O slideshow foi denunciado.
AVOIDING THE LEGAL PITFALLS IN
ACQUIRING ACOMPUTER SYSTEM
BY LOUIS H. MILRAD
"The misnomers and industrial shorthand ofthe
computer world make the most esoteric legal
writing seem as clear and lucid as the len Com
mandments... ,. and to this Babel, the experts ...
while using exactly the same words, uniformly
disagree as to precisely what they mean. "
Honeywell, Inc. v. Lithonia Lighting, Inc.
317 F Supp. 406, 408 (N D. Ga. 1970)
AVOIDING THE LEGAL PITFALLS IN ACQUIRING A COMPUTER SYSTEM
Louis H. MiJrad
Weir & Foulds, Barristers and Solicitors
The Canadian Information Processing Society, 243 College St., 5th Floor, Toronto,
Ontario M5T 2Y1
All material is Copyright 1979 by the Canadian Information Processing Society. Reproduction in whole or
in part is strictly prohibited unless permission is obtained from the Canadian Information Processing
First printing by Arthurs·Jones Lithographing Ltd .. October. 1983.
All copies $4 for CIPS members. $6 for non-members. Orders can be placed with the Canadian
Information Processing Society. CIPS TIPS. 243 College St.. 5th Floor. Toronto. Ont.. Canada M5T 2Y 1;
telephone (416) 593-4040.
TABLE OF CONTENTS
Introduction ....................................... , 2
Acquisition assistance ............................ . .. 2
System approach ................................... 3
Preparing for the negotiation process .................. 4
Initiating the negotiation process. . . . . . . . . . . . . . . . . . . . .. 5
The negotiating arena ............................... 7
Contract documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
1. Hardware sales agreement . . . . . . . . . . . . . . . . . . . . .. 8
2. Operating system licence ....................... 8
3. Applications software agreement. . . . . . . . . . . . . . . .. 9
4. Software support issues ........................ 9
5. Hardware maintenance agreement ............... 10
6. The leasing environment . ....................... 10
7. Insurance coverage ............................ 11
System acquisition .................................. 11
Contract overview . ........................... . ...... 12
Some general types of clauses to consider . ............. 12
Entire agreement clause ....................... . .. 12
Limitation of liability clause ........................ 1,3
Price, amounts, terms, dates ....................... 13
Conclusion .................................. . ...... 13
• erps TIPS 1
It is recognized that implementing a computer system is a fairly complex
undertaking and based largely upon the goodwill and fairly sophisticated level
of technical knowledge of the parties. Still , it is necessary to look beyond these
two elements. When Suppliers refer to reputation, trust, know-how, number of
installations, and the satisfaction of other Users, one should question how any
of these items may be enforced against the Supplier when problems arise. They
require proper advance planning, coupled with a well-considered and struc
tured approach. Unfortunately, however, in today's business environment, the
acquisition of computer technology is often approached with significantly less
than suitable planning and with little, if any, emphasis on strategies for
negotiation and acquisition.
The potential User and his Supplier(s) often fail to properly articulate the
terms of acquisition. Many issues of paramount importance to the User are
overlooked or addressed too late in the acquisition process. Much to the User's
dismay, many of these ignored issues tend to manifest themselves during the
actual implementation of the system. By this point, the User may be faced with
added costs, business disruptions , and perhaps even tax problems and/ or legal
Many results of an unsuccessful system procurement might well have been
avoided through a 'team approach' had the User worked with a properly
qualified and reputable consultant, and in conjunction with his own tax and
legal advisors. A skilled consultant will work hand-in-hand with the User to
provide him with an agreed-upon level of assistance in:
1. assessing the User's needs and requirements;
2. preparation of Requests for Proposals (RFPs);
3. evaluation of Proposals and systems;
4. the User's negotiations with Suppliers;
5. assistance in structuring the procurement;
6. system implementation; and
7. acceptance testing.
The User's tax advisors should be consulted prior to contracting for a system
or any of its components. This allows the User to structure the acquisition so as
to maximize the available tax benefits and avoid pitfalls. Although sound
business judgment may dictate against the use of available tax incentives, the
User must nevertheless be afforded the chance to evaluate opportunities.
