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P TPS
CIPS TIPS
CIPS TIPS
CIPS TIPS
CIPSTIPS
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 ...
TABLE OF CONTENTS
Introduction ....................................... , 2 

Acquisition assistance .........................
Introduction
It is recognized that implementing a computer system is a fairly complex
undertaking and based largely upon t...
Supplier(s) some element of protection, Proposals will often make specific
reference to the most pertinent provisions of t...
available through a number of software houses that have similar applications to
those required by the User and designed to...
dates and confirming that maintenance services will be available. While these
elements form the framework for system acqui...
desire to find the solution to that need as soon as possible. Due to Supplier- or
self-imposed time limits, Users often si...
User some right to use the software under certain predefined and limited
conditions. There might also be a separate hardwa...
many installations, depending on the circumstances, they can be consolidated
into one or two documents.
1. Hardware sales ...
• Is the most recent version or release of the operating system and system
software included, and does the licence entitle...
such support, the issues which must be addressed and put in writing, include
the following:
• Detection and correction of ...
the equipment in lieu of renting it. An alternative is the
2. Finance lease. A lease of this type will generally come abou...
1. Outright purchase: Under this approach, the User acquires the system
tbrough his own internal source of funds or throug...
and all other communications between the parties with respect to the sub;ect
matter contained in the contract. "
Essential...
those requirements, provisions for payments, contingencies and remedies for
default. The User, in a computer acquisition, ...
Louis H. Milrad
Louis Milrad, whose practice is primarily restricted to computer-related
matters, is a member of the Toron...
• 

Canadian Information ProcessingSociety 

L'Association Canadienne de L'lnformat/que 

The Canadian Information Process...
CIPS TIPS - the series you can't afford to miss
Here's a handy, innovative way to update your knowledge of key topics with...
NAME_ _ _ ___ _ _________ MEMBERSHIP NO._____ _
COMPANY____ ___ _ ___ _ _ _ ___________ ____
ADDRESS_____ ___ _________ _ ...
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  1. 1. P TPS CIPS TIPS CIPS TIPS CIPS TIPS CIPSTIPS AVOIDING THE LEGAL PITFALLS IN ACQUIRING ACOMPUTER SYSTEM BY LOUIS H. MILRAD WEIR &FOULDS
  2. 2. "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 Prepared by: Louis H. MiJrad Weir & Foulds, Barristers and Solicitors Published by: 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 Soc~ ~ ­ 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. r
  3. 3. 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 I
  4. 4. Introduction 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 implications. Acquisition assistance 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 •
  5. 5. 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 his Supplier(s). 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 should: • 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 perform. 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. System approach 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 r
  6. 6. 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 design specifications; • acceptance testing procedures for the hardware, software, and the over-all system; • performance milestones coupled with payment schedules; and • representations and warranties as negotiated between the Supplier and the User. 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 •
  7. 7. 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 advisors. 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 r 5
  8. 8. 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 software. 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 with: • 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 •
  9. 9. 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 peripherals. Contract documents The following agreements, referred to above, should also be considered. In • CIPS TIPS r 7
  10. 10. 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 system software? • 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 subsequent resale? 8 CJPS TIPS •
  11. 11. • 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 supplied and the terms of use. 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 User? • 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
  12. 12. such support, the issues which must be addressed and put in writing, include the following: • 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 analyst). 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 years. • 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 charge. • Assurance that a certain level of service will be maintained throughout the term. 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 •
  13. 13. 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 lhree ways: 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 preserved? • 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. System acquisition Essentially, the components of the system may be acquired by the User through any of the following four methods or any combination of these approaches: • CIPS TIPS 11
  14. 14. 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. Contract overview Risk/benefit assessment 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 contract overrides "all proposals, prior agreements, representations, whether oral or written, 12 CIPS TIPS •
  15. 15. 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 obligations. Conclusion 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
  16. 16. 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 •
  17. 17. 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
  18. 18. • 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 information processing. 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). CIPS 243 College St. 5th Floor Toronto, Ontario M5T 2Y1 (416) 593-4040
  19. 19. 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 outlined below: • 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 business. • 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. Membership Information 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 _ __ _ _ _ _ __
  20. 20. NAME_ _ _ ___ _ _________ MEMBERSHIP NO._____ _ COMPANY____ ___ _ ___ _ _ _ ___________ ____ ADDRESS_____ ___ _________ _ _ _____ _ ___ _ CITY_____ ____ ____ ___ PROV._ _ _______ _____ POSTALCODE____ ______TELEPHONE( 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 CIPS 243 College Street 5th Floor Toronto, Ontario M5T 9Z9
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    Mar. 2, 2021

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