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The explosive growth of e-commerce has thrust legal concerns about electronic transactions, such as privacy, security and e-signatures, into the limelight. Those issues, however, assume that information technology (IT) systems work properly — both within a firm and in transactions with others. That assumption, unfortunately, is often erroneous. Accordingly, effective legal management of e-commerce must address not only electronic transactions and their implications, but also the technological foundations of those transactions. The greatest risk typically arises in connection with the development or acquisition of new technologies. A new IT system may take longer than expected to develop or install. It may substantially exceed budget estimates, it may not work properly, or it may not work at all. The trickle-down consequences of an IT failure can be devastating. In recent years, stories of bankruptcies resulting from IT failure have not been unheard of. The effective legal management of IT generally requires oversight during four phases of IT projects: due diligence, contract negotiation, project implementation and dispute resolution. The most important method of minimizing risk related to IT projects is to conduct adequate review or due diligence before acquiring a new system. Such a review should include site visits to examine — to the extent possible — the operation of the system in a working environment. Likewise, current users of the system should be interviewed to gain insight into system performance and the responsiveness of the vendor to customer concerns or unique requirements. Apart from inadequate due diligence, IT projects frequently start out on the wrong foot by ignoring legal considerations when selecting vendors or service providers. A vendor’s proposal to deliver an IT system for the lowest cost and in the shortest time will have little value if the vendor is unwilling to commit to a contract that assures vendor accountability for system defects, delays or other shortcomings. To promote vendor accountability, purchasers of IT services should specify the required terms of service at the outset of their selection process. Purchasers should provide vendors, for example, with a proposed agreement, along with other criteria, as part of a proposal request. At minimum, the final selection of an IT vendor should not be completed until contract terms have been reached. Key contract terms often depend on the parties’ respective bargaining power, and the premature selection of a vendor may preclude effective contract negotiation and legal management of the project. Like most commercial contracts, technology agreements have two main objectives. First, they must specify each party’s obligations, and second, they must allocate risk. Effective contract negotiation, therefore, requires an understanding of a project’s technical objectives, as well as common sources of risk. DEFINING OBLIGATIONS In defining the parties’ obligations, technology agreements must address the fact that purchasers and suppliers of technology may frequently have multiple types of relationships with each other in a single transaction. For example, when a business acquires new accounting software, it may need to rely on the vendor for a variety of services in addition to the software itself. The business may, for example, require the customization of the software, to assure its compatibility with other software and systems; the conversion of existing data files, to allow effective operation of the new system; the development of specialized features, functions or interfaces; or system maintenance and support, including periodic upgrades or enhancements to meet changing business or regulatory requirements. Each service or component of the deal should be analyzed separately because a misunderstanding or deficiency in any area could undermine the entire transaction. The second critical aspect of any technology agreement is the allocation of risk. In other words, the parties must address who is responsible, and to what extent, if the system fails to work properly, doesn’t work at all, or isn’t delivered on time. It is too easy to be lured into the comforting, but often unrealistic, assumption that new technology will always work properly and will improve the efficiency of business operations. Perhaps the most significant mechanisms for allocating risk in a technology agreement relate to the payment stream and delivery of work product. Notwithstanding the legal protection included in an agreement, the strongest incentive to assure a vendor’s complete performance is the withholding of payment. Of course, the opposite is also true; vendors will seek to assure payment by withholding delivery or performance. Although a contract will invariably provide a remedy — at least in theory — for deficient performance, as a practical matter it is much easier and cost-effective to withhold payment than to recover it. PROMISES, PROMISES Warranties likewise help allocate risk between the parties. In most cases, warranties for technology systems are limited in scope and duration, based on negotiations between the parties. Obviously, the intensity of such negotiations depends on the scope and amount of liability that could be caused by a system failure. Because it may be difficult for purchasers to hold vendors fully accountable for losses that arise from system failures or deficiencies, purchasers should attempt to minimize risks related to new technology systems by other means. Operating environments differ dramatically, and no amount of due diligence can ever fully identify potential system issues. Accordingly, purchasers should attempt to mitigate risk by negotiating extended “acceptance” periods, to enable them to review system performance in their own environment. Ideally, such a provision would permit the purchaser to use the new system for a period of time, either in operation or in parallel with an existing system, before being obligated to make full payment for the new system. On the other hand, vendors generally prefer to treat use as acceptance of the system and to address subsequent shortcomings as part of the warranty or maintenance obligations. The difference between these approaches can be significant, as contract remedies for breach of warranty may, in many cases, be more limited than remedies for failure to deliver the systems at the outset. Because of the inherently risky nature of IT projects, it is important to address disputes and termination procedures in the contract. Many IT contracts require mediation or nonbinding arbitration as a precondition to litigation. In addition, IT contracts should address the ownership of works in progress in the event of premature termination, and purchasers should consider requiring transition assistance if they are required to change vendors due to a