Some legal concerns confronting the User, and which may be addressed with
the help of his lawyer, might include the following:
• in those cases where the acquisition proceeds by way of RFP, structuring
certain elements of RFP wording. The RFP is a rather germane document
around which the various Suppliers' Proposals will be fashioned. To afford the
2 CIPS TIPS •
Supplier(s) some element of protection, Proposals will often make specific
reference to the most pertinent provisions of the User's RFP, by exact reference
to User-identified observations and conclusions. Besides describing the User's
functional and performance needs, any specific obligations for which the User
relies upon the Supplier's expertise (e.g., determination of volumes and
capacities, if these are within the User's specified needs) must be clearly and
unambiguously spelled out. Expectations of Suppliers - not only in terms of
inviting the Supplier(s) to identify product offerings and recommended solutions,
but also in addressing such matters as expectations and level of involvement,
responsibilities and accountability (for example, in the case of more than one
Supplier, who is to be the "responsible" Supplier) - must be provided for in
clear, precise language;
• reviewing and advising upon the various Suppliers' respective forms of
agreement. Documentation leading up to the actual contracting stage should
be incorporated by reference. The User will ultimately rely on the Supplier's
representations, especially with respect to delivery and performance.
• assisting the User in tailoring to his needs the exact form of contractual
documents needed to reflect the terms of bargain made between the User and
A well-structured contract, setting out the mechanics of a successful
installation, acts as the blueprint upon which the foundation can be built. The
contract is available for reference and consultation after time has erased each
party's recollection of what the deal was. Ideally, a well-structured contract
• describe the nature of the tasks to be performed and the price to be paid;
• explore the contingencies surrounding such tasks; and
• provide for available remedies given any failure by either of the parties to
The purpose of this booklet is to assist the User in addressing some of the
legal issues pertaining to system acquisition, and especially in identifying some
of the inherent legal pitfalls contained in the various documents presented to
him for signature.
One of the major contributing factors to an unsuccessful computer installa
tion is often the User who fails to regard and treat the acquisition as a "System."
Often he sees instead an array of individual components - hardware supplied
through one vendor, software supplied through another vendor, hardware
maintenance through a third vendor, etc. If the User's needs are such that he
has his own "in-house" data processing department, he may well select this
latter approach of purchasing individual components from various Suppliers.
He can then proceed with the installation of that Honeywell, IBM, Burroughs,
Univac, Amdahl or other system as required. In such a case, many of the
applications are likely to be User-developed in-house; or, they may be made
• CIPS TIPS 3
available through a number of software houses that have similar applications to
those required by the User and designed to run on a specified hardware
configuration. In these cases, the acquisition process will generally be treated
on a case-by-case or needs basis.
At the opposite end of the spectrum, however, many Users - especially
first-time Users - will have made their selection based upon a particular
hardware/software configuration (in effect a "turnkey" system). In this case, the
hardware and system software may be supplied by one Supplier. The applica
tions software of another Supplier may be made available through the hardware
Supplier, or perhaps through an independent sales organization that bundles
the hardware and software and sells them as a turnkey system.
An example of the latter scenario might go something like this: the User
negotiates with a single supplier (often the hardware supplier) to furnish the
required hardware and system software configuration, and also the software
applications he requires (e.g. general ledger, accounts receivable , inventory
control, etc.). This is done on the express and distinct understanding that the
hardware/ software configuration will operate as represented, and that the
combination shall be warranted by that hardware supplier (which may be the
hardware manufacturer itself or some independent sales organization, such as
an OEM - really a misnomer for "Original Equipment Manufacturer"). If the
system fails to operate to the User's acceptance criteria, the User will be
entitled to some form of relief - perhaps through return of the equipment and
refund of the purchase price or a substantial portion of it.
Under this type of arrangement the User usually pays the hardware Supplier
a premium as an added element of protection. This is generally calculated at
between 5 and 10 per cent of the cost of the applications software, and is
regarded by many Users as an inexpensive form of insurance. The agreement
covering this type of situation would be based upon the recommended
hardware/ software configuration, with the User-developed functional specifica
tions normally attached as a schedule.
