Contract Types

IT Contracts

The forms of contract for IT provision may range from highly negotiated agreements for complex high-value bespoke requirements to standard form agreements in respect of off the shelf products.

The general principles of contract law apply. The systems and deliverable requirements should be specified and defined.  In particular, performance, capacity, and minimum requirements should be set out.

The general warranties that apply by law should be considered and modified as appropriate.  Guarantees may be provided in the context of ongoing support. Warranties may appropriate to the effect that the product or system will conform to the relevant expectations and requirements.

Issues may arise as to what extent the requirements are promised to be functional in relation to the particular business. The component parts may operate, but it may not perform the overall functions required in the context of the business’ requirements.

The extent of responsibility and liability will depend on the terms of the contract.  Difficult questions of interpretation may apply in applying implied sale of goods and supply of services legislation warranties in this context.

Systems Supply Contracts

Contracts for the provision of hardware and software systems may range from highly bespoke and developed systems and software provided for an individual business to generic widely used software and which are purchased in a standard form, commonly over the internet.

The supply contract may range from a basic business support system to the complete outsourcing of particular functions by the customer to the IT suppliers.  This may raise issues in relation to employment law.

A complex bespoke system may involve a detailed contract between the supplier/developer and the user.  Existing software may need to be developed and refined for the particular business environment.  The customer’s requirements must be indicated and understood. Communication issues arise.  Inevitably in complex bespoke projects, it will be necessary for sufficient interaction to take place.

A development agreement may be entered, specifying what is to be provided and specifying, the rights in the final system, payments, delivery, support, testing, and maintenance. There are commonly confidentiality issues.

The definition of completion of the project will be critical.  There should be tests and mechanisms in the contract to prove that the requirements have been delivered and that the systems meet the requisite standards and expectations.

Common Disputes and Proprietary Issues

Disputes sometimes arise where software and systems have been developed in a novel business setting, between the customer and IT developer.  The IT developer may wish to use and apply the system and software in other spheres.

The customer may wish to retain exclusivity, particularly if the software development and application may have involved input from both supplier and customer and may have involved substantial expenditure. The customer may wish to guard against the IT developer, selling it as a package to a rival.

There may be negotiation as to whether the intellectual property rights remain with the developer or vest in the business.  This will depend on the market strength and the extent to which the business requirements are unique.

In some cases, intellectual property rights will vest expressly or impliedly vet in the customer.  On the other end of the spectrum, the customer will have a licence to use the system or software, with the supplier entitled to exploit it as provided.

Complex issues may arise if other proprietary systems are involved in respect of which the supplier may have limited rights only, to use them.  In this case, an outright assignment of all elements of the system may not be possible.

Maintenance and Support Contracts, I

Anything more than basic IT systems will require ongoing support and maintenance. There may be provision for ongoing training, consultancy, support, repair upgrades.  Warehousing agreements provide secure storage of business data and hosting.  The business will wish to ensure that its data is properly secured and that the requisite hosting systems perform.

The IT system or systems may play a particular function within the business (for example, in payroll or the general accounting systems). In other cases, the business itself may have a significant web and e-commerce presence, in which case, the IT system may be central to the business.  The support contract may range from basic remote or automated support systems to a more compressive on-site support presence.

Systems whether bespoke or standard are likely to have a warranty period, during which their functionality is warranted and their maintenance is provided by the supplier. After that, a longer-term maintenance contract may be put in place to deal with ongoing issues.

The maintenance contract will define the extent of maintenance and support provided. It may involve a response to specific queries, the ongoing maintenance of hardware and software elements, repairs, replacements, site attendance, and diagnosis and resolution of difficulties online or on the customer’s premises where necessary. There may be a member of the supplier’s staff on site or on call. The matter may be the subject of a service level agreement.

Maintenance and Support Contracts II

There will be provision for charging fees. The fee levels may be revised from time to time as the agreements provide or on its expiry. If the customer has a right of renewal on expiry, the supplier may require a mechanism for the determination of a revision in the level of fee.

At the end of the term of the agreement, the maintenance may be transferred to another supplier. The contract may provide for and facilitate the transfer of the arrangements

The customer may wish to transfer the contract/system to another entity within its group or externally. Equally, the supplier might wish to transfer the benefit of the contract to a group company.

Maintenance may encompass updates and training.  The supplier may agree to provide further releases and updates of the software, developed by it during the course of the contract. This may include new versions, removing bugs and providing for enhancements. The customer may be obliged to accept upgrades so as to facilitate the supplier in servicing all of its customers.

There may be a range of warranties on specific matters to supplements statutory implied warranties (as to the provision of services with due care, skill, and due diligence).

Faults and Problems

The faults and issues that may arise may be categorised in accordance with their seriousness. A mechanism for quickly categorising them may be required unless they are clearly defined.

More serious faults with more thoroughgoing effects and potential impact on business may have a higher-level categorisation and be subject to higher level of responsiveness and resource allocation by the supplier.

The basic principle of contract law is that a breach of contract gives rise to liability for direct loss only. The failure of an IT system may have serious knock-on consequences.  Under general contract law principles, these will not be the subject of compensation. In any event, an IT supplier is unlikely to be willing or able take on such liability.  It may be appropriate to provide for pre-defined liquidated damages or service credits in respect of failures of performance

The service level agreement may define the time scale in which there is an initial response to and ultimately, a resolution of a problem that has arisen. There may be consequences in terms of service credits or liquidated damages in the event of protracted delays.


Software ultimately consists of a series of instructions to hardware to work a process in order to provide a function or application. Software is protected principally by copyright law.The source code is the ultimate, low-level base of software. It generally requires to be compiled into a form that can operate. The object code is the lowest level binary coded base of the program.

