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contract

Contract Negotiations on the run

Steve White, November 1996

Introduction

A project suddenly takes off and you needed to finalise your contractual arrangements last month. What can you do? How can you best protect your position? In this paper, we will examine the essential elements of a contract and the options available to the parties to provide a legal framework so that the project can be successfully completed on schedule.

The options available to the parties are:

  • no contract at all
  • an oral contract
  • an oral contract supported in part by cross letters
  • signed letters
  • brief formal contract or deed
  • formal contract

Essential Contractual Elements

Common to all contractual relationships, there are a number of conditions which must be satisfied for a contract to exist being :

  • two or more parties
  • offer
  • acceptance
  • consideration1)
  • certainty
  • an intention to create a legal relationship
  • agency

Terms

Let us now examine the terms we might wish to include in a software development project.

Details not covered in this agreement which should be considered in letters of engagement etc:

  • Intellectual Property 2)
    • Copyright
      • works
      • geographic locations
      • future works
    • Licence
      • exclusive
      • permitted use and copying,
      • backup,
      • site(s),
      • modification,
      • sub-licence,
      • term,
      • irrevocable
  • Confidentiality
  • Payment - Quantum, when, how, expenses
  • Specifications
    • Software
    • Documentation
    • Input
    • Milestones (Deliverable)
    • Output
    • Standards
  • Variation of Specification
  • Pre-requisite Hardware and Software
  • Consequences of a failure to achieve a milestone
  • Acceptance of the Software (linked to payment and maintenance obligations)
  • Installation and Migration (non-trivial)
  • Training
  • Maintenance Obligations
    • term
    • time (windows)
    • scope
    • failure
    • exclusions
    • compulsory software and hardware upgrades
    • off site?
  • Insurance
  • Personal Guarantees for development obligations3)
  • Performance Bonds
  • Warranties
    • Software Design and Code
    • Ownership of Software4)
  • Indemnities
    • IP infringement for materials supplied by both parties
    • Loss and Damage to parties and third parties
    • Statutory Requirements and professional advice
  • Limitation of Liability

Oral Agreements

This is the most informal of contract types and so, the hardest to enforce.

Remember that it is the obligation of the party asserting the right to prove on the balance of probabilities that there was an agreement, the obligation was a term of the agreement, that there was a breach of that term giving rise to loss and damage which was foreseeable or a specifically enforceable right to other relief. ie an injunction.

Some contracts unless in writing ie Copyright Assignment and Guarantees amongst others are very difficult to enforce.

Before any negotiations establish when a contract shall come into existence. ie in writing and signed by xyz

Make sure you write down as much as possible including who attended meetings, what was discussed, where and when the meetings were held. It seems a basic step, but so many people find out just how difficult it is to reconstruct the process of a protracted negotiation procedure from diary notes and memory recall rather than taking the pro-active step of recording everything as negotiations proceed. It is a lot easier to throw out unnecessary notes at the conclusion of successful negotiations than to prepare them in the case of an unsuccessful conclusion.

If possible, have minutes taken at all meetings and have all those present at the meeting sign these minutes to verify their accuracy.

How do you intend to prove what happened actually happened? At all times you must plan that the other parties to the transaction may completely deny the conversation or event occurred.

Oral Agreements Supported by letters

If an oral agreement is entered into and each stage confirmed by writing by way of a letter, there is at least a sequential written record of the alleged negotiations which the other party had a chance to dispute.

Further a claim under the Trade Practices Act 1974 (Cth) for misleading and deceptive conduct (Section 52 or Section 53) is well under way when you have a written representation made to you upon which you rely.

Whenever possible, refer to and confirm the outcome of negotiations. For example, if writing a letter, an opening paragraph reading:

 
We refer to our meeting of 31 October 1996 and confirm your agreement to provide access for our programming staff to your premises on 8 November 1996 between 8 am and 8 pm.

would provide written evidence of your oral negotiations which may be required in the event of a dispute

We will now examine some letters.

Short Written Agreements

A written agreement, even if not formally structured, which is signed by the parties to the agreement is at least an undisputed record of the agreement. A bad written agreement always gives a start point to apply some implied warranties under the Trade Practices Act, the Fair Trading Act (Vic) 1984 or the Goods Acts or some express oral terms.

Example5)

G & K signed a short written agreement which contained a term stating that if required, a future 'formal contract of sale' would be prepared and signed. 

K sought to not proceed with the sale. 

The short agreement was held to be a valid and binding contract as it was not the intention to make the execution of a formal agreement a condition for a binding agreement to exist. )

Heads of Agreement can also be binding unless expressly expressed not to be so. 6)

As a minimum a Deed of Intellectual Property Assignment and confidentiality may well get you running from a position of strength,

Formal Agreement

A formal agreement which outlines the responsibilities of the parties is obviously the best way to proceed.

However, the disadvantages are the time delay, costs and the friction that may be caused between the parties.

All of these disadvantages can be overcome by selecting an appropriate practitioner who is skilled in the area and familiar with the relevant technology and commercial risks involved in the transaction.

Conclusion

Evaluate the risk, choose a method which achieves the objectives, and remember investing time and money in documentation now can save a great deal of time, money, loss and damage in the future.

1) A deed does not require consideration but its does in some states require stamp duty and to be executed using a particular method
2) , 4) Copyright Act 1968 (Cth), s196
3) Instruments Act (Vic), s126

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