Other matters covered under this type of agreement would include:
• preparation and delivery by the Supplier, and approval by the User, of system
• acceptance testing procedures for the hardware, software, and the over-all
• performance milestones coupled with payment schedules; and
• representations and warranties as negotiated between the Supplier and the
Preparing for the negotiation process
The User should be made aware of the need for proper and timely planning
and preparation before the start of the negotiation process. As mentioned, too
often the focus, from the User's perspective, is merely on identifying the
hardware and software configuration, designating the delivery and installation
4 CIPS TIPS •
dates and confirming that maintenance services will be available. While these
elements form the framework for system acquisition, unfortunately both the
Supplier and the User often fail to identify a proper, detailed process, in
writing, that outlines:
1. how these events are to occur;
2. allocation of responsibilities; and more specifically~
3. the precise nature of the goods and services to be furnished.
Many of the typical problems in system procurement and implementation
might have been avoided if the User had been properly prepared prior to sitting
down at the negotiating table.
Too often the User fails to recognize the single decided advantage that he has
in his negotiations with Suppliers: he, the User, is the buyer who needs the
goods and services. Given this rather unique position and the extent of
competition in the marketplace, the User is not only theoretically, but
practically, the one with the added advantage during negotiations. However, it
is the Supplier who, because of his expertise in marketing and sales, can usurp
the User's competitive edge at the outset if the User has been remiss in
preparing for the bargaining process.
It must be remembered that the Supplier is in the business of selling
computer goods and services, and he has developed a marketing and sales
organization to this effect. Suppliers are much more adept at negotiating
contracts, on a daily basis (especially with their own preprinted "standard
forms"), than are Users who are not as familiar with the more essential elements
of the contract. For example: a User might spend lots of time arguing over
whether he should be paying for a second or third set of User manuals, when he
should perhaps be directing his attention to some other critical element of the
agreement, like the hardware warranty. Under one particular Supplier's form of
contract, this warranty starts from the day the hardware is sitting on the
Supplier's shipping dock in California, rather than commencing on the date of
proper installation at the User's installation site. Another example is where the
Supplier's form of agreement fails to commit to a delivery date, while the User
has scheduled conversion based upon his perception of when the equipment
will be installed.
Without proper advance planning before negotiations start, the User may
find himself intimidated into executing and delivering contracts to one or more
Suppliers upon terms that fail to address his concerns and do not work to his
advantage. Often these contracts are also executed under conditions of
pressure without being properly considered by the User and his proper
Initiating the negotiation process
Suppliers of computer technology generally have greater experience in the
negotiation process than Users. The Supplier is armed with keen insight and
knowledge of the User's predicament: namely, a need to be filled and a genuine
• CIPS TIPS
desire to find the solution to that need as soon as possible. Due to Supplier- or
self-imposed time limits, Users often sign contracts that do not reflect their real
needs. Many times this occurs as the direct result of signing the Supplier's
"standard form of contract", without having so much as fully read. let alone
understood its terms.
The User's RFP should alert all potential Suppliers that both the RFP and the
Supplier's Proposal are to be integrated as part of the over-all acquisition
agreement. This approach will impose an obligation upon any potential
Supplier to be accurate in his Proposal, as the document itself is to be
incorporated as a Supplier's representation and warranty.
One of the most critical priorities in the planning stages of negotiation is
requesting the Supplier to furnish copies of ALL forms of agreement which the
User is expected to sign.
Essentially, for a typical "system" acquisition, these agreements might
include the following (anyone or more of these agreements might be addressed
on acquisition of any single component):
1. Hardware sales agreement.
2. Operating system licence and licences for any other systems software
including utilities, compilers and interpreters.
3. Applications software licence or other use agreement for applications
4. Software support agreement for applicalions software.
5. Maintenance agreement for hardware, operating system, compilers, inter
preters and other system software.
6. Leasing, rental or other financing agreements.
The substance of each of these headings will be dealt with separately further
on in this pamphlet.
There are many ways of structuring the procurement. Depending on how the
particular acquisition is fashioned, the above agreements may be entered into
• a single Supplier. For example, [he entire configuration and all anCillary
services might be acquired through an intermediary vendor, such as an OEM
(Original Equipment Manufacturer).
The OEM is intended to provide the User with a turnkey system through
"value added" service, perhaps by combining the hardware of one manufactur·
er with the operating system of another and applications software from an
independent software house. The OEM might also look after the software
support function and the leasing arrangements for the entire system. This will
perhaps be done internally through its own financing vehicle (if the OEM has
such a mechanism in place), or through a third party leasing company.