Most software packages are sold to the mass market to meet generalised requirements. The best known include Microsoft’s family of programs, Word, PowerPoint, Excel, and Outlook.

Software may be specifically designed for a particular purpose. Existing software may be customised and adapted to meet the customer’s need.

Intellectual property rights are of key importance in the IT sector.  Most software and many hardware systems are the subject of proprietary intellectual property rights held by the developers or owners. Licensing of IP, which is a consent to use another’s IP’s rights, plays a central role.

Escrow agreements may be used to deal with the risk that the supplier may become insolvent or fail to perform its obligations.  The escrow agreement provides that the key technical information such as software source codes, manuals are delivered with a third-party agent.  The escrow agreement will provide the terms on which the same may be released to the customer in the event of supplier’s default.

Licensing of Software

Because software comprises intellectual-property protected by copyright, its use is licensed. The terms of the licence are provided for by contract law and effectively the terms of the consent to use. The creator or another owner of the copyright thereby permits its use subject to terms and conditions.

The owner of copyright will usually seek to exploit it in the way that commercially optimises the total licence fee return. The licence duration is commonly expressed to be for a period, generally a long period.

The terms of the licence and correspondingly the level of the licence fee will determine the extent of rights granted. Typically, the use is limited to a particular computer or user or to a particular network or group. The licence may limit use to a domestic or business purposes of the user. In particular, it may not be commercially exploited.

The terms of the licence are likely to limit the extent to which the software may be transferred and used. This restriction may have implications in groups of companies where the terms of the relevant licence may be limited to use by the customer entity.

Copyright licences may purport to restrict transfers of the software to third parties, both to protect the software owner’s, copyright and economic interests and to control track the identity of the users. These limitations may have implications in relation to the use of the software within an organisation which are not readily apparent on purchases.

Shrink Wrap Licences

Shrink-wrap licensing developed in the early days of software distribution. It seeks to create a contract between the customer and owner of the software governing the terms and conditions of its use.

The contractual terms of licence were set out in the outside of a package containing a medium (commonly a CD) through which the software was loaded onto hardware. The term of licence was visible through transparent plastic film and were deemed to be accepted by opening it.

The shrink-wrap licence does not fit easily with conventional mechanisms for contractual acceptance. Questions may arise as to acceptance where there is no prior opportunity to see the terms and conditions.

Its precise status is uncertain, although it was once commonly used.  To a large extent, the distribution of software over the Internet has obviated any issues in relation to contract formation. Typically, on Internet purchase acquisition, a clear sequence of offer and acceptance of Terms and Conditions occurs between the customer and software supplier.

Supply of Bespoke Software

Where the software is bespoke, there is likely to be a supply contract dealing the licensing of the use. This will often be part of a more extensive contract which covers all issues regarding the development and delivery of bespoke software.

In bespoke contracts, all or some intellectual property rights may vest in the customer.  In general, when a work is commissioned, the copyright remains with the creator and not the party who has commissioned it. The contract will commonly have a contrary provision

Cloud Computing

Cloud computing involves data storage at a remote location to and from which it is transmitted to and from computers devices. It allows backup and storage in a manner that is easy to retrieve. It facilitates content sharing. Data is accessed from the cloud on demand rather than being stored locally. In effect, the cloud is a central repository of enormous data. Much the same issues as arise with digital information generally apply with the cloud.

The use of cloud storage and software raises much the same issues as digital media generally It raises data protection and privacy issues.Services may be sold by a means of access to cloud proprietary data such as video, music, images etc. Provision is made for access through the platform to the relevant digital media.

Cloud-Based Services

Cloud services involve the provision of hardware and software remotely as required. Infrastructure may be provided as a service including the server, storage, and equivalent over the Internet and on demand.   This has changed the contracting environment to a significant extent.

The customer may be provided with a foundation on which it may install and run its own applications. A platform is a service, which gives the customer access to the basic infrastructure together with operating systems.  The resources are then accessed through the Internet when required.

With software as a service, payment is generally made on the basis of use. The customer avoids the necessity of having its own server and storage. Maintenance and upgrading are undertaken by the provider on an ongoing basis. Customers pay for processing and storage as they require it. It reduces the requirements for businesses to have their own in-house IT facility.

Public and Private Cloud Services

Cloud computing may facilitate sharing by users within a single organisation. Large entities may utilise an internal cloud and share computing resources throughout an organisation. They may communicate with subsidiaries in different countries. The service may be outsourced to a third-party supplier. Bespoke development may be expensive

A public cloud is outsourced and is provided to numerous but is in standard form. The service may be accessed remotely over the Internet. A public cloud involves considerable data and privacy issues, security issues. There are risks in terms of storage of data, security, restricting access and retrieval.

There may be hybrid elements involving a public and private cloud.  The hybrid version binds elements of the public and private model. This allows the efficiencies in terms of scale while maintaining individual user’s control over essential applications and data. Businesses must ensure that their data may only be accessed or processed in accordance with the terms of consents which they hold from the requisite parties.

Cloud Computing Services Terms of Contract

Cloud computing services are often provided by large-scale providers who can offer their services on a basis that is favourable to them. They usually give minimal warranties as to performance. Above refers to public cloud providers.

Contract with private cloud providers’ clouds may be negotiated specifically, particularly in the case of larger organisations.

Security on clouds providers may be more efficient the other systems the levels of security and encryption are usually higher or more sophisticated. This may facilitate home working, n allowing direct logging into a system rather than the use of memory keys which may present a higher security risk.