This article is written by Raghav Madan pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.

Introduction

For any business to survive and grow, it has to ensure that it produces maximum output at minimum cost. Accordingly, when any entity or any organization undertakes a project, it aims to complete it within the minimum cost of resources and maximum profit. 

For this purpose, a key decision top management of any organization has to make is whether a certain project or task can be completed using the internal resources available in the company or whether outside vendors need to be hired. Obviously, they would prefer to use internal sources as much as possible but there will be instances where they will need external support by way of outsourcing. This process of outsourcing the services is called ‘procurement’. When this procurement is incorporated in the technological domain, it is called ‘IT procurement’.

IT procurement is performed typically on the basis of a contract. An IT procurement contract is a document detailing the legally binding agreement between a vendor of IT products and services and a purchaser where they will be bound by the terms of agreement throughout the process.

Why is it important for an organization to engage in IT procurement?

IT procurement helps in providing the acquisition of goods or services with the correct timing, location, quality, and quantity requirements of a business project at the lowest possible cost. 

It gives the technology companies the liberty to focus on more important aspects such as research and development, fundraising, intellectual property, etc. 

Vendors, most of the time, provide such IT services cheaply and ensure a comprehensive service because they specifically operate on a larger scale through contracts with similar other entities thus, being more productive since organizations focus on what they are good at in their respective fields.

Many organizations do not give much time and importance to these IT procurement contracts. But without due consideration, procurement can have disastrous consequences including breach of one’s own confidential information. When a complication arises, the project will succeed or fail based on the strength and comprehensiveness of the original procurement contract which is where IT procurement contracts become very powerful.

Types of IT procurement contracts

IT procurement contracts are mainly of 3 types:

• Fixed-price contracts

Where the terms of the project are laid down clearly. The seller knows exactly what they are required to supply, and the buyer knows exactly how much to pay once the contract is complete;

• Cost-reimbursable contracts

Where the buyer pays for the cost of the work completed along with indirect costs (like salaries and utilities) that are directly involved in creating a product or service;

• Time-and-materials contracts 

Where vendors are reimbursed for the materials used along with payment for the amount of time (in hours) spent on the project. This is the most used type of procurement contract in the IT sector.

Essential elements in a successful procurement contract

1. Due consideration of all involved sourcing processes;
2. Robust and comprehensive negotiations;
3. Detailed project management requirements;
4. Precise definitions of key contract terms;
5. Essential clauses that balance the interest of all the parties;
6. Awareness of stakeholders regarding all the terms and conditions.

If the above-mentioned points are kept in mind beforehand, you create an IT procurement contract that not only will protect your company but also develop trust with the vendor. Thus, a well-vetted contract is very important in this aspect and for that one has to have knowledge of all the key clauses involved in that aspect. Let’s discuss these key clauses in detail.

Key clauses in an IT procurement contract

The basic clauses which are to be included in any IT procurement contract are as follows:

• Defining the scope of services

Procurement contracts in the IT sector heavily deal with services. Therefore, detailed terms must be provided that specifies the product or service being offered by the supplier, as well as to what extent and to whom. This eliminates any misunderstandings about the vendor’s responsibilities. It can be drafted in the following manner:

“The services under this agreement must meet the descriptions, quantity, shape, performance, and functions set forth in Appendix 1, or such additional specifications as the parties may agree to in writing.”

• Payment

Payment is a very important clause as it simply refers to how payments are to be made and received, and under what circumstances payments will not be allowed.

Generally, the payment is through a particular schedule. The sample clause is as follows:

“Payment for the first system acquired by the buyer will be made according to the following schedule:

1. 30% when the sellers issue the order, and 20% to be billed when the product is delivered, and 
2. 50% on acceptance of the products.”

• Confidentiality

Confidentiality is a very important clause in IT procurement contracts. It is advisable to have a separate non-disclosure agreement in this regard between the parties considering a lot of confidential information could be shared breach of which can have dire consequences. This clause shall state the details and nature of confidential information, what can and cannot be shared and exceptions if any. It usually also contains details as to whether the clause will survive termination or not.

• Intellectual property and its ownership

This clause ideally states what intellectual property is involved, what are the rights associated with its usage and who will have ownership of such property. It can be drafted in the following manner:

“Except as expressly stated in this Agreement, nothing shall grant or be deemed to grant either party any right, title or interest in any intellectual property rights owned by the other party and nothing in this Agreement shall entitle either party to use the other party’s intellectual property rights in any way whatsoever without the prior written consent of the other party other than as provided for under this Agreement.”

• Breaches and indemnity

Just like every contract, breach and indemnity form an integral part of IT procurement contracts as well. It can be framed in the following manner:

“If the other party is in significant breach of any material terms or condition of this agreement, the other party may terminate this with prior written notice of 30 days. The failure of any party to enforce any right or remedy provided at any time shall not be considered a waiver of such right or remedy with respect to any subsequent breach by the other party.”

• Governing law and jurisdiction

Jurisdiction issues are very important especially if the procurement contract deals with organizations from separate countries. It shall be drafted as follows:

“1. The courts in Delhi shall have the sole and alone jurisdiction in all the matters arising out of, incidental to/ concerning this agreement. 

2. Further, Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity, or termination, can be referred to and resolved by Arbitration in India in accordance with the Arbitration and Conciliation Act, 1996 for the time being in force, which rules are deemed to be incorporated by the reference in the agreement. 
3. The Tribunal shall:

• Consist of three arbitrators. Each party shall appoint one arbitrator and the two appointed arbitrators would further appoint a third arbitrator;
• The language of the Arbitration shall be English; 
• The venue of the Arbitration shall be Delhi, India.”

Relationship between the parties

Since services are being outsourced, it is important to define the relationship between the parties which shall be drafted in the following manner:

“This Agreement does not create a joint venture, partnership, or principal-agent relationship between the Parties, and nothing in this Agreement may be used to imply such a relationship between the Parties. Neither Party has a right, power or authority to obligate or bind the other in any manner unless authorized in writing by the other Party in a specified instance.”

Keep in mind that the above-mentioned clauses are a list of some essential clauses in a contract. Apart from these clauses, you should also include a few important clauses which are essential in every contract such as the recitals clause, rights and obligations clause, representations and warranties clause, definitions clause, interpretations clause, survival clause, notice clause, etc.

The clauses may also differ from business to business. Remember that protecting the interest of your business is the main objective and you must incorporate all such clauses which shall protect the interest of your business.

Conclusion

IT procurement contracts are regularly used as they tend to be a more effective and efficient method and sometimes, even more, cost-saving as we discussed. Further, a well-balanced procurement contract builds business relationships by protecting both the buyer and seller and develops a sense of trust.

They are of various types but in the IT sector, time and material contracts are most commonly used considering their matching characters with that of the IT sector. We further discussed essential elements an IT procurement contract just possesses.

And ultimately, including a few important clauses such as the scope of services, delivery times, fees, costs, payments, confidentiality, protection of IPRs, etc. in a procurement contract which provides a blueprint that allows all the parties to collaborate confidently which is ultimately the aim of every organization.

References

• https://ironcladapp.com/journal/contracts/what-is-a-procurement-contract/
• https://whatis.techtarget.com/definition/IT-procurement-contract
• https://www.computereconomics.com/article.cfm?id=1407

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