In the above case, the User might contract directly with the OEM for the
acquisition and implementation of the system. It is likely that he would also
have a contractual relationship with the owner of the operating system
software and with the owner of the applications software, that would grant the
6 eIPS TIPS •
User some right to use the software under certain predefined and limited
conditions. There might also be a separate hardware maintenance contract
with the hardware manufacturer to provide the necessary maintenance services.
• through any two or more Suppliers (multi-Supplier approach). An example is
where the User acquires the hardware and system software from the hardware
manufacturer, who is also responsible for providing hardware maintenance; the
software is acquired from an independent software house, which is also
responsible for software support services; while the User himself arranges for
financing the acquisition through a third party leasing company.
The negotiating arena
The essentials of the negotiating process must address all of the User's
concerns, which should be included as fairly high priority items. These should
be addressed initially and throughout the entire negotiation process with a view
to incorporating them into formalized agreements.
Contract negotiations should be initiated at the very outset of the proposed
acquisition process. Suppliers should be made aware, in all meetings and in all
Requests for Proposals (RFPs), that any proposed acquisition by the User with
that particular Supplier must be documented in writing, by a contract accept
able to both parties. This immediately alerts the Supplier to the fact that his
standard form of contract may not necessarily be the one which will be used.
Each Supplier should also be requested to furnish copies of all the standard
forms of contracts he would propose having the User execute, should a deal be
signed. It is important to ensure that the Supplier provides copies of ALL of the
contracts including sales, licensing, maintenance and hardware agreements at
the beginning. This will help avoid any misunderstandings or delays in
finalizing the arrangements later on.
Assuming that the User has, in reply to his RFP, received Proposals for
evaluation, he will undoubtedly attempt to evaluate these Proposals - with
some consultative help. This process will, of necessity, require clarification and
negotiation with the various Suppliers.
Assuming that the User has properly identified his needs, both the User and
the Supplier must also identify and resolve such items as:
• Specified individual responsibilities of both the User and Supplier, so as to
avoid any future misunderstandings. These responsibilities should be documented;
in fact, they should form part of the implementation documents.
• Development of and agreement upon the implementation plan and schedule.
Both the Supplier and the User should direct their efforts towards developing
and living within realistic timeframes, rather than looking towards a wish list.
• Identification of some type of price protection on subsequently acquired
The following agreements, referred to above, should also be considered. In
• CIPS TIPS
many installations, depending on the circumstances, they can be consolidated
into one or two documents.
1. Hardware sales agreement
In this stylized document, most often presented as the hardware Supplier's
"standard form of contract", the User becomes somewhat bewildered and
troubled by the blend of 'legalese' and 'computerese'. The style of document
may be a single page, the front side of which is typically nothing more than an
order form for the hardware, and accompanied by the User's agreement to
comply with all the terms and conditions contained on the reverse side. When
turned over, the document provides for the terms of payment (usually upon
delivery or within a very short period thereafter), some type of permission from
the Supplier (or as an extension of the owner of the operating system) to use
the operating system and the system software supplied with the hardware. The
balance of the document may be comprised of a series of paragraphs, in bold
print, excluding the Supplier from all kinds of responsibilities, liabilities and
obligations to the User. At the other end of the spectrum, the form of hardware
agreement may extend from 12 to 20 pages, reduced to very fine print (often
requiring a very large magnifying glass to be read)!
The User will approach the review of this document with all the flare and
excitement he would show in reviewing the terms of a typical insurance policy.
2. Operating system licence and licences for any other system software,
including utilities, compilers and interpreters
Although the User acquires legal title and ownership to the hardware, the
User's rights with respect to the operating system, utilities, compilers, interpret
ers and other system software are of a more limited nature. The User is
provided with a non-exclusive, non-transferable right to use these items under
the terms of a licence (often included as part of the hardware purchase
agreement and at other times provided as a separate document). It sets out the
terms and conditions under which the User is entitled to use these items
required for operation of the hardware and consequently the applications
programs. The terms of the licence must be carefully scrutinized, especially
with respect to:
• length or term;
• rights of termination; and
• transferability on sale of the hardware.
