The most important purchase your business makes this year may be a new computer system. Computers are at the heart of everything we do, and the practical reality of the information age is that if your computer system is down, so is your business.
While the importance of having a fully operable computer system is obvious, the risk that the technology will fail to perform as promised is often overlooked in computer transactions. In purchasing a new or custom computer system, the specifics and timing of the “deliverables,” including the specifications and functions, must be described in a manner that makes clear what is expected from the vendor. The representations, warranties, covenants, and remedies form the framework for your legal rights and are part of what you are paying for. Here are some guidelines to consider.
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- Be wary of “standard forms” and make sure that the purchase or license agreement you sign clearly sets forth the substance of all your negotiations with the vendor. For example, if you solicited a vendor through a detailed Request for Proposal and fine-tuned an agreement through natural “give and take,” the written contract should reflect the product of your negotiations. Special customizations should be detailed. Functions that are basic to your agreement should be specifically listed among the vendor’s representations. Do not sign an agreement that says it is “the complete expression of agreement between the parties” when, in fact, there are representations and understandings that are not contained in the written agreement. Marketing and promotional materials are not necessarily part of the agreement. If you are relying on such materials, attach them or incorporate them by reference in the body of the written agreement.
- Read and make sure you understand the warranties. A warranty that promises that the system conforms to the published documentation does not necessarily mean that the system will meet your specific needs. The software may fully conform to the published documentation (which is to say, it does what it was written to do), but does not perform the functions that you need it to do. You are paying for the warranty; make sure it covers what you bargained for.
Also, think of your purchase not as a single system but as several systems that need to work together. The software may be perfectly suited to your needs, but the hardware platform is incapable of running it. The vendor should warrant that the hardware and the software will work together and, if there is more than one software component, that the several components work together. - Define specific performance standards. Although the vendor probably will not agree to pay consequential damages for interruptions to your business, you may be able to build reductions into the purchase price for downtime and relief from installation payment obligations. Contact your insurer to find out what coverage is available. In short, computer malfunctions are foreseeable when dealing with new or customized technology — plan for them.
- Avoid limitation of liability provisions. Many standard forms limit the vendor’s liability to repairing the system or refunding the purchase price. Repair is often a meaningless remedy, especially after the vendor repeatedly has tried to debug the system and has proven incapable of making the system perform as promised. Refund often involves a Hobson’s choice between a partially operative system and no system at all.
- Reach an understanding as to what point installation is complete. Oftentimes, a maintenance and support agreement is part of a computer technology transaction. Maintenance should not begin until the vendor has delivered a working system. You do not want to pay the vendor for debugging a system that never worked in the first place.
- Make sure that the vendor has the right to transfer the software to you. Ownership is crucially important. The vendor may be using someone else’s software as a component part. The vendor should indemnify you against infringement claims by third parties. Also, establish whether you will have the right to transfer the software in the event of a merger or acquisition of your business.
These are only a few of the myriad issues lurking in standard form computer contracts. Obviously, you will be careful in selecting a vendor. You should be equally careful in reducing your agreement to writing. Consulting a lawyer is always a good idea. If, when purchasing new or custom computer technology, you ensure that the contract you sign clearly and accurately expresses your agreement, you will save yourself a giant headache later on.
Charles D. Blackman is an associate with the law firm of Hinckley, Allen & Snyder LLP. He concentrates his practice in commercial litigation.