breach. To promote fair negotiations, moreover, the contract should assure that neither party would have the ability to coerce the other in case of a dispute. For example, an IT contract should generally prohibit the vendor from disabling the system through such self-help devices as back doors (secret entry points or passwords into the systems) and time bombs (codes that will shut down a system) without the purchaser’s consent. Most IT contracts expressly disclaim the recovery of consequential damages; the contracts likewise should prevent a party from imposing consequential damages to enhance its negotiating posture. In view of the substantial harm that can be inflicted by electronic self-help devices, the Uniform Computer Information Transactions Act, which has been adopted by two states (Virginia and Maryland), includes significant restraints on their use. (See Va. Code Section 59.1-501 et seq.; Md. Commercial Law, Section 22-101 et seq.) Finally, purchasers of systems should beware of “boilerplate” contract terms. For example, standard contracts may include language that disclaims the purchaser’s reliance on any statements or representations made by the seller, other than those included in the agreement itself. Because vendors often oversell the capabilities of a system, purchasers should make certain that any agreement does not eliminate the seller’s accountability for important representations made during the sales process. TAKING CARE AT THE GET-GO Companies acquiring large technology systems frequently seek legal advice when entering agreements and when disputes arise. The same companies, however, often overlook the role of sound legal practice in monitoring and managing the implementation of technology agreements. The effective management of implementation can prevent costly disputes or can improve a party’s likelihood of success should a dispute become unavoidable. Most significant, purchasers and suppliers should condition themselves to expect glitches in the development or implementation of a new system and to address them as they arise. Too often, parties simply assume that even significant problems will be ironed out over time. Managing problems as they arise has three main elements. First, the parties must decide who bears responsibility for the problem. This can be difficult. Did the problem arise because the vendor overstated the capabilities of the system? Did the purchaser incorrectly specify the operating environment or its requirements? Did problems arise due to personnel changes at either the purchaser or vendor? Second, the parties should agree on a timetable for curing the defect or problem. Third, the parties should agree on a remedy if the problem is not resolved in the specified period. Remedies could include termination of the project if the problem is critical, a modification of the licensing fees, and refunds. All agreements regarding changes in the project or remedies for problems should be in writing. A clear demarcation of rights and responsibilities will almost certainly promote effective management of the project and reduce the risk of protracted disputes later on. By contrast, failure to address significant problems can allow them to fester and grow. A main goal of managing technology should be to avoid disputes. Disputes and, in particular, litigation related to the development or implementation of technology systems are likely to be time-consuming and expensive. Nonetheless, some disputes are unavoidable, and efforts should be made to minimize their potential costs. Litigation related to technology systems may cost more than other types of commercial litigation for several reasons. First, the technology in question may be complex. Accordingly, educating the court or fact-finder about the nature of the dispute may require a substantial effort and the involvement of one or more expert witnesses. Second, the adoption or development of new technology may involve large numbers of business and technical personnel, each bearing responsibility for a small part of the project. As a result, the record of the dispute may include voluminous amounts of conflicting testimony. Third, disputes over new technology may involve large numbers of documents and technical materials. Collecting and analyzing these documents may also entail significant expense. QUICK REACTION To manage a dispute effectively, a party should act quickly when a dispute appears likely or inevitable. Early preparation may, among other things, allow for early evaluation and settlement to avoid protracted litigation costs. A party should, for example, take the following steps: � Collect relevant technical and legal documents, including all correspondence with the other party. � Interview project personnel. � Prepare a chronology that describes the history of dealings between the parties. � Fairly evaluate the strengths and weaknesses of potential claims. � Assess potential litigation costs as part of evaluating settlement posture. � Consider various mechanisms for resolving the dispute, including direct negotiation, mediation, arbitration and litigation. In addition to evaluating the available evidence, a party to a potential dispute must recognize that continued dealings with the other party will have legal significance. Because the record of dealings between the parties may be murky, the manner in which the parties deal with each other may have great significance. As a consequence, a party to a potential dispute should identify the legal and factual basis for its position and should refrain from conduct that could be construed as inconsistent with that position. To mitigate damages, for example, once a decision has been made to terminate an agreement, the termination should be done quickly to avoid the accumulation of additional damages or business injury. The party purchasing the services should consider appointing someone to manage all continued communication with the opposing party to avoid sending conflicting messages. The person in charge of such communications should work closely with legal counsel to promote a consistent and effective legal posture for the dispute. Finally, a party to a dispute related to new technology should coordinate its business and legal strategies. Given the uncertainty that is inherent in legal proceedings involving complex matters, a party should not rely solely on legal proceedings to resolve its technology concerns. Instead, the party should also attempt to develop alternative technology or a business strategy to remedy its concerns. Technology plays an increasingly important role in modern business. Effective management of new technology requires clear and consistent mechanisms for managing its associated legal risks. Gary Kaplan is a partner at Pittsburgh, Pa.’s Reed Smith and the head of the firm’s information technology group.

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