Among some of the concerns a User might have with regard to the operating
system and system software are the following:
• Are the terms of the licence set out in writing?
• What restrictions are there regarding the use of the operating system and
• Is use restricted to a single computer (usually designated by serial number)
and, if so, does the right to usage pass along to any purchaser on any
8 CJPS TIPS •
• Is the most recent version or release of the operating system and system
software included, and does the licence entitle the User to updates? Furthermore,
is the User compelled to use updates? (The applications software may not be
compatible with some vendor-supplied enhancement or modification to the
operating system or system software.)
• What responsibilities are imposed upon the User to protect any proprietary
rights of ownership? Are they realistic expectations?
3. Applications software agreement
One of the most neglected issues in the acquisition of software by a potential
User is the failure to properly define certain items, including those identified
under this heading. Many problems arise because the software Supplier may
furnish nothing more than a copy of his programs on tape, disc pack, disc, etc.,
without indicating to the User, in writing, the precise nature of what is being
Among the issues to be addressed are the following:
• What are the precise rights being acquired by the User? (That is, is the User
purchasing the software outright, and if so, does that entitle him to ownership
of the copyright or any other proprietary interest rights in the software?) This
obviously becomes a concern in custom-designed applications. It also becomes
important to the User from an income tax point of view, as it will influence the
actual rate of capital cost allowance which the User becomes entitled to claim.
• Is the User acquiring only a limited right to use (perhaps by way of licence or
rental) the applications software?
• Are there any restrictions on the use of the applications software by the User,
and if so, what are these restrictions? Can the applications software be used by
this particular User and no other? If so, what is the position of the User upon
any merger or acquisition of the User corporation? Are there geographical
limitations on use?
• What rights of termination exist with respect to the use of the software by the
• The tax consequences resulting from the way in which the applications
software is supplied to the User may defeat the User's tax planning as
recommended by his tax advisors.
• Are there any withholding tax requirements if the User is .acquiring software
through a U.S.-based software supplier?
1 • What is the nature of any warranties?
4. Software support issues
l A further area where both Supplier and User fail to properly address their
respective obligations is the area of software support. Once installed, the
applications software will undoubtedly require ongoing support; this is normal
ly provided by the software supplier on either a time and material basis, or
through periodic regular payments. Regardless of the method of payment for
• CIPS TIPS 9
such support, the issues which must be addressed and put in writing, include
• Detection and correction of coding errors.
• Availability to the User of all revisions and enhancements.
• Procedures for initiating corrective action.
• Times during which services are to be made available.
• Availability of emergency service and schedule of additional charges.
• Procedures for responding to User-originated requests.
• Obligation to maintain confidentiality of the User's business and financial
information, including data.
• Rates of charge for designated categories of individuals (i.e. the User is
charged at a lower rate for a junior programmer than for a senior systems
5. Hardware maintenance agreement
Normally, the hardware supplier will have available his own form of
maintenance agreement which is often produced for signature at the same time
as the hardware sales agreement. The fact that it is produced for signature at
such a time should not mislead the User into believing that it must be signed
then. Only when the User is satisfied that he has struck his best deal
reflected in writing to his satisfaction - should the relevant documentation be
signed; not piecemeal, but in a proper, structured business fashion.
Some of the issues the User may wish to address, by way of revision or
addendum to the hardware maintenance agreement, might include the following:
• Guarantee that hardware maintenance will be made available for the User's
particular configuration for a minimum period of time; for example, eight to 10
• Assurance to the U~er that he will receive the most favorable pricing for
hardware maintenance throughout the term of the agreement.
• The User's right to cure any default occasioned by him during the term,
before the Supplier is entitled to exercise rights of termination.
