Conditions, Warranties, Indemnities and Guarantees in Technology Service Agreements OBA - Technology in Bloom March 8. 201...
Conditions, Warranties, Indemnities and Guarantees in Technology Service Agreements
Guarantees – Scope of the Guarantee <ul><li>Traditional guarantees are normally for the payment of money. </li></ul><ul><l...
Guarantees – When Necessary? <ul><li>In a multi-national company when the service provider is not the ultimate parent. </l...
Guarantees – Material Adverse Change <ul><li>Occurs when there is a material adverse change in the financial condition of ...
Guarantees – What Constitutes a MAC? <ul><li>Public Company </li></ul><ul><ul><li>Change in credit rating. </li></ul></ul>...
Guarantees – What Constitutes a MAC?  (Cont’d.) <ul><li>Private Company </li></ul><ul><ul><li>Since no objective credit ra...
Guarantees – Remedies for a MAC <ul><li>In the event of a MAC, most credit risk departments will require additional or sup...
Guarantees – Remedies for a MAC  (Cont’d) <ul><li>Good solution is a Letter of Credit (“L/C”.). </li></ul><ul><ul><li>Can ...
Guarantees – Cure of a MAC <ul><li>Event causing a MAC may be resolved or cured. </li></ul><ul><ul><li>i.e., credit rating...
Conditions and Warranties – Overview of Terms <ul><li>Warranty – is a promise that a fact is true. </li></ul><ul><li>Repre...
Corporate and General Matters <ul><li>Organization and Power </li></ul><ul><li>Authority and Enforceability </li></ul><ul>...
IT Transactional Matters – Quality <ul><li>The services will be performed in a good and workmanlike manner in accordance w...
IT Transactional Matters – Quality  (Cont’d.) <ul><li>The services will be provided in a cost-effective manner. </li></ul>...
IT Transactional Matters – Quality  (Cont’d.) <ul><li>It will provide the individuals performing the services with adequat...
IT Transactional Matters – Software <ul><li>After acceptance by the customer, all work product developed by the service pr...
IT Transactional Matters – Software  (Cont’d.) <ul><li>All software will be maintained by the service provider in good wor...
IT Transactional Matters – Hardware <ul><li>All hardware that may be sold, transferred or assigned to the customer will be...
IP Matters <ul><li>The service provider is the owner, valid licensee, or authorized user of its IP. </li></ul><ul><li>The ...
Indemnities – Use of Indemnities <ul><li>Indemnities are frequently used as additional remedy for claim between the partie...
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OBA Presentation on Warranties

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OBA Presentation on Warranties

