Avoid contract traps

How do IT managers avoid being bitten by nasty terms hidden in the many contracts they have to sign? By biting the bullet and learning how to negotiate better deals, say experienced readers.

My recent column on the experience of “Mr. Reading” with an automatic renewal clause in an L-Soft International Inc. maintenance contract sparked a great deal of discussion from readers about how IT managers can protect themselves. Many pointed out that L-Soft isn’t the only software company whose maintenance contract renews automatically if the customer doesn’t give 90 days notice. Such terms are apparently called “evergreen” clauses (since their purpose is to keep the green stuff coming in permanently), and experienced IT contract negotiators say they are always on the lookout for them.

“I have reviewed more than my fair share of contracts, and autorenewal is something I always notice and always strike out of the contract,” wrote one reader who believes all contracts should be reviewed by a lawyer. “After watching bad business decisions and poor contract review cost our company literally millions of dollars, I am not so sure that most midsize companies shouldn’t at least keep outside counsel on retainer…Since many software agreements include other sneakwrap provisions – like providing full access to the premises to inspect the servers to make sure customers comply with licensing, aggressive payment terms, and allowing the vendor to use the customer name in presentations and marketing materials, I think it must be the IT professional’s duty to review this language carefully. Taking the time to review all contracts and licence agreements up front protects the company down the road.”

There are ways for IT customers to play hardball with vendors who won’t modify their terms. “I once was negotiating a large services contract that the vendor refused to negotiate on the softening of the automatic renewal clause,” wrote another reader. “The contract stated that at least 90 days’ notice must be given, there was no upper limitation on the notification, and I knew their intent was that the clause would be forgotten about until it was too late…so at the contract closing, I handed him the cancellation notice that prevented the automatic renewal from taking effect.” Along with giving the vendor a cancellation notice, the reader also notified the vendor that all change orders were going to be completed by another vendor, which prompted the vendor to agree to draft a fairer contract. “It actually turned out to be a good relationship between the companies, but it nearly didn’t happen because of the hidden agenda of their evergreen clause.”

Other readers reported learning the hard way that they must adopt similar tactics. “As a new IT manager back in 1998, I was burned to the tune of (US)$24,000 because our contract database incorrectly documented a 60-day termination notification, when in reality the contract stated 90 days,” wrote another reader. “The vendor was right; our documentation was wrong. Our legal department response was that a contract was a contract, and we needed to cough up the $24K. I was not very popular with my boss to say the least. Immediately after this unpleasant experience, I proceeded to write cancellation letters for every contract we had, regardless of termination date or whether or not we intended to sign up for another year. Any new contracts in which the vendor refused to remove auto-renew clauses were not argued over, but simply signed, sealed, and delivered along with a cancellation letter living up to the auto-renew and termination section of the contract. Believe me, it will not prevent the vendor from invoicing for a maintenance renewal when the time comes. All IT managers with contract responsibilities should review any and all contracts, with or without legal assistance, specifically for termination clauses.”

Experts say that evergreen clauses are among the terms software companies are usually most willing to make concessions on. “It all depends on your negotiation power, but if there are multiple vendors in the mix who want to do business with you, I have never failed to get a termination for convenience clause into the contract,” said Randy Roth, partner at Corporate Consultants (www.corporateconsultants.com). “A termination for convenience clause in a contract allows the customer or both parties to terminate the contract without cause given a certain notice period. The notice period would generally be 30 days for the customer but should be a minimum period of 60 days for the vendor, with the maximum being the length of time that it would take the customer to replace the existing service. In the case of a complex outsourcing agreement, that could be a year or more.”

Along with IT negotiating expertise, it also helps to have a lawyer who knows the state law governing the contract. “At least one state, New York, has a specific rule with respect to evergreen maintenance contracts,” wrote Robert Schrager, business attorney at the law firm of Bondy & Schloss (www.bschloss.com). “New York law provides that no contract for service, maintenance, or repair shall be deemed renewed pursuant to an automatic renewal clause unless the person furnishing such maintenance gives notice (15 to 30 days) prior to the time specified for serving notice of cancellation. The notice must be served personally or by certified mail and must call attention to the automatic renewal clause. I constantly see invalid evergreen clauses in the computer maintenance and leasing contracts that I review.”

Many readers also pointed out ruefully that IT managers didn’t used to need law degrees for their job. Maintenance agreements in particular were seen as a partnership and a way for customers to help keep their vendors in business. Unfortunately, that’s not the way the software industry chooses to work anymore.

Foster is InfoWorld’s reader advocate. Contact him at [email protected].

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