If you don’t know the difference between a warranty and an indemnity, you are certainly not the first person and you won’t be the last. If agreement clauses, contract variation and limitation clauses leave you cold and the thought of dispute resolution leads to sleepless nights, you are not alone.
However help is at hand to ensure you get the right contract in place at the outset of any project, preventing a serious headache, not to mention a significant legal bill, later.
Analysis of over five years’ of claims data has revealed that 49 per cent of all technology professional indemnity claims have stemmed from contract breach, yet many companies are not doing enough to protect themselves against being sued for breach of contract.
In a lot of cases, these disputes originate from poorly worded contracts leading to misunderstandings between the suppliers and their clients. In other cases smaller businesses have often felt pressured into signing customers’ contracts or terms and conditions without feeling able to challenge or even review specific clauses.
The analysis suggests that some of the most common reasons that tech companies’ clients use as the basis to sue include project delay and the supplied service being regarded as not fit for purpose. However, we have also seen disagreements over fees and material defects such as loss of client data.
It is not only breach of contract; technology companies also face threats from intellectual property claims. For example, accidentally breaking someone else’s copyright, and theft of high value equipment from offices or data centres. Therefore it is important to ensure you get the right advice, and of course cover, to help safeguard against these eventualities.
One of the most effective ways to reduce the chance of a breach of contract claim being made, which in turn reduces the chance of expensive litigation and, as importantly, a breakdown in relationships, is to ensure that contracts drafted at the outset lay out clear responsibilities and that there is an agreed process if mediation is required.
To help technology companies improve their understanding of the common pitfalls when it comes to drafting contracts, Hiscox has teamed up with leading law firm DLA Piper to provide tips on dealing with a range of issues that all businesses should be aware of, and understand, when engaging in contractual agreements, including:
- Understanding how a contract is formed: A contract is formed between two parties when the basic principles of offer, acceptance, consideration (payment in any form, not necessarily in money) and an intention to create a relationship have been met. When negotiating a contract, it is important to keep in mind the four basic principles so as not to bind yourself to terms which you had not intended to agree to.
- The differences between a warranty and an indemnity: In English law, a warranty is a contract term which, if breached, may give the innocent party the right to claim damages. It does not usually allow the innocent party to treat the contract as if it had been ended. An indemnity is a promise made by one party to compensate another party for a specific loss, often related to a third party claim.
- Agreement clauses: Including an ‘entire agreement clause’ in a contract helps to ensure that the written contract agreed between you and your client sets out the full extent of your responsibilities, reducing the possibilities of future disputes.
- Contract variation: A contract variation can be spoken or in writing. Any agreement which varies the terms of an existing contract must either be supported by consideration or be executed as a deed.
- Dispute resolution: In the event of a dispute, you should first check your contract to see if it contains a dispute resolution procedure which the parties are required to follow. Even if the contract has been terminated, most dispute resolution clauses remain and therefore all parties are obliged to comply with them or risk being in breach of contract.
Getting the right legal advice at the right time is key to dealing with any dispute that does arise. Ensuring that you have the right paper trail and the ability to find the relevant documentation to support your case is vital and remember to inform your insurance company as soon as you become aware of any claim, even if a formal dispute has not yet arisen as failure to do so could invalidate your cover. Most importantly of all, getting the contract negotiations right at the start could prevent problems down the line.