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					    Contracts

IT Engineering II
Instructor: Ali B. Hashemi




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Contract:
“   an agreement between two or more
    persons which creates an obligation to
    do or not do a particular thing… A legal
    relationship consisting of the rights and
    promises constituting an agreement
    between the parties that gives each a
    legal duty to the other and also the right
    to seek a remedy for the breach of those
    duties.”
                 [Black’s Law Dictionary, 6th ed.]

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In other words …

      A contract is a
legally enforceable promise




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Why/When use Contracts?
 Pursuit of the missions
 Buy or sell goods
 Buy or sell services
 Employment of new employee




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What are
the Sources of Contract Law?


 Common law : judge-made law, as
 distinguished from laws passed by
 legislature




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                                         5
Contract law asks and answers
the following questions:
1. Have the parties acted in such a way
   as to create legally recognizable
   expectations in one another;
2. How should we characterize and
   understand those expectations;
3. Was the understanding of the parties
   faithfully carried out;
4. What should the law do about it?
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                                              6
What form must a contract take
to be a legally enforceable?




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Question

Does an agreement between two or
more parties have to be in writing in
order to be enforceable in a court of
law?




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                                            8
A Contract Can Be Written or
Oral
 Certain contracts must be in writing:
   Contracts for the sale of goods over $500! (in US)
   Contracts for the sale of real property
   Contracts that are incapable of being
   performed within 1 year
   Promises to answer for or discharge the
   debts of another (Guarantee)


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                                                        9
Written and Oral
Contract Terms
 Sometimes a contract may be in writing,
    but if a dispute occurs, an issue will be whether
    oral terms have modified written terms

    This is why we have “merger” clauses in contracts, such
    as:

    “This Agreement sets forth the entire understanding and
    agreement between the parties and supersedes all
    proposals or communications, oral or written, between
    the parties relating to the subject matter of the
    Agreement.”

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                                                              10
Written and Oral
Contract Terms (cont.)
  Parol Evidence Rule :
     a rule that oral evidence cannot be used to
     contradict the terms of a written contract
  When a “final” agreement between parties has been
  reduced to writing, evidence of any earlier oral or
  written expressions is not admissible to vary the
  terms of the writing…
     UNLESS…one party can prove a material
     UNLESS
     ambiguity or omission exists in the written
     terms …THEN oral testimony about contract terms
     is considered

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                                                        11
Written and Oral
Contract Terms (cont.)

  A contract is only as good as
 what you can later prove to be
    the terms of the contract




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                                  12
Contracts can have many names…
 Contract
 Agreement
 Purchase Order
 Memorandum of Understanding
 Terms and Conditions
 Handbook (“implied contract”)
 License
 Ticket


 Or no name at all…
               all
     a letter…
     a telephone call…
     an e-mail…




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                                      13
Other names of Contract
 Agreement
 Purchase Order
   a commercial document issued by a buyer to a seller,
   indicating the type, quantities and agreed prices for
   products or services that the seller will provide to the
   buyer.
 Memorandum of Understanding
   is a legal document describing an agreement between
   parties. It expresses a convergence of will between the
   parties, indicating an intended common line of action,
   rather than a legal commitment. It is a more formal
   alternative to a gentlemen's agreement, but generally
   lacks the binding power of a contract.

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                                                              14
Contracts can have many names
(cont.)

   Terms and Conditions
   Implied contract/Quasi-contract
      A quasi-contract is a contract that should have been
      formed, even though in actuality it was not.
   License
      A licence (British English) or license (American
      English) is the document demonstrating that
      permission.
      License may be granted by a party ("licensor") to
      another party ("licensee") as an element of an
      agreement between those parties.
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                                                             15
What are the
Elements of a Contract?
 Offer
 Acceptance
 Consideration
 Mutuality


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Offer
 A proposal to do a thing or pay an
 amount
   usually accompanied by an expected
   acceptance, counter-offer, return
   promise or act
   A contract is said to come into existence
   when acceptance of an offer has been
   communicated to the offeror by the
   offeree.

