January 29, 2023

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Unlimited Technology

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Legal minds explore risks associated with technology contracts

The signing of a long-term technology agreement is certainly common enough, but according to a group of lawyers with Norton Rose Fulbright Canada LLP, there is a myriad of legal implications that need to be considered once the physical outsourcing and procurement takes place.

Exactly what those are was outlined recently at the company’s inaugural virtual technology privacy and cybersecurity summit, during an opening panel that focused on risk management in technology contracts.

According to the firm, as “businesses continue to engage in digital transformation, they are relying more and more on outsourcing and technology procurement for additional resources and expertise.”

Moderated by Liana Di Giorgio, senior associate with Norton Rose Fulbright in Toronto, the panel consisted of Janet Grove, a partner from the firm’s Vancouver office who focuses on technology and life sciences, Fahad Siddiqui, a litigation partner based in Toronto, and Nikita Stepin, a business law partner who specializes in commercial intellectual property (IP) and is based out of the firm’s Montreal office.

Grove said one of the biggest risks organizations face revolves around pricing, and a key question to ask prior to the signing of an IT contract is, “is it fixed, or will it increase”? She suggested that any signatory who thinks “pricing should be firm,” should then absolutely make sure a conversation with the vendor takes place, and any guarantees are reflected in the contract.

If there are going to be increases, she said, it is important to know the level of the escalation. For example, that could mean a price increase related to changes in the Consumer Price Index (CPI), or additional pricing above and beyond the rate of inflation.

“As you go into the contract, you really have to look at the marketing document you’re given, look at the sales document, but then look at the contract and make sure that whatever expectations around price and price protection that were given to you as part of the pitch, or in the sales document, are translated into your contract.”

Di Giorgio said that she has noticed more and more people attempting to negotiate caps on pricing increases every year, “especially in today’s environment and not just tying it to CPI, but actually saying they won’t increase by more than five per cent, or whatever number makes sense for the business.”

A ceiling of five per cent might have worked in the past, said Grove, but it is “becoming more difficult with inflation having gone out of the ballpark over the last year.

“For vendors, it is tough to commit to five per cent, and we are seeing more negotiation around how long they will commit to a particular price cap, particularly if they are not tied to CPI, or to an index that is more relevant to the technology sector. But if you are the customer, the more certainty you can get, the better.”

Conceding that “you are rarely going to get certainty forever,” Grove said that the key is to look at the anticipated lifespan of the service, “but also really, at what point for you would it make no sense to go into this? Do you need to know you have price certainty for five years to get a sufficient payback from the service? Try and get price certainty for long enough that you have that payback, and really look at also, what kind of notice you get when price is going to change.”

Vendors, she added, in a standard form contract might have the ability to change price at any time, or certainly on renewal. “How much lead time do you need if your vendor for whatever reason needs to increase the price beyond what you think is competitive or tenable? How much notice do you need of that, so that you could look at an alternate solution?”

Di Giorgio responded by saying that the “dispute mechanism in a contract does not really lend itself to negotiating a price adjustment on an invoice.”

Contract terms that address price, said Siddiqui, are ultimately where the parties’ desire to get a business deal done and the lawyers’ desire for outcome certainty, clash.

“What you will typically find in all contracts, but with technology contracts especially, are clauses that leave these things open,” he said. “And the parties sort of close their eyes and hope that they will figure it out along the way, and their external and internal counsel sort of cringe and hope that nothing goes wrong. And so, typically, you see this addressed in two ways.

“The first is, you will have a set price laid out in your contract for all your contractual agreements, and the parties will agree to mechanisms to address changes that are required. Typically, those are change order procedures, you can go as far as to agreeing to a certain percentage variation that will or will not be accepted.”

At the end of the day, said Siddiqui, “what you are looking for is for your vendor to act reasonably, in terms of how much the vendor will deviate from what the parties agreed, and your buyer is going to, not unreasonably, reject a price change to choose to get out of an improvident deal.

“The other way that you typically see this done is an agreement that the parties have cast their minds to a preliminary budget, but that the budget itself is not necessarily where the price is going to end up. And this is where disputes lawyers and arbitrators and judges start to get creative. And that is usually not a good thing from a business perspective.”

As for the IP issue, Stepin said the key is to establish a written roadmap that defines what data can be shared – be it from the vendor or the customer – and what data will need to be protected.

“These issues typically need to be addressed at the outset when data has any sort of value in a commercial technology transaction,” he said.