CYA: Using Contracts to Protect Your Company: Part 2

Continued from CYA: Using Contracts to Protect Your Company. Escrow: When purchasing software (especially from small vendors), make sure the source code is placed into escrow with a third party. This means that if the vendor goes bankrupt or out of business, you have the source code of the software to help support the application. Perpetual Licenses: Your software licenses should be perpetual. This allows you to use the software forever even if you drop support and maintenance (can’t get updated versions). While you might save some money with term licenses, when they expire you are forced to purchase all new licenses. Exclusivity: A non-exclusive software licenses means the vendor can sell the product to many customers. An exclusive contract dictates that the vendor will not sell the product to anyone but your company. If a vendor is developing software only for you it should be exclusive. If they are using you as the first customer to fund the development to sell to other companies you should get a large discount. Transferable and assignable: Consider negotiating for a license that is transferable or assignable. If your company ever splits off units into other operating entities, you can assign the license to the new entity. You should allow the vendor to specify that you can’t sell the license to someone else however. Termination: Always, always make sure you have a termination clause such as 30 days written notice to terminate the agreement. If the project you are working on is cancelled a month in, you don’t want to keep paying support or maintenance for a year. Smart vendors might want to make you pay extra for a termination clause as they depend on the contract duration for their income streams. Force Majeure: Make sure this clause is specific. An act of god could mean anything. In some cases, these circumstances are part of the reason why you want to purchase support and maintenance. Confidentiality / Publicity: Make sure this clause cuts both ways. Typically they state your company can’t issue statements about them. Make sure the vendor can’t issue statements about your company without approval as well. Location: Shoot for worldwide. While your company might only operate in the United States, you might someday decide to open a branch in Europe or Mexico. Payment: Make sure this matches your company’s payment methods. If your company pays net 45, don’t let the contract state net 30 or you might be faced with penalties. Also, if the contract references a service to be provided, don’t pay 100% upfront. You never know when you won’t like the end result. Limitation of Liability: Make sure your interests are covered here and not just the vendor’s. Indemnity: Make sure your interests are covered here and not just the vendor’s. Service Levels: Define specific service levels, escalation procedures, fix timeframes, etc. If the vendor is not living up to their promises, you want to be compensated. Response Times: Determines the response time of the vendor for various situations. If the vendor is not living up to their promises, you want to be compensated. Also, make sure your technical support people know the response times so they can plan accordingly and are not surprised. Remedies: Remedies are used to provide financial (or other) compensation for a party not living up to the terms in the contract. Make sure your interests are covered here and not just the vendor’s. Governing Law: Ensure your legal team agrees to the governing body. Your corporate legal and procurement teams are valuable resources in reviewing and negotiating software and hardware contracts. Always work with them to make sure you are using all of your company resources to get the best terms and contract conditions. Related Articles: Software | Hardware Licensing: Key Contract Terms