Friday, January 3, 2014

Service warranties

This was a discussion on LinkedIN and people of the selling side basically wanted to provide limited warranties and limit the buyer’s remedies to just re-performance of the work. While that’s nice for them, it may not provide the buyer with adequate protection and the amount of protection required under services contracts varies based upon the type of the services being performed.

To select the right warranties to be included in your agreement you always need to consider two basic things. The first is what is the nature of the services that are being performed as that has a clear impact on what you may need. The second is what would be the impact if those services were not performed correctly? Services can range from something simple such as custodial services for an office space to providing highly technical design services to create a product, design a facility or design a manufacturing process. The impact of failing to correctly perform services can be minimal or they may cause significant damage. In the performance of certain services the transaction may also become subject to a variety of laws that apply to the performance of the work. For example services involving certain technology are subject to export control laws. Services that deal with personal data are subject to personal data laws to protect the individual’s rights in that data. Services for certain heavily controlled industries like banking may be subject to a number of laws.

To provide my thoughts I’ll break service warranties into the following categories. General, Authors or Creative Works, Software, Quality warranties, Export, Personal Data.

General Warranties

The party signing the agreement has the right to enter into this Agreement. This means that they are fully authorized by the company to execute agreements on the company’s behalf. If they are not the other company may not be obligated to perform, but the individual that signed the agreement and gave that warranty can be personally liable for the damages caused.

Performance will comply with any law, regulation or ordinance it is subject to. If a service is performed and that service does not comply with applicable laws the buyer may be liable for that non-compliance or may not be able to use what was produced by the services. For example an owner hires a construction contractor to construct an addition, if that contractor failed to follow the local building codes, the owner would need to correct the work or would not get a certificate of occupancy to be able to use the addition.

No claim, lien, or action exists or is threatened against Supplier that would interfere with Buyer’s rights.
You hire a company to perform maintenance services on your air conditioning systems. That supplier subcontracts with another supplier to perform those services in other locations. The supplier does not pay the subcontractor. The subcontractor files a mechanics lien against the property since they have not been paid.
The landlord that owns the property has a clause in their lease that requires your company to have the lien removed. This warranty would allow you to go against the supplier to collect the cost of having the lien removed.

Services do not infringe any privacy, publicity, reputation or intellectual property right of a third party;
Simply stated what you want is for any supplier that you hire not act in a manner where you could be sued by a third party for infringement of their rights. Under the theory of agency the buyer is the principal in the relationship and the supplier is considered an agent of the buyer and principals can be liable for the acts of their agents.

Services Involving Authors or Creative Works

All authors have agreed not to assert their moral rights. In the United States, the term "moral rights" typically refers to the right of an author to prevent revision, alteration, or distortion of her work, regardless of who owns the work. If you have a service performed for you such as having someone take a photograph or create a document, you want the right to make changes to that for future use, updates etc. To ensure you have those rights you want authors to waive their moral rights in the works.

Services Involving Software Code:

Software does not contain harmful code. Harmful code or malware is defined as software that may be used to disrupt computer operation, gather sensitive information, or gain access to private computer systems. As a software user you want any disputes that you may have with the licensor or that the licensor may have with a third party licensor to be resolved contractually and not by the parties accessing code as part of self help where they can disable the use of your use of the code. You also don’t want the to have code that could access your or your customers information or systems.

It has disclosed any third party code that is included in or is provided in connection with the Software. The disclosure of what third party code is used in the software you will license is something that allows you to identify potential risks associated with that third party code. This is especially important when the third party code is open source code. There are two primary risks with open source code. One is the potential claim of infringement of another party’s intellectual property rights. The second is the impact that open source code can have if you were to use the licensed software to create derivative works. Open source software requires that any use of it be licensed under a General Public License (GPL) and you would need to license your derivative work under a GPL and would not have any IP rights in that protected.

Software is in compliance with all licensing agreements applicable to such third party code. If you license software the includes third party code, you want to ensure that they are not in violation of their license agreement with the third party as the third party could prevent you from using the software because your software supplier is in breach of their license agreement with the third party.

Quality of Services Performed

Services will be performed using reasonable care and skill. This is a standard warranty for quality. Depending upon the services being provided and the service provider, you can always raise the standard to a higher level. For example you could have the standard apply to someone experience in providing that service,
An individual that has a minimum number of years of experience providing that service or an expert in providing that service and what is reasonable care and skill will vary based upon the classification.