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                                                17
Acceptance
 Compliance by the offeree with terms
 and conditions of an offer
   Aggreement to terms of offer in a manner
   invited or required by the offer
   The offer and acceptance must match:
   mutuality




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Acceptance           (cont.)

 Does not necessarily occur only by
 signature of a contract
 Acceptance can occur by:
   Action
     using goods
     opening the package (software)
     entering an establishment or
     participating in an activity
   Inaction
     not returning goods


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Acceptance            (cont.)

 Sometimes acceptance does not appear
 “voluntary,” but it is still sufficient
   adhesion contract (one-sided
   contract/standard form contract )
     A fine-print consumer form contract which is
     generally given to consumers at point-of-sale,
     with no opportunity for negotiation as to it's
     terms, and which, typically, sets out the terms
     and conditions of the sale, usually to the
     advantage of the seller.
     “Take it or leave it” terms
                       it

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                                                            20
Can Email Be Conclusive!




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Consideration

   What is the “value” of a
          contract?




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Consideration                (cont.)

 It’s not only what your company
 receives or pays, but also What it
 agrees NOT to do :
   confidentiality clauses
   non-compete clause




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Mutuality
 A “meeting of the minds” with respect
 to material contract terms
  A signature, sufficient to evidence this
    signature
  requirement
it is crucial that you read carefully and
      understand all of the terms of a
         contract before you sign it


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                                                  24
Some Additional Contract
Elements:
 Both parties must be legally competent
   Over 18 and mentally capable of
   understanding the agreement
   Authority to negotiate for and bind a
   company/institute




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                                                25
Information that you should
include in contracts…
 Clear and specific statements of your
 requirements and expectations
   Type of performance expected
   Quality, including inspection before
   Quality
   acceptance
   Timing of performance
   Warranties or guarantees, if applicable



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                                                  26
Contract Clauses to Include(cont.)
 Clear statements that specify
   all terms,
   documents,
   attachments,
   proposals,




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Contract Clauses to Include(cont.)
 Provisions that protect the your/your company’s
 interests, assets, and information (i.e., confidentiality)
 Liability Protections
    Defense & Indemnification
    Insurance

 Termination
 Dispute Resolution
    Litigation; Arbitration; Mediation
    Governing Law
    What court? Where?


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Challenges,
Problems & Pitfalls




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Potential Contract Pitfalls
 Not reading and understanding the
 contract


 Not negotiating and documenting the
 contract’s terms as needed to reflect
 your requirements


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Potential Contract Pitfalls
(cont.)
  Disclaimers or limitations on the other party’s
  performance;
    ِDisclaimers of warranties, etc.
  Any clause permitting the other party to
  change contract terms without the permission
  of you in writing
  Failure to specify all terms, documents, etc.
                         terms
  that are included in the contract
  Failure to show acceptance (i.e. signin)
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Potential Contract Pitfalls
(cont.)

  Reference to terms, documents or
  websites that you have not been
  provided
  Indemnification, Liability Releases,
  Indemnification            Releases
  Limits on Other Party’s Liability




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Potential Contract Pitfalls
(cont.)

  Termination of Contract
    Excessive opportunity for the other party to cure its
    breaches of the contract
    Excessive or unreasonable penalties imposed on
    yourself for terminating the contract
  Dispute Resolution in
    distant locations (other party’s country)
    and under laws of a foreign country! (other party’s
    country)


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Potential Contract Pitfalls
(cont.)

  Is a promise to make a gift (a pledge) a
  contract?
     No consideration, so not a binding contract
     unless…
          reasonable reliance by intended recipient and
          to its detriment
          (e.g., starting construction on a building,
          inducing other donors to give)


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                                                          34
Potential Contract Pitfalls
(cont.)




 ALWAYS LOOK A GIFT HORSE IