this is a provision that never goes away, but seems to vary in its frequency.
in February this year, I answered the question from a buyer's perspective and you can see the answer I gave in the member library (see under Resources). The points I make there apply in reverse for you, as a seller.
I think it is important to understand your buyer's motivation - what are they really trying to protect? If, for example, it is a mechanism to reduce the need for regular market testing, it may be to your advantage to agree a mutually acceptable MFC clause. Perhaps in return you might request an extended contract term.
Ultimately, I think most MFC clauses are relatively meaningless. You will probably commit that you will not offer lower prices on the same terms and in similar volumes; this actually gives you tremendous flexibility. But it may satisfy the need of your counter-part in Procurement to show that they successfully 'protected' their position.
I am also going to send you a link to a survey we undertook several years ago because in most respects, I don't think much has changed on these particular clauses - except perhaps that technology may be giving you better insight into pricing variations and whether or not you are complying with the terms agreed.
Hi, you don't specifically say what kind of IT contracts, but here is a good one related to software licensing and software-as-a-service (SAAS).
The answer on this, unfortunately, will be that it depends. That is, it depends on what the IP clause in the contract specifically states. Do you have a specific contract or clause that applies to this situation?
The clause reads as standard;
"all Intellectual Property conceived or made by X in the course of providing the Services shall belong to Y."
The problem is that the project is being funded by a third party, and part of our agreement with that third party is that they will own all IP arising from the project. We are contracting with another party to deliver one element and our funder is asking that we name them as the owner of IP in the abovementioned clause in the contractual agreement between us and the other party.
Usually the only parties that have any rights to the IP are those parties to the contract. Should another party want access to the IP then the best way to protect the first two parties is that the third also becomes a party to the contract or another way is that the third party enters into a confidentiality agreement with the first two parties explicitly for the purposes of accessing the IP.
In your case you might need the separate agreement as the people you have contracted to may not want to share or assign any rights to their IP with the project financier.
I assume you refer to the indemnification clause in the context of third party claims, correct? Whether a breach is considered material or not remains a question for the courts (at their discretion). However, typically in the context of SW agreements, material breaches would include breaches of IP and breaches of confidentiality/privacy. As software vendors, we consider a breach of payment to be a material breach but, again that is subjective and subject to interpretation. I would not agree to this change if I were you because this creates risk uncertainties to your disadvantage as a software vendor.
A friend of mine works in the same organisation as you (as a Contracts manager with a legal background) and is an IACCM member so, if you want, I can ask him to contact you and perhaps you guys can discuss this matter internally. Let me know.
All the best.
• Hewlett-Packard Company
Please contact the Office of the General Counsel for assistance in these matters. We are here to help. If you are in the US, feel free to contact me directly.
David, as you are probably aware, MFN clauses are inevitably problematic unless there are independent sources of price comparison. In many cases, even if there are research companies offering data, the most highly negotiated deals are protected by confidentiality undertakings. And even when some data can be accessed, it is usually possible for a supplier to claim that price differences reflect other differences - for example, in risk allocation, availability, volume or term of agreement etc. In my experience, MFN clauses are of limited meaning or value.
However, this does depend to some extent on how much you trust the integrity of your supplier and also you should be clear about your own goals. For example, do you really need to have better prices than all other customers, or is your real sensitivity that you want better prices than your competitors? Must you really be best, or perhaps it is sufficient to be in the top 5 or 10%.
You might make such a provision subject to periodic confirmation by the supplier, making it clear that misrepresentation would represent a fundamental breach of the agreement. You can require independent audits, though few large suppliers will agree to this and the cost may be prohibitive. You could commission periodic research which, depending on the market and the nature of the service, may yield practical results.
I would suggest that your real concern here is that you want to ensure pricing remains fair and reflects market trends. Often the only way to test this is by regular market testing via competitive bidding. Such an approach has little attraction for you or the supplier - it is expensive and potentially disruptive. So you might consider a clause modelled around the principle that the supplier has responsibility to demonstrate not only that your prices are the best they offer, but also that they are among the best available in the market. But again, be cautious that in your focus on price you do not lose sight of broader issues of value. There will always be someone cheaper, but what is the cost associated with 'being cheap'?
Thanks for your comments Tim. In this case, we are actually the supplier who has (unfortunately) agreed in the past to include a MFN clause in certain ongoing agreements. This was done so at the absolute insistence of a handful of our customers. While we readily see the downside of agreeing to such a restriction, it's amazing what gets negotiated at the 11th hour when finalizing a deal with a major client! In any case, we are now faced with creating some validation analysis that would support our adherence to the "spirit" of the clause. What makes it difficult is that the services that we provide (market research) have some common aspects across clients, but no 2 packages are exactly alike. While this may ultimately be our saving grace, we do feel the need to prepare some form of validation in case one of these customers request an audit of some kind. At this point we are doing our best to note both the common aspects across specific client deals, as well as outlining the variables that might affect the ultimate prices we charge. While we feel that we are in full compliance with the clause, providing evidence of this for our customers is proving to be a bit of a challenge.
• Sodexo SA
David, A useful comparison may be drawn between your situation and the delivery of FM in the PFI market, where benchmarking is a standard requirement.
It is normal practice in such scenarios to make 'adjustments' (e.g. adjusting for the size of buildings, No of occupants etc) to comparators so that the benchmarking exercise is 'fair'. Whilst this is an inexact science it is an attempt to demonstrate compliance. This type of approach can be dismissed by a client, but ultimately if the client chooses to be difficult they could reject any approach you take.
Demonstrating different options to them will show your willingness to work with them and may encourage them to engage in dialogue about what will satisfy their concerns.
David, I agree with John's observation. Given that there is rarely - perhaps never - an exact 'like for like', comparisons will always have a degree of subjectivity. It is good that you make efforts to validate your position.
As mentioned in my previous reply, you may want to think about alternatives with the customer and discuss their real concerns. In particular, if you can build confidence over the market competitiveness of your pricing, there is potential for a 'win-win' by avoiding the need for future competitive bidding as a method of validating your price. This seems to me a much more productive and relevant discussion. Meantime, I think just continue your monitoring.
In the matter of termination, there are three prongs to the overall evaluation:
- can we contractually/legally terminate? Sometimes the contract and/or regulations preclude one from terminating without a significant financial impact.
- can we commercially terminate? Sometimes the exit from the contract has a larger commercial impact to the broader relationship, or a simple cost/benefit analysis demonstrates that termination would not be prudent.
- can we ethically and morally terminate? This is not intended to be a judgment of broader organizational or personal values. Rather, some consideration should be given (even though the contract and financial spreadsheet indicate that termination is the right course of action) to whether termination is the overall right thing to do. Will this termination cause the other party to go bankrupt? Have we led the other party with a slew of promises upon which they placed their good faith in our word? Will this termination gain visibility in the market, and will we develop a negative reputation because of the termination.
To the general spirit of your question, one should consider whether preventive measures are not more effective and desirable than reactive measures. Liquidated damages and termination are similar to a defect with a manufactured product. In this case the product is the contract. Quality management research has repeatedly demonstrated that prevention is more effective than remediation and correction.
So, perhaps the focus needs to shift to how to prevent breaches, rather than quantifying and allocating the financial burden for the "defects" in the contracted project and relationship.
• Copenhagen Business School
Thanks Jim for your interesting reply!
The three prongs seem to me to be a useful way of looking at the termination decision and I agree that prevention is better than cure, and that it is essential to consider why relationships sometimes deteriorate to the point where termination becomes an issue. (I realize that this has much to do with the way in which contractual cooperation is organized both between the two parties and within each firm; in my view, this is an under-researched field). However, I still believe that questions of the kind that I raised in my post remain relevant. I should perhaps have mentioned why I think so, to make clear where I am coming from. My thought is this: When a project is not going well, it becomes essential that the supplier (or entrepreneur) continues to exert costly effort to minimize delays or cost overruns. To ensure such efforts, the threat to terminate may become important, as may the use of liquidated damages, I would argue. These remedies, while often considered reactive, may in fact be considered proactive in the sense that they force the supplier to put resources into preventing further delays or cost-overruns. Of course, termination rights are important when the relationship is no longer profitable in the sense that more value can be generated through a dissolution of the old relationship and the creation of a new, but termination rights can also affect the incentives of the supplier even when it is costly for both parties to end the relationship; even when the Buyer's threat to terminate is not fully credible, the supplier will not know exactly when the threat will be exercised and this might keep him on his toes. For this reason, a Buyer may - in a sense proactively - seek strong termination rights. However, such rights come at a cost. The accompanying performance bonds are expensive, and the supplier will want compensation for the risk of termination. My question then is this: if it is important for the Buyer to ensure that the supplier keeps exercising effort when the project is not going well, which instrument creates more value: termination rights or liquidated damages? In this comparison, I am thinking that liquidated damages are in a sense less costly (in the sense that liquidated damages create more value for the two parties taken together) than termination rights because they do not entail the risk of the costly dissolution of the relationships; in this sense liquidated damages preserve value. If, then, liquidated damages is a better - less costly- instrument, what is the role of termination rights? Should termination rights be limited to those situations where the supplier turns out to be unable to perform (compared with his competitors) or to projects that should be ended because costs have turned out to be too high or benefits too low? I would be curious to know whether termination rights and liquidated damages are set with such reflections in mind, and whether there are other concerns that should be kept mind.
Henrik - yes, termination rights and liquidated damages are set with those factors. But, there are instances where termination is pursued due to other factors. These might include where the broader project is unprofitable or undesirable (even though the immediate sub-project related to the contract is still desirable), or where a broader corporate strategy (such as exiting a given market) is driving the decision. It would be interesting to see input from others with specific examples.
Risk needs to be brought into the conversation - if one deems risk as a lack of clarity or certainty. Liquidated damages bring greater (but never perfect) clarity and certainty into the analysis. And with such clarity and certainty, both parties are able to integrate a more reliable financial equivalent of the risk. The benefits of this approach come to not only the immediate transaction, but also help prevent a recoup mentality in future transactions.
• Copenhagen Business School
Jim, When mentioning that termination may be written into the contract when the broader project needs to be discontinued, are you not mainly thinking of termination at will? I did not mention it but I was thinking mainly of termination for cause.
So, wouldn't it be beneficial to then add some definition and clarity around what qualifies as "cause"?
• Copenhagen Business School
Yes, and this is what is conventionally done, since the default rule (when nothing is agreed) is that fundamental breach is cause for termination, and this concept is too vague. When considering the causes that enter into standard form contracts, such as Fidic Silver or Yellow book, or e.g. NEC, I think I find that termination right for cause are quite narrowly restricted in construction contracts, because termination is so costly to both parties. Instead, LD's are used (to the extent permitted by the law). But I am curious about how the standard contracts are in this respect modified in practice and how all this works out in reality.
• Raytheon Systems Limited
Any discussion on termination should perhaps also include termination for convenience, ie termination not due to any fault in the performing party. Working in an industry that mainly does busines with government departments, thios can occur where departments funding is cut or limited by changes in government spending plans.
In these cases termination for convenience clauses probably don;t go far enough to recognise the impacts to the parties and could probably do with strengthening to address mitigation of need to terminate or at the least 'damage limitation' to the parties in these cases. It is entirely possible that the real cost to the parties of termination in these cases could exceed the value expected to be saved by discontinuation of the contract!
• Copenhagen Business School
Jemma, Yes, I have also wondered why the right to terminate for convenience is not more restricted. While the entrepreneur is of course entitled to damages, I guess you have experienced that the damages do not fully cover the profits that the entrepreneur would have made if the project had been carried through, since some of the profits are likely to be considered hypothetical (is that no so?). As you suggest, if damages are stingy, one would expect that the loss to the entrepreneur of discontinuation might well exceed the benefit to the client. I see the problem which may perhaps be said to lie in the courts' often very conservative estimates of damages. I wonder whether contractual solutions can be found that e.g. stipulate liquidated damages on top of expectation damages (if that will be upheld) in case of termination of convenience.
Speaking at a high level only, some clients will demand higher liability caps for breaches of information security, whereas we on the vendor side resist what we see as unreasonable levels. My view is that some clients are overreaching with their information protection contract terms. Calling for unlimited liability for breaches, for example, seems to ignore the reality that it's virtually impossible for any provider to thwart all threats. Some of the terms I see have clauses requiring the vendor to notify the client of all "potential" or "suspected" breaches. How could we even begin to put a box around what that means? Why ask the vendor to comply with HIPAA-related rules when the contract is being performed wholly in Europe and is therefore subject to European rules?
I've generally found vendors to be highly resistant to negotiating ANY terms in SaaS agreements unless there is truly significant amounts of spend and the promise of increasing volumes. In particular, with one very large SaaS vendor last year we were told that they would never now sign up to the LOLs that they agreed five years ago in relation to security. In general I think that the industry is moving more and more towards a one size fits all model which will make any carve outs more difficult to obtain.
Greg raises a fair point. When purchasing prepackaged services, it is reasonable to expect a different risk tolerance from the provider than when purchasing the software as a product. It may not be feasible to price the risk of a dozen different sets of terms and/or delivery models.
On a corollary point, I have attended at least one presentation on the subject of SaaS (and other XaaS offerings) where the speaker recommended to a mostly buy side audience that a provider's software license incorporated into the SaaS document be rejected. To the extent that an XaaS offering involves a limited right to use software, even if it's not a local copy on a desktop, I still would advocate for inclusion of some license terms. A license might be necessary to comply with any third party license requirements.
I have found for the liability portion of SAAS contracts one truly has to determine 1st the confidentiality / security level of the data being distributed in the cloud
I've been able to include in T & C's as well as SLA agreements notification of breach and within 24 hours and to provide mitigation strategies.
Limitation of the liability in most cases I've experienced is the total sum of both the contracted value or at least 5Million this also depends on the type of data and impact to the organization e.g. privacy