• Negotiation for guaranteed annual maximum increases in the mainte'nance
• Assurance that a certain level of service will be maintained throughout the
6. The leasing environment
It is not unusual for the User to acquire a system under the terms of either a:
1. Rental or operating lease, which is essentially a short-term lease with the
equipment supplier. It usually has a duration of about one to two years, with
stipulated monthly payments and surrender of the equipment at the end of the
term. Although the monthly cost to the User will be higher than that of a
finance lease, it is of relatively shorter duration and affords the User the
opportunity to "try before he buys". Some Suppliers will offer a credit of a
percentage of the accumulated rentals as an incentive to the User to purchase
10 eIPS TIPS •
the equipment in lieu of renting it. An alternative is the
2. Finance lease. A lease of this type will generally come about in one of
a) Once the User has selected the configuration that best suits his needs and
all appropriate documentation has been signed, the Supplier will sell the
equipment to a third party leasing company, which in turn leases the
equipment out to the User. Or,
b) the equipment lease itself, originally entered into directly by the User and
his Supplier, is assigned by the Supplier to a third party leasing company. Or,
c) the User, following his purchase of the equipment from the Supplier and
his satisfaction as to its operation, may sell the equipment to a third party
leasing company, which in turn will lease the equipment back to the User for
a fixed term.
Generally the term of the lease will vary from five to 15 years, depending
upon the credit-worthiness of the User, the expected useful life of the system,
and its residual value. The lease may afford the User an option to purchase at
the end of the term. The monthly rental will be made up of the capital cost of
equipment plus the finance charges on this capital cost, which is then
amortized over the term of the lease.
In any of the above-described three situations, the User may wish to concern
himself with the following issues:
• How are any manufacturer-supplied warranties and representations to be
• What rights, if any, does the User have to withhold rent in the event that the
system does not live up to its ex pectations?
• How are systems software and applications software licensing arrangements
handled under either of these leasing arrangements?
• What rights does the User, as lessee, obtain under the lease to ensure that he
will not have his rights interfered with by any parties claiming through the
leasing company'! .
• What are the lessee's insurance obligations vis-a-vis himself and the lessor?
7. Insurance coverage
The user's existing and potential insurance coverage should be thoroughly
reviewed. This will verify that the appropriate coverage is in place, with limits
that are acceptable and deductions that are satisfactory to the User and lending
institution (if it is a financed acquisition). It will also ensure that any additional
endorsements (such as the cost of disaster recovery in case of destruction of the
system and reconstruction of data) are provided for. Do not be surprised if you
need additional coverage; the area of insurance must be thoroughly canvassed.
Essentially, the components of the system may be acquired by the User
through any of the following four methods or any combination of these
• CIPS TIPS 11
1. Outright purchase: Under this approach, the User acquires the system
tbrough his own internal source of funds or through conventional borrowings.
Undoubtedly, if the User chooses to use external funding, he will have to
furnish his own covenant and provide the appropriate security agreements to
tbe lending institutions. The security agreement or some form of notice will be
registered in some form of provincial central registry in those provinces which
have set up the appropriate mechanisms. Title will remain with the lending
institution until the User has satisfied his indebtedness, following which a
release or discharge of the indebtedness will be furnished.
2. Instalment purchase: In this type of transac tion, payment for the equip
ment is made to the Supplier over a predetermined and stated period of time.
Title to the equipment will remain with the Supplier until he has received the
final instalment; the transaction will be recorded by some type of security
agreement. such as a conditional sales agreement. This document, or some
form of notice, will be registered in some provincial central registry in those
provinces that have the appropriate mechanism in place.
3. Operating lease (Rental) , or
4. Finance lease.
Please refer back to the preceding Section 7, The Leasing Environment. for
discussion of some issues pertaining to operating and finance leases.
Allow me to emphasize that the contract documents furnished by the various
Suppliers, should be carefully scrutinized and reviewed by the User together
with his consultant, accounting and legal advisors. This process will help the
User to address and deal with many of those vague and grey areas of the
acquisition - which, by their very nature, can and often do arise at that point
when little , if anything, can be done to correct or overcome their effects. The
most contentious elements of the Supplier's "standard form of contract" can be
identified at the outset, along with reinstatement and evaluation of the User's '
requirements. This can be accompanied by lhe User's assessment of internal
risk/ benefit priorities. Throughout all negotia tions, the User would be well
advised to ensure that a representative of his firm's senior management could
be made available to deal with his counterpart in the Supplier organization(s) ,
should the need arise.
