SEPTEMBER 2003
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Hints for Buying Technology Products:
Never Sign the Standard Form Contract
Buying technology products, whether it's a simple computer system or a complex manufacturing system is never an easy task. A great deal of time and effort is spent trying to obtain the "right" system. Skilled consultants are hired, either to work alone or with the company's MIS or information technology staff, to find the best system for the company's needs. Unfortunately, in this process the legal "technicalities" are often ignored or put off until the end of the process. In many cases, signing licenses and contracts with the vendors is almost viewed as a clerical task - a way to close the deal, rather than an important part of the process, requiring the same expenditure of time, thought and effort as the selection of a system.
Many executives likewise tend to think of the acquisition as a technical, not a legal matter. Few business people like dealing with legal issues. Legal matters do not generate revenue and often appear to create roadblocks or a needless waste of time and effort - at least until something goes wrong! Unfortunately, company technology systems are often vital to the company's very survival. Having agreements to purchase technology products reviewed and negotiated by technology counsel should be automatic. The general lack of interest in negotiating the contract for the acquisition stems from several misconceptions.
1) There is a belief that the contract is only important if there are problems with the system. If the right system is selected, the contract issues dealing with "who is at fault" will not be important. The fallacy of this belief is that contracts and licenses often cover many issues beyond who is liable for a faulty system. Agreements often limit how the purchaser may use the system, including prohibiting use by subsidiaries or parent companies or the number of users. Contracts may require that all maintenance and support services be provided by vendor. They may even provide that the purchaser must buy all updates and upgrades to the system, whether purchaser wants them or not.
2) Another common belief is that the contracts are not negotiable. This is simply untrue. One piece of advice, which is close to universal in the acquisition of technology products, is to never sign the vendor’s standard form contracts or licenses, even if vendor indicates that they are non-negotiable. Always negotiate. The attorneys who drafted the vendor’s agreements were hired to minimize vendor’s obligations and risks, while maximizing the purchaser's obligations. The vendor knows that most agreements are one-sided. The general view, from the vendor's side, is to see what the purchaser will sign. In most cases, most terms are negotiable. After all, the bottom line for the vendor is to make the sale. If negotiating will help, most vendors will negotiate.
There are some contract sections which are very difficult to negotiate. There is little chance that vendor will agree to change the warranty provisions, which generally exclude most warranties. There are ways to get around these warranty limitations, but negotiating a change is not likely to be one of them. However, it never hurts to ask. Purchaser should ask for all the changes it wants. It doesn't hurt to throw in requests to which the purchaser assumes the vendor will not agree. The vendor may agree to some of those requested changes, just to appear reasonable and encourage the sale.
3) There is a belief that the consultants will take care of the contract and license issues. However, the consultants, as skilled and as necessary as they are for a successful acquisition, are not lawyers, just as lawyers are not consultants. Consultants are familiar with the technical aspects of the system and the technical specifications. However, they do not fully understand the legal issues or have sufficient knowledge to use seemingly unimportant small contract changes to drastically improve purchaser's position. It is unfair to expect skilled contract negotiation from consultants. Their interest and knowledge is technical not legal. Unfortunately, most consultants, with their technical orientation, often do not recognize the importance of these issues themselves. In some cases consultants do not even review the contacts or licenses, beyond assuring that the specifications are correct. The consultant will generally have the purchaser sign the agreements, with little in-depth review of the legal provisions.
On occasion a consultant will also act as a system vendor. Aside from the obvious conflict of interest, the need for an independent review of the agreements in such a case is obvious. Unfortunately, many smart business executives have failed to require a legal review, even when there is in-house legal counsel available.
The legal review should not be left until the end of the acquisition. The vendors' standard contract and license should be requested at the beginning of the process, even before the final vendor is selected. There must be time for negotiation or even a credible threat to change vendors, if necessary. By engaging in negotiations over contract terms at the same time as the negotiation over the specifications, the contracts are likely to be ready for signing shortly after agreement is reached on specifications and costs. There should be little or no delay in the acquisition. However, delay or not, contract negotiations are vital to a successful acquisition and protection after the sale.
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