When a ‘contract’ is not a contract

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We often get asked to review a document which looks like a contract and contains legalistic words, but, on closer analysis, is not one.

What is a contract?

A contract is an agreement between two or more people or organisations (“parties” to the contract), which creates rights and obligations for those parties. General legal principles apply to all contracts, including IT contracts. but there are provisions and terminology which are only applicable to IT contracts. The commercial structure underlying an IT contract is often complex, and the rights and obligations of organisations not parties to the contract (“third parties”) must also be taken into account. A single IT contract may involve different elements of services, hardware, software, licensing or sale.

Purpose of a contract

The purpose of any contract is to inter alia:

  1. enable the parties to achieve their strategic and commercial aims;
  2. record the intention of the parties;
  3. record their respective rights and obligations;
  4. provide legal certainty as to what will happen if one person fails to carry out their obligations;
  5. apportion risk; and
  6. manage the legal risks posed by technology which will have legal ramifications.

(1) to (6) will only have any effect if they are drafted in a clear and unambiguous manner, capable of easy interpretation and give rise to relevant, appropriate and determinable legal remedies. This includes drafting them in plain language.

If the contract does not fulfil all of these functions, and in particular where it lacks one or more of the essential terms of a contract (as spelt out in laborious detail in contract law) which would render it legally unenforceable, vague and open to one interpretation or contrary to established legal precepts (including case law), then it has failed to fulfil its purpose and is effectively not worth the paper it is written on to each party. As it is often said, the law is a very precise profession, and you have to be precise in order for things to be correct: you have read all those cases where the incorrect positioning of a comma, has lead to a totally different interpretation result.

When a dispute arises, it often becomes necessary to analyse the essential terms of the contract which are often taken for granted at the time of making the contract, to establish what the the terms actually were.

In addition to the rights and obligations dealt with in a contract, it must be remembered that there may be other rights which are enforceable at law by an injured party. An example would be negligence or defamation which can give rise to an action by the injured parties for damages independently of the contract. The likelihood of this arising needs to be taken into account and possibly dealt with under apportionment of risk.

Furthermore, there is legislation which affects contractual terms. For example, the National Credit Act 34 or 2005 applies where a vendor provides credit to a customer (e.g. to buy hardware) and the Consumer Protection Act 68 of 2008 imposes terms around unfair, unreasonable or unjust contractual terms, requires you to give notice in certain circumstances and imposes liability on the supplier of goods for defective goods.

Objective of drafting a contract

Horrible agreements cross our desks every day. The same old templates get re-used and circulated. They are often too long – everyone complains about long documents. They are often badly structured – a really important commercial term (like “the fees”) is hidden on page fifty three in the middle of the page.

The objective of drafting an IT contract is not to write the most elegant contract, or one which can be considered “watertight” from at least one party’s perspective. It is to achieve a good quality working document which gives each party what it essentially requires and which enables the parties to do business without undue delay. It is founded on the assumption that the parties want to do business together and the task of the attorney is to facilitate this in a suitably commercial manner. Point scoring in esoteric should never transcend commercial objectives and it is important for the attorney to keep the commercial wishes of his client in mind.

Should non-lawyers be drafting contracts?

Non-lawyers often draft Service Level Agreements (so called “SLAs”), schedules, roles and responsibilities and the like to the IT contracts. Sometimes they also draft the IT contracts as well. Is this a good or a bad thing?

We believe that a good IT contract will always be a collaboration between the lawyers and those persons who are able to provide the essential factual input. Lawyers cannot draft good SLAs without the accurate, detailed and reliable technical input that may be required. Conversely, non-lawyers should not be drafting IT contracts as they do not possess the legal training, nor the experience which one gets from legal practice to be able to confidently and reliably assure a client that the contract will address all the legal risks posed by the technology and provide it with the necessary legal protection. Contracts are not all about using precedents. They are all about understanding what building blocks (clauses) need to be put in place in order to ensure that the contract achieves its purpose and objective. Sure precedents play a role, but ultimately one has to understand why one is putting the various building blocks in place.

Ultimately a non-lawyer cannot reliably draft a contract which can muster the test of litigation in particular, without the requisite qualifications and training. The person to test the workability of the contract is the lawyer, who should be able to say with reasonable certainty that (i) the SLAs do indeed tie into the rest of the IT contract and (ii) what has been recorded will in fact meet the purpose for which it is intended.
By | 2017-03-30T13:22:31+00:00 December 5th, 2009|Categories: IT Contracts|Tags: , , , , |