Some general types of clauses to consider
Entire agreement clause
Most contracts contain a clause which, in effect , states that everYlhing in the
contract expresses the entire agreement between the parties and that the
"all proposals, prior agreements, representations, whether oral or written,
12 CIPS TIPS •
and all other communications between the parties with respect to the sub;ect
matter contained in the contract. "
Essentially, this clause may negate the legal effect of all brochures,
correspondence, proposals, communications, and verbal representations and
warranties, including those casually extended to potential Users by the
Supplier's salesmen. If the User's decisions are based upon certain germane
understandings represented by tbe Supplier, and those understandings have not
been put in writing and incorporated into the contract, the User may find that
he has no recourse against the Supplier in enforcing the "understandings" and
"good faith" promoted between himself and that Supplier. While good faith is
an essential component of selecting the Suppliers with which the User will be
contracting, it is unenforceable at law. And while the parties enter into the
contract with little or no expectation of trouble, circumstances change. The
original parties conducting the negotiations may not - and in fact many times
are not - the parties who later have to deal with the issues.
This clause may be of equal importance to both the Supplier and the User,
for it will encourage both parties to address the relevant issues.
Limitation of liability clause
Computer contracts are notorious for their "limitation of liability clauses",
inserted for the Supplier's protection. Generally, these clauses are cautiously
worded in favor of the Supplier. They are an overt effort by the Supplier to
insulate himself against monetary liability to the User in cases where, for
example, the Supplier has breached a material term of the agreement. Another
example is where the product may infringe upon the patent. copyright or other
proprietary interests of some other Supplier.
Many times, the Supplier will try to stipulate a limit of monetary relief; for
example, 5100,000 or an amount equal to the purchase price of the product.
However, this is of little comfort in situations where the User's financial future
and undertaking may be jeopardized, due to some act or failure to act by the.
Supplier or his products.
Price, amounts, terms, dates
The price, amounts, terms and dates for making payments should be clearly
specified. If payments are in any way associated with achieving performance
milestones, the achievement process must be clearly spelled out. Similarly, the
contracts should address issues such as responsibilities for payment of customs
and duties, sales taxes, delivery and installation charges, and insurance
A contractor who erects a structure is totally reliant not only upon his
architectural plans and specifications, but also upon the construction contract.
It specifies the owner's requirements, obligations of the contractor in meeting
• eIPS TIPS 13
those requirements, provisions for payments, contingencies and remedies for
default. The User, in a computer acquisition, is in much the same position as
the owner in the construction example. Unless the contractor (Supplier)
complies with the terms of the construction contract, the owner is entitled to
exercise his remedies. However, also be aware that the contractor is not without
remedy against the owner should the owner fail in his obligations.
In this pamphlet, I have tried to identify some of those areas of legal concern
to the User in contracting for the acquisition of computer goods and services. I
have endeavored to gain the User's support for the position that the legal issues
must be identified as part of the planning process, and addressed in the
negotiations. The ultimate goal is that of working hand-in-hand with his
Suppliers towards designing a working contractual relationship that articulates
the concerns and expectations of both parties. To this end, there are obviously
many ways of structuring the acquisition, and many complexities have been
identified. At the very least, prior to concluding any agreements, the User
should have them reviewed by his tax and legal advisors. They may be better
versed in preventing problems in the initial stages, rather than trying to solve
them at a later and costlier stage.
14 eIPS TIPS •
Louis H. Milrad
Louis Milrad, whose practice is primarily restricted to computer-related
matters, is a member of the Toronto law firm of Weir & Foulds. He obtained his
B.A. in psychology in 1964 from the University of Toronto and his LL.B. from
Osgoode Hall in 1967; he received his call to the Bar of Ontario in 1969. Mr.
Milrad now serves as both a director and workshop chairman of the Toronto
section of the Canadian Information Processing Society, and has written a
number of articles on computer matters for publications such as Computing
Canada, The CIPS Review, InfoAge and Canadian Office. He has also
participated in various seminars, workshops and conferences sponsored by
organizations such as the Annex Computer Report, CIPS, CCG , OYEZ and the
Canadian Bar Association.
Mr. MiJrad has been instrumental in the establishment and organization of
computer user groups on both a local and international level. He is actively
involved in the Canadian Information Processing Society (CIPS), and is a
member of the Association for Systems Management (ASM), the Computer
Law Committee of the International Bar Association, the Computer Law
Association and the Canadian Bar Association.
