How better contract management can improve your firm’s risk management
Read it once, toss it in a desk drawer — and leave it to the lawyers to sort out if problems arise. Is this your company’s idea of contract management?
Fact is, contracts can be used to prevent problems from surfacing and to more effectively manage them when they do. What’s more, well-written contracts clarify agreements, improve project outcomes and create good working relationships between you and your clients, suppliers and business partners.
But contracts for high-tech initiatives, such as Web site generation, or software development present unique challenges. Because many of the projects are complex and are often mission critical for businesses, there are no precedents- and not approved languages. So they are usually written from scratch or pieced together – and end up being overly vague or incredibly complex.
The biggest problem many technology companies have with their contracts is that they tend to over promise, according to The Hartford Technology Industry Manager Toby Levy. He says, “This industry is so fiercely competitive that many contracts are overly optimistic about when a project will be completed, like when a new software package will be available for sale, or when a newly designed web site will go live. And that can lead to disappointment on the part of the client – and legal disputes with their technology firm.”
So how can you manage risk through contracts? Hartford attorney Rich Gentile, outlines some best practices for managing, reviewing and drafting contracts for technology-related firms.
- Understand what a contract is. A contract is a legal document that clearly states what service each party has agreed to perform. And in order for it to be legal, there must be an offer and an acceptance.
- Ask a lawyer to review any and all contracts. As a legally enforceable agreement, and contract has important consequences that can impact your business. Therefore, you should always ask an attorney familiar with contract law to review your firm’s contracts.
- Beware of sample documents or forms available on the internet or in books. Not all forms fit all situations – and simply using one that seems to fit your particular cirsumstances may result in unintended legal consequences for your company. As Gentile advises, “There can be different interpretations of a clause in a standard contract that, in your particular situation, may be better worded another way — for
both you and your client’s mutual benefit.”
- Identify all parties in your contract. Don’t just include names of employees. Be sure to list names of any third parties or subsidiaries that will be supplying any services during the project as well as their addresses.
- Describe the specifics of the work involved. In your contracts, cover such details as the scope of the work, the tasks included, the amount of time required, the costs involved, and any necessary insurance requirements.
Don’t incorporate or reference other documents in your contract. Remember, a contract should contain all the material terms for a specific project. If the work is similar to another job you’ve performed, don’t just attach an old agreement. Instead, repeat the same terms, so there’s no confusion about what your company is being asked to do.
- Address roles and responsibilities. It’s critically important to state in writing who’s responsible for what. . .and what the liability is if something doesn’t happen according to plan.
- Include a default and termination provision. While you always want to assume a project will go smoothly, you’ll want to spell out what your remedies are . . . just in case it doesn’t.
- Specify how to terminate the contract. Let’s say, midway through a project, you assess that it’s not going well . . . and that it’s in your best interest to severe the agreement. Have you allowed for that in your contract? Or can you be sued for damages?
- Specify choice of law. In case a dispute does arise and your company is sued, you’ll want your contracts to specify what laws will be applicable and in what state the lawsuit can be filed.
- Identify your risk management goals. Know your company’s approach to planning, direct¬ing and controlling resources to manage risk. Be clear about what activities management will negotiate on — and which ones they’ll never agree to.
Of course, proper contract management is only one of the ways you can minimize the financial risk of legal disputes. Contact The Hartford agent in your area to discuss other ways to better manage and cost efficiently transfer some of this risk.
|Sound Advice Whether you’re signing a lease agreement for new computer equipment or a multimillion dollar work authorization to program a new software application, contracts are a fact of life in the tech|
industry. Carefully review your drafts and consider:
|Just the Stats |
Defend Your Firm Against Lawsuits with Professional Liability Coverage
Today, more than ever, companies across all industries rely on technology. But when systems go down, or do not perform as expected, companies are filing lawsuits against their technology providers, software developers, programmers, Web hosting firms, information technology consultants — regardless of the terms outlined in their contracts.
So what else can your company do to protect itself from the threat of a suit? One thing is to make sure you’re covered by professional liability insurance.
For tech professionals, this coverage can protect you in the event you’re sued for a variety of issues:
- negligent acts, errors and omissions;
- copyright or trademark infringement and plagiarism;
- libel, slander and invasion of privacy as a result of the work you performed;
- failure of the technology services you provide to perform as intended, such as failing to prevent unauthorized access to a Web site;
- breach of warranties or representations.
While many insurers offer this type of coverage, The Hartford uses an innovative approach. Michael Dandini, Assistant Vice President, Technology Errors and Omissions at The Hartford, explains: “We realize that no two technology companies are alike. So we tailor our professional liability cover-age, known as FailSafe, to the specific needs of your business. This way, if you need, let’s say, insurance protection for errors and omissions, but not for security claims, we can customize coverage for you.”
Better yet, Dandini states that The Hartford will package all the technology errors and omissions coverages you need into a single integrated policy. “Unlike other insurers, we can structure your protection so there’s one premium, one deductible and one policy. So there’s no reason to piece together coverages . . . or go to several different companies,” he explains.
For more information on The Hartford’s FailSafe technology liability insurance, contact The Hartford agent in your area.
|General Liability Coverage Is Not Enough…Don’t think you need professional liability coverage because your business insurance policy covers general liability claims? Think again. The two offer drastically different coverages. So not choosing the one or the other can expose you to unnecessary risk.Here’s a quick rundown of why you may actually need both to protect your business.General Liability coverage|
For example, general liability coverage would not protect you if an accounting software package you developed calculates taxes incorrectly and causes a state to lose millions in tax revenue.
Professional Liability coverage:
For example, professional liability coverage could protect you if the e-commerce site you were building for a client was released late because of a glitch or programming error, allowing a competitor to capitalize on a market opportunity. . .and causing your client to lose substantial revenue.
For more on The Hartford’s professional liability insurance for technology companies, go to mb.thehartford.com/view_industry/offer_hightech_
Structure Your Contracts to Avoid These Common Mistakes
Learn More About What Mistakes To Avoid When Drafting Your Contracts.
Because of the inherent complexity of many high-tech projects, you may try to draft your contracts to cover every possible situation and outcome to mitigate risk. Or depending on the project, you may think the best strategy may be to keep the contract vague and sketchy.
Either way, contracts can end up confusing — and never address any of the risks you were hoping to cover. So if you want to make sure your contracts are off to a good start, iDealReview (Sept. 2000) recommends avoiding these common mistakes.
Your Opinions Welcome!
To make this newsletter as valuable as possible, we welcome your ideas and suggestions. If you have any feedback on this issue or story ideas for future issues, just e-mail them to Toby Levy, Technology Manager at firstname.lastname@example.org.
This document is provided for information purposes only. It is not intended to be a substitute for individual legal counsel or advice on issues discussed within. Readers seeking resolution of specific legal issues or business concerns related to the captioned topics should consult their attorney and/or insurance representative.
This document provides an overview of coverages and services. Coverages may differ in availability by state. All coverages are individually underwritten. For a complete description of all coverages, terms and conditions, refer to the insurance policy. In the event of a conflict, the terms and conditions of the policy prevail.
Riskbytes is brought to you as a service from the Middle Market business unit of The Hartford.