Professional Issues in IT

Computer Contracts
Introduction
● An agreement between two or more parties for the
doing or not doing of something specified
● Contracts serve the following purpose:
○ 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
Introduction
● If contracts are too harsh or unfair causing any issue
between parties to be resolved, it is the responsibility of
the contract laws to contemplate according to the
rules.
● contract law provides rules for the termination of the
contract if performance becomes impossible
● it sets aside contracts which are too harsh or
unconscionable(unreasonable)
Introduction
● Law provides a framework for the settlement of points of
disagreement
● In order to avoid disputes and future difficulties it is
better to draft a document which sets out:
○ The terms on which both parties is to work.
○ Methods of payment.
○ Appropriate ways to terminate the contract-notice required.
Introduction
● Many lawyers are still not familiar with the technology.
● Even fewer computer scientists are familiar with the law;
and as both use their own jargon
● While optimists make the best deal makers, pessimists
make the best contract writers.
● Lawyers in particular are born pessimists.
● Frustration on the part of a business client
● Resolving potential and hypothetical points may just be
seen as time-wasting by the client.
Introduction
● Contract should be clear, consistent and concise. 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, effort and therefore money, in resolving the matter
Introduction
● Software engineers are likely to come across many
different types of contract—insurance contracts,
contracts of employment, contracts with hardware
suppliers, consultancy contracts.
● We shall concentrate on contracts which are relevant to
the development and supply of software
Custom-built software at a fixed price
● Producing a good contract costs a lot of money;
● good commercial lawyers are not cheap.
● software suppliers try to use what are known as standard form
contracts, which are used or intended to be used many times over
Structure of the contract
1. a short introductory section which specifies, among other things
the names of the parties to the contract;
2. a set of standard terms and conditions;
3. a set of appendices or annexes. (an addition to a document.)
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.
Issues dealt with standard terms and conditions
● What is to be produced ?
● What is to be delivered?
● Ownership of rights
● Payment terms
● Calculating payments for delays and changes
● Penalty clauses
● Obligations of the client
Issues dealt with standard terms and conditions
• Standards and method of working
• Progress meetings
• Project managers
• Acceptance procedure
• Warranty and maintenance
• Termination of the contract
What is to be produced
● the standard terms and conditions refer to an annex and the
annex then refers to a separate document which constitutes
the requirements specification
● reference to the requirements specification identifies that
document uniquely
● A specification sets out the detailed requirements of the
client. Ideally, the specification should be complete,
consistent and accurate and set out all that the client wants
to be done in the performance of the contract.
● Unfortunately, we know that it is very difficult to achieve this
ideal standard and, even if we succeed, the requirements of
the client may evolve as the contract proceeds, and
sometimes the changes may be substantial.
● Solution ?
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.
● contract states what precisely is to be provided
○ 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.
Ownership of rights
● Sale or assignment: copyright passes to the client after
full payment.
● License: Client is merely given permission to use.
● Exclusive license
● Non-exclusive license with right to veto
Licensing
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 certain events
2. transfer of license to others
3. scope of the licence:
○ use on one particular computer?
○ limited to one site?

4. confidentiality: the licence will often seek to restrain the licensee

from allowing anyone other than company employees to become
familiar with the use of the software.
○ This can be an embarrassment for educational establishments who wish
to
purchase the software for use by their students.
Ownership of rights
● If the supplier goes into liquidation or otherwise ceases
to trade. The supplier is then no longer able to maintain
the software
● Specify in the contract that, after 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
Confidentiality
● The commissioning client may well have to pass
confidential information about its business operations to
the software house.
● software house may not want the client to (disclose
sensitive information) divulge to others details of the
program content or other information
● For each party to promise to maintain the confidentiality
of the other’s secrets, and for express terms to that
effect to be included in the contract.
Payment terms
● 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.
Payment terms
• Specify pattern of payments
1. an initial payment of, say, 15 percent 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.
Calculating payments for delays and changes
● when the client fails to provide information on a due
date or when changes are requested which result in
extra work.
● The contract must specify the process by which these
extra payments are to be calculated
● annex will include daily charging rates for each grade of
staff employed on the contract and the amount of extra
effort to be paid for will be agreed at progress meetings.
● 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
Penalty clauses
● Suppliers are very reluctant to accept penalty clauses
● 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 software 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
● 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
difficulties (or incompetence!) rather than lack of motivation.
Obligations of the client
● client will have to fulfil certain obligations if the contract
is to be completed successfully.
● provide documentation on aspects of the client’s
activities or the environment in which the system will
run;
● provide access to appropriate members of staff;
● provide machine facilities for development and testing;
● provide accommodation, telephone and secretarial
facilities for the company’s staff when working on the
client’s premises;
● provide data communications facilities to the site.
● failure to meet the obligations may render the client
liable for delay payments
Standards and methods of working
● 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
● 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.
Governance and Acceptance procedure
● Progress meetings
● Project Managers: The Project Managers must have at
least the authority necessary to fulfil the obligations
which the contract places on them.
● Acceptance procedure: critical part of any fixed price
contract, successful completion of the contract is
judged, client should provide a fixed set of acceptance
tests and expected results and that successful
performance of these tests shall constitute acceptance
of the system
Warranty and maintenance
● Once the product has been accepted, it is common
practice to offer 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 prolonging the period will
increase it.
● Once the warranty period is over, the supplier may offer,
or the client demand, that maintenance will continue to
be available on request.
Indemnity
● In contract law, an indemnity is a contractual obligation
of one party to compensate the loss incurred by another
party due to the relevant acts of the indemnitor or any
other party.
● It is advisable to include a clause under which each
party indemnifies the other for liability arising from its
own faults in this respect.
Termination of the contract
● 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.
● supplier is to be paid for all the work carried out up to
the point
● 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.
Arbitration
● Court action to resolve a contractual dispute is likely to
be expensive.
● 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.
● 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.
● Some organizations may be unwilling to accept an
arbitration clause because they feel that they are
signing away some of their legal rights.
Inflation
● commitment to long term maintenance, the supplier will
wish to ensure protection against the effects of
unpredictable inflation
● include a clause which allows charges to be increased
in accordance with the rise in costs
● 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
● Applicable law: Where the supplier and the client have
their registered offices 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
Other types of software services contract
There are four types of contractual arrangement which are
widely used in connection with the provision of software
services:
1. contract hire;
2. time and materials;
3. consultancy;
4. fixed price
contract hire
● the supplier agrees to provide the services of one or
more staff to work for the client;
● staff 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 staff
● Issues such as delay payments, acceptance tests and
many others simply do not arise
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 labor charged in the
same way as for contract hire
● This is a type of contract that pays the contractor for the materials
he or she uses as well as the amount of time spent to finish the
job.
● A time and materials contract usually signals to the customer that
there is risk involved. The project could cost more than initially
anticipated.
● 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
Time and materials
● 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
● Time materials or fixed price, which one would you
prefer ?
Consultancy contract
● You hire team of consultants
● 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