Deliverables will comply with the specifications and requirements of the Agreement. Most of the time you would use this for what I call break/fix services. In the end you want the item being repaired to meet the same requirements and specifications as the original. One of the problems with this warranty is all requirements of the original specification may not be able to be met. For example in a out of warranty repair service the service performed may be simply to identify a defective part and replace that. The repaired item would never be able to meet the original product’s reliability specification as all the items that weren’t replaced have been subject to wear through use. In that case you may want the deliverables to simply meet certain performance and functionality requirements,

Services Involving Technology that is Subject to Export Controls:

It is knowledgeable with and will remain in full compliance with all applicable export and import laws. A supplier’s compliance with export and import laws is important as the buyer can be subject to substantial fines and other penalties and may have their rights to export be impacted as a result of any violation.

It will not export U.S. content provided by Buyer to any of the countries or to nationals of those countries listed in U.S. Export Administration Regulations. For contracts involving U.S. Buyers, especially those involved with high technology, there are strict export controls over providing information to individuals or companies from locations that have access restricted by the U.S.. The buyer can be subject to substantial fines and other penalties and may have their rights to export be impacted as a result of any violation.

Services Involving Personal Data

It will not use, disclose, or transfer across borders any information that is processed for Buyer that may identify an individual (Personal Data), except to the extent necessary to perform under this Agreement. This type of a warranty takes into account the fact that different countries provide significantly different legal protection to personal data. As such the Buyer who is responsible for that personal data and who could be liable for its wrongful use wants to make sure the data is only held within one location and is not used, disclosed or transferred to any location where it will receive different protection under the law. This is also a significant issue with Cloud contracting as protection for not just personal data but also confidential business data and Intellectual property may vary significantly based upon the location where it is being stored.

It will comply with all applicable data privacy laws and regulations. While this may be redundant to the general warranty of complying with laws, it may be inserted simply to remind the supplier that personal data is involved and there are different laws that they need to comply with.

Liability and Remedies.

Many times a supplier may want the sole remedy for the breach of a service warranty to be the obligation to re-perform the service. In deciding what is appropriate you need to consider the impact that a breach will have. Let me give you a few examples just to get you thinking about what’s appropriate in different situations:

You contract with custodial services provider for daily cleaning of a location. They fail to provide the service on one day. That day has passed and you don’t need to have the service performed twice the next day to make up for the failure. The appropriate remedy for that is not to re-perform the service, it’s a deduction of the value of that service from their next payment.

You have a contract with a heavy equipment repair shop to repair a huge diesel engine for a bulldozer. The supplier performs the repair and fails to replace several parts. You turn the engine on and it destroys the engine.
Re-performing the repair isn’t going to fix the destroyed engine. What should be the liability and remedy?

You contract to have a supplier provide “cloud services” where personal data will be stored. The security of the cloud system is breached. That data is accessed by third parties who wrongfully use that data. What should be the liability and remedy?

You hire a contractor to perform a highly technical design service. You provide them with critical technology designs, and they fail to manage that data and it winds up being disclosed to a third party operative of an export restricted company. What should be the liability and remedy?

You hire a contractor to perform debit card processing services where shutdowns of any kind are costly because of either loss of business, or the fraud or collection problems they can create. What should be the liability and remedy?

You hire a designer or design build contractor to build a power plant that will produce a specific output. That output is never reached. What should be the liability and remedy?

There is no set formula for structuring liability and remedies. I once negotiated a Debit Card Processing agreement for a Bank. Their major concern was they wanted the suppliers system to be as stable as possible during peak shopping periods. We wanted to make sure that there were no system changes during peak processing times and shutdowns for maintenance needed to be done in the middle of the night to have the least impact on our customers and the least financial impact on the Bank. General service level measurements, which are averages, didn't work because they didn't take into account the impact. I structured liquidated damages based upon three factors. The length outage, the severity of the outage, and when the outage occurred. If they were down in the middle of the night it cost them nothing because our losses would be minimal. If they were down right in the middle of a peak shopping day where the number of transactions was in the millions it became very expensive. The longer they were down the more it cost. I believe liabilities and remedies should be used to drive the behavior you want.