NEGOTIATING INFORMATION TECHNOLOGY SERVICE AGREEMENTS TOP TIPS TO CONSIDER © 2013, WILSON VUKELICH LLP. ALL RIGHTS RESERVED. Diane L. Karnay September 25, 2013

Introduction  Demand for IT service providers has continued to grow.  A well-drafted service agreement is beneficial both to the service providers as well as their customers.  Service agreements should be clear on the fundamental business terms – who is doing what, when, where and how?

Introduction  These terms can be addressed in a single purpose services agreement, or a master services agreement with multiple project-specific work orders or statements of work.  The tips outlined in this presentation are skewed to the service provider’s perspective.

Define scope, specifications and service levels  Clearly identify the services and specific deliverables, as well as any interim or final timetable or delivery schedule.  Clarify whether any deliverables are third-party equipment or software.  Identify all applicable metrics, performance indicators and service levels, so deliverables and performance can be measured against objective goals.

Have a workable acceptance mechanism  There should be a clear mechanism for addressing how deliverables will be tested and accepted.  Acceptance should be tied to objective specifications, so that a failure to meet these is the only basis for rejection.  There should be a limited period to reject a deliverable, and detailed reasons should need to be given.  The deliverable should be deemed accepted, unless the customer rejects it within the limited period.

Ensure payment terms are clear  Clearly set out invoicing and payment terms.  Invoices should be issued monthly or upon meeting specific milestones, and not only at the end of the assignment, to assist with cash flow.  A deposit at the front end is also recommended.  Clearly set out what additional expenses the customer will need to bear – i.e. out-of-pocket expenses, third-party assistance, etc.  Clearly set out payment terms.

Include remedies for non-payment  Reserve the right to charge interest on overdue amounts.  Have the customer be responsible for collection expenses.  Reserve the right to suspend services if payment is late, and clarify that such suspension does not breach the agreement.  Obtain security on equipment, if applicable.  Consider obtaining a guarantee from a parent company if the customer is little more than a shell.

Address missed deadlines  Clarify that the service provider is not responsible for missed deadlines caused by the customer – i.e. customer’s failure to provide timely information or instructions, access to facilities or equipment, or otherwise not cooperating under the agreement.

Clarity termination rights  Both parties should be able to terminate: (i) for a material breach which is not cured within a reasonable period of time – i.e. 30 days; and (ii) if the other party becomes bankrupt or insolvent.  Termination for convenience is more problematic and may not be appropriate. If a customer wishes to have the this right, then consider whether there should be a cancellation fee or the forfeit of any pre-paid amounts.  Clarify obligations on termination.

Limit Representations and Warranties  Representations and warranties should be carefully reviewed, to ensure they can be comfortably given.  Where appropriate add knowledge, materiality, or other qualifiers to limit the scope.  Limited performance warranties should only be given for those products and services provided by the service provider – original supplier’s warranty should apply to third-party products.

Consider liability issues Disclaimers:  Include a disclaimer of all other representations and warranties, other than those expressly set out in the agreement.  Limit monetary liability for breach of direct damages by expressly excluding indirect, special, incidental or consequential damages – customers may wish to carve out confidentiality from this limit of liability.

Consider liability issues Indemnities:  Service provider should try to give as few as possible, and should also try to limit any indemnity by carving out liability arising from the customer’s own negligence or intentional misconduct.  An indemnity that the products or services do not infringe third-party IP is reasonable, provided (i) the service provider has the right to address the issue, (ii) by carving out liability not attributable to the service provider, and (iii) by clarifying specific remedies.

Consider liability issues Limitation of liability:  Service provider should cap its total liability under the agreement.  Cap mechanisms can be a fixed amount or variable amount – i.e. total fees paid under agreement, or fees paid in specified period or under specific statement of work – or amount of insurance maximum, etc.  Customers may push for uncapped liability for situations such a IP infringement claims, confidentiality breaches, and personal injury and tangible property damage.

Ensure protections are in place For:  IP ownership – each party will want to retain its existing IP, and the parties will need to agree upon ownership of new IP created during assignment;  Confidential information – include provisions protecting each party’s confidential information;  Personnel and business relationships – consider non- solicit provisions.

Have more questions? For more information about IT service agreements, please contact: Diane L. Karnay (905) Toll Free: x2350