate for convenience? For example, the customer may wish to have a right to terminate for convenience if it decides for whatever reason that it no longer requires the services provided under the agreement. If this happens, what notice period would a Supplier require and would it want to charge early termination charges?
4. Because of the dependence on the system / service is termination really viable? At what point does the impact of not receiving the performance contracted for outweigh the inconvenience and cost of unwinding the arrangement?
5. Can the customer use the current solution without the supplier? This applies at two levels - Is the customer able to use it? Is the Customer allowed to use it?
6. Can someone else support the solution?
7. Is an alternative solution available?
8. What would be required for the customer to support the current solution or move? Is access to source code and other materials needed to support? If so is access available? On what basis? Escrow?
9. What input is needed from the Supplier for the customer to use the current solution or move?
10. How long is it likely to take?
11. Is this paid for separately?
12. Does the position on this change if the end of the relationship is caused by the customer or the supplier?
With any technology contract, the dependence of the customer on the supplier is likely to be greater than for more traditional suppliers. As a result, termination is not something that should be considered lightly. There is likely to be a lot of cost and inconvenience for both the customer and supplier. It is best to explore what is likely and what is possible in terms of performance (of the technology and/or associated service).
The parties should also explore openly what is possible and likely should the arrangement need to end. If having done this either party doesn’t like what it sees then it may be best not to go there. After all, it is better not to go there if the expectations aren’t aligned than to incur the cost of the lawyer when it doesn’t meet a party’s expectations.
Simon Martin is a partner at Hudson Gavin Martin, a boutique IP and technology law firm in Auckland.
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