  1. 1. Conditions, Warranties, Indemnities and Guarantees in Technology Service Agreements OBA - Technology in Bloom March 8. 2010 Adam D. Vereshack Barrister & Solicitor
  2. 2. Conditions, Warranties, Indemnities and Guarantees in Technology Service Agreements
  3. 3. Guarantees – Scope of the Guarantee <ul><li>Traditional guarantees are normally for the payment of money. </li></ul><ul><li>In technology service agreements, it should also contain a performance guarantee. </li></ul><ul><ul><li>Not a simple matter of bringing in another contractor. </li></ul></ul><ul><ul><li>Information technology work is normally very complex requiring high degree of familiarity with the functional and detailed specifications. </li></ul></ul>
  4. 4. Guarantees – When Necessary? <ul><li>In a multi-national company when the service provider is not the ultimate parent. </li></ul><ul><li>If the service does not meet customer’s credit risk requirements: </li></ul><ul><ul><li>Balance Sheet – credit worthiness. </li></ul></ul><ul><ul><li>Substantial customer base. </li></ul></ul>
  5. 5. Guarantees – Material Adverse Change <ul><li>Occurs when there is a material adverse change in the financial condition of the guarantor (a “MAC”). </li></ul><ul><li>Two distinct issues: </li></ul><ul><ul><li>What constitutes a MAC? </li></ul></ul><ul><ul><li>What should be the remedy in the event of a MAC? </li></ul></ul>
  6. 6. Guarantees – What Constitutes a MAC? <ul><li>Public Company </li></ul><ul><ul><li>Change in credit rating. </li></ul></ul><ul><ul><li>Specifically, if credit rating falls below a certain level: </li></ul></ul><ul><ul><ul><li>“Investment Grade” </li></ul></ul></ul><ul><ul><ul><li>As determined by Rating Agency </li></ul></ul></ul><ul><ul><li>Other criteria? </li></ul></ul>
  7. 7. Guarantees – What Constitutes a MAC? (Cont’d.) <ul><li>Private Company </li></ul><ul><ul><li>Since no objective credit rating, the customer should have the contractual right to declare a MAC in its discretion. </li></ul></ul><ul><ul><li>Too open-ended for most service providers. </li></ul></ul><ul><ul><li>Solution is to allow service provider to challenge determination (Arbitration). </li></ul></ul><ul><ul><li>But, before challenge is even started, the ‘remedy’ of the declaration of a MAC must be put in place. </li></ul></ul>
  8. 8. Guarantees – Remedies for a MAC <ul><li>In the event of a MAC, most credit risk departments will require additional or supplementary form of security (“Additional Security”). </li></ul><ul><ul><li>Must be immediately available. </li></ul></ul><ul><ul><li>From either service provider or guarantor. </li></ul></ul>
  9. 9. Guarantees – Remedies for a MAC (Cont’d) <ul><li>Good solution is a Letter of Credit (“L/C”.). </li></ul><ul><ul><li>Can be established very quickly (5 days). </li></ul></ul><ul><ul><li>Terms can be agreed upon in advance. </li></ul></ul><ul><ul><ul><li>Bank acceptable to customer. </li></ul></ul></ul><ul><ul><ul><li>Location (city) of bank’s offices specified. </li></ul></ul></ul><ul><ul><li>Ideally, form of L/C should be a Schedule to the agreement. </li></ul></ul>
  10. 10. Guarantees – Cure of a MAC <ul><li>Event causing a MAC may be resolved or cured. </li></ul><ul><ul><li>i.e., credit rating improves. </li></ul></ul><ul><li>In such a case, the agreement should permit the removal of the Additional Security. </li></ul><ul><li>Customer should also have right to contest service provider’s notice of cure where no objective criteria such as Rating Agency published change. </li></ul>
  11. 11. Conditions and Warranties – Overview of Terms <ul><li>Warranty – is a promise that a fact is true. </li></ul><ul><li>Representation – is a statement of fact. </li></ul><ul><li>Covenant – is a promise that something will or will not be done. </li></ul>
  12. 12. Corporate and General Matters <ul><li>Organization and Power </li></ul><ul><li>Authority and Enforceability </li></ul><ul><li>Non-Contravention </li></ul><ul><li>No Claims for Damages </li></ul><ul><li>Consents </li></ul>
  13. 13. IT Transactional Matters – Quality <ul><li>The services will be performed in a good and workmanlike manner in accordance with applicable professional standards. </li></ul><ul><li>The services will be performed with promptness and diligence and carried out in a professional manner. </li></ul><ul><li>The service levels will be achieved. </li></ul>
  14. 14. IT Transactional Matters – Quality (Cont’d.) <ul><li>The services will be provided in a cost-effective manner. </li></ul><ul><li>The services will be performed in accordance with the practices and professional standards used in well-managed operations performing services similar to the services. </li></ul><ul><li>Service provider will use qualified individuals with appropriate training, education, experience, competence and skills to perform the services. </li></ul>
  15. 15. IT Transactional Matters – Quality (Cont’d.) <ul><li>It will provide the individuals performing the services with adequate training with respect to new products and services before their implementation. </li></ul><ul><li>It will supply the services using current technologies that will enable the customer to take advantage of technological advancements in its industry and support the customer’s efforts to maintain competitiveness in its markets. </li></ul>
  16. 16. IT Transactional Matters – Software <ul><li>After acceptance by the customer, all work product developed by the service provider will conform to the design specifications. </li></ul><ul><li>All commercially-available software will conform to its published documentation. </li></ul><ul><li>All software that is not commercially available will conform to its documentation and any agreed-upon requirements and performance criteria for such software. </li></ul>
  17. 17. IT Transactional Matters – Software (Cont’d.) <ul><li>All software will be maintained by the service provider in good working order, ordinary wear and tear excepted. </li></ul><ul><li>If the software is designed to prevent unauthorized access, or to disable or erase software or data, or to perform similar actions, then the service provider will provide the customer with the necessary passwords so that the customer will have the necessary access and use of the software at all times. </li></ul>
  18. 18. IT Transactional Matters – Hardware <ul><li>All hardware that may be sold, transferred or assigned to the customer will be: (i) free and clear of all liens, claims and encumbrances; (ii) in good working order, ordinary wear and tear excepted; and (iii) eligible for maintenance by its manufacturer without payment of any fees to become eligible. </li></ul><ul><li>All hardware used to provide the services will be approved by the applicable standards associations in the jurisdictions in which such hardware is located. </li></ul>
  19. 19. IP Matters <ul><li>The service provider is the owner, valid licensee, or authorized user of its IP. </li></ul><ul><li>The service provider IP and proposed use of such materials shall not infringe the IP rights of any third party. </li></ul><ul><li>The service provider shall have the right to grant the license rights set out in the agreement. </li></ul><ul><li>As of the effective date of the agreement, no IP rights infringement claims have been threatened or asserted or are pending against the service provider. </li></ul>
  20. 20. Indemnities – Use of Indemnities <ul><li>Indemnities are frequently used as additional remedy for claim between the parties. </li></ul><ul><ul><li>No need to mitigate damages. </li></ul></ul><ul><li>Submit that this is inappropriate. </li></ul><ul><li>Should only be used for third party claims. </li></ul>

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