Customer-Vendor Relationships: Negotiating Essential Provisions in IT Contracts to Protect Customers and Create Successful Partnerships

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March 01, 2012
Legal Corner
Steven J. Fox - sjfox@postschell.com
VadimSchick- vschick@postschell.com

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Standard IT contracts, including license agreements, are widely used in the hospitality industry, and hospitality businesses often sign such contracts without negotiating the essential terms and conditions therein.  However, IT contracts should include adequate protections, safeguards and other rights reserved for the customer, especially in the event that the vendor defaults or otherwise fails to perform to the customer’s satisfaction. This note provides a very brief, high-level overview of some, though certainly not all, essential provisions that should be included in IT contracts.

It is important to remember that everything is negotiable, including price, payment terms, warranties and the scary provisions regarding limitation of liability. Also, for significant IT deals, it is much more effective to select the top two vendors, then advise the preferred vendor that if negotiations break down, the second choice is waiting in the wings.  In some cases, a dual track negotiation process may be worthwhile.  These methods tend to keep the pressure on the preferred vendor and generate additional concessions.

License
Hospitality businesses must choose the correct type of license for their organizations’ particular needs, among, for example: site licenses, covering a specific geographical location; enterprise-wide licenses, encompassing the entire scope of the hospitality business; named user or concurrent user licenses; and ASP or SaaS (software as a service) licenses (also known as cloud software), granting the right to use software on a subscription basis.

Customers should also consider the term (perpetual or limited) of licenses, use of the acquired software by affiliates and third parties, growth of customer’s business, limitations on vendor’s audit rights, and numerous other issues which must be carefully analyzed.

Confidentiality, Privacy and Security
Hospitality businesses should insist on mutual confidentiality obligations with strict limitations on the vendor’s use of the organization’s customer information. This is especially important in light of the strict PCI data security standards exposing hospitality businesses to significant losses in the event of a breach, a growing threat of data loss tort claims in the United States and Canada, and potential changes to the existing privacy regulations, as contemplated by both chambers of the U.S. Congress.

Warranties
Most vendors provide minimal to nonexistent warranties in their form contracts.  It is crucial for customers to make sure that the contract includes important warranties, including, but not limited t compliance with functional and performance specifications; compatibility of components; prevention of unauthorized access or usage of system; sunset issues; ongoing availability of support/maintenance, along with many other important issues.

Limitation of Liability and Indemnification
Failure to adequately address the limitation of liability and indemnification issues may result in the inability to recover or even claim damages for actual losses suffered as a result of the vendor’s breach of contract or negligence.  It is essential to carve out a number of areas, including breach of confidentiality and privacy; personal injury, death and property damage; and intellectual property infringement from a cap on any damages.

Unfortunately, it is not uncommon for vendors to require customers to indemnify them from any third-party claims brought against the vendor that arise out of the customer’s use of the software, even where the vendor is at fault. Such provisions should be rejected as unacceptable. In fact, good contracts should contain strong indemnification provisions and warranties by the vendor protecting the purchaser from privacy/confidentiality violations by such vendor; third-party claims for bodily harm, injury or death caused by the vendor’s personnel or its products; as well as claims that the software infringes on third-party patents, trademarks or copyrights, or misappropriates trade secrets.

Pricing and Payment Terms
It is best to negotiate objectively measurable performance milestones that the vendor must achieve before payment is required.  These milestones should be coordinated with detailed acceptance testing criteria.  For example, 10 percent of the contract price may be paid upon execution, 20 percent upon delivery of the software, 30 percent upon completion of installation, and the remaining 40 percent upon final acceptance.  Vendors are increasingly resisting milestone payments, blaming their position on revenue recognition rules. Customers should resist such pressure and withhold a majority of the charges until they are satisfied that the product works properly, especially if the agreement does not permit a refund.

Termination Rights
Hospitality businesses should be able to terminate the agreement if the vendor breaches a material provision and demand a refund of all fees, charges and expenses paid under that agreement. Vendors should not be able to terminate the contract, or stop supporting the software, except for a very serious breach by the customer.  Even if such a breach occurs, the agreement should provide the customer with plenty of time to cure the breach and require the vendor to notify multiple executives and representatives of the breaching party.

The acquisition process for IT systems is generally complex, intensive and critically important to all of the participants. However, if the concepts demonstrated above are learned and utilized, the ultimate outcome is likely to be a contract that protects the customer and benefits both parties by creating a sustainable partnership.

Steven J. Fox, sjfox@postschell.com, is a partner and Vadim Schick, vschick@postschell.com, is an associate at the Washington, D.C., office of Post & Schell, P.C. Fox is chair of the law firm’s Information Technology Group and co-chair of its Data Protection Group. Messrs. Fox and Schick focus on information technology agreements and data privacy and security compliance.  This information is general and educational and is not legal advice.  For more information, please visit www.hospitalitylawyer.com.

©2012 Hospitality Upgrade
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