• CIPS TIPS 15
Canadian Information ProcessingSociety
L'Association Canadienne de L'lnformat/que
The Canadian Information Processing Society is an organization whose
members are computer professionals from across Canada. CIPS members are
provided with a forum which helps them keep abreast of developments and
corresponding implications within their industry.
Local CIPS sections across Canada hold monthly meetings and technical
sessions featuring prominent speakers or panels. Each year CIPS organizes a
National Conference which, on even-numbered years is held in Western
Canada and on odd-numbered years, in Eastern Canada.
Once a year, in Toronto, CIPS sponsors the Canadian Computer Show and
Conference, the largest such show in Canada. In Montreal the Society sponsors
Le Salon de I'ordinateur.
Also presented every year is a National Seminar which travels across the
country to local sections to supplement their activities.
All CIPS members receive a bi-monthly magazine, the CIPS REVIEW,
which features articles dealing with problems, developments and implications
peculiar to, or stemming from, the Canadian information processing industry.
Members also receive two annual publications, The Canadian Computer
Census, and the National Membership Directory. For a slight additional fee
members receive INFOR, the only refereed Canadian journal devoted to
CIPS is Canada's member society in the International Federation for
Information Processing (lFIP) and is also a member of the Institute for the
Certification of Computer Professionals (ICCP).
243 College St.
CIPS TIPS - the series you can't afford to miss
Here's a handy, innovative way to update your knowledge of key topics within the
data processing industry - at a cost that's hard to beat. The Canadian Information
Processing Society (CIPS) has developed a series of booklets called CIPS TIPS, with
the help of noted experts in the field . Each booklet covers a specific area, as
• CIPS TIPS 1: A Buyer's Guide to Small Business Computers, by Dr. Harvey S.
Gellman of Gellman, Hayward & Partners Ltd. Due to popular demand, this original
CIPS TIPS has been updated and revised. The 1983 version contains a step-by-step
approach to purchasing and implementing a small computer system for your
• CIPS TIPS 2: Using the Computer Strategically, by Dr. Harvey S. Gellman and
James H. Hayward of Gellman, Hayward & Partners Ltd. This booklet covers two
different models for decentralizing computer facilities, and offers a 10-point method
for strategic system planning.
• CIPS TIPS 3: Professional Time Management in Software Engineering, by Graeme
S. Balcom of Sydney Development Corporation. Tips for project managers on how to
use control tools for top efficiency and profitability.
• CIPS TIPS 4: Avoiding the Legal Pitfalls in Acquiring a Computer System, by Louis
H. Milrad of Weir & Foulds. Helpful legal hints on what to watch for to make your
computer acquisition smooth and hassle-free. '
Each copy of CIPS TIPS is $4.00 for members and $6.00 for non-members. Bulk
copies are $3.00 each, plus shipping and handling.
Use the form on the reverse to order your booklets now. Please make cheque or
money order payable to the Canadian Information Processing Society (CIPS TIPS),
and mail to: CIPS, 243 College St., 5th Floor, Toronto, Ont. M5T 2Y1. Please allow
two weeks for delivery.
LAST FIRST MS DR PROF
NAME_ _ _ _ _ _ _ _ _ _ _ NAME_ _ _ _ _ _ _ _ _ MR MISS MRS
COMPANY_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ __
MAILING ADDRESS INDICATE HOME 0 OFFICE 0
ADDRESS_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
CITY_ _ _ _ _ _ _ _ _ _ PROVINCE_ _ _ _ _ _ POSTAL CODE _ __
JOB TITLE _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ __
TELEPHONE _ __ _ _ _ _ __
NAME_ _ _ ___ _ _________ MEMBERSHIP NO._____ _
COMPANY____ ___ _ ___ _ _ _ ___________ ____
ADDRESS_____ ___ _________ _ _ _____ _ ___ _
CITY_____ ____ ____ ___ PROV._ _ _______ _____
Please check booklet(s) ordered:
o CIPS TIPS: A Buyer's Guide to Small Business Computers
o CIPS TIPS: Using the Computer Strategically
o CIPS TIPS: Professional Time Management in Software Engineering
o CIPS TIPS: Avoiding the Legal Pitfalls in Acquiring a Computer System
Total amount of payment:___ ___ _ _
BUSINESS REPLY CARD
No Postage Necessary if Mailed in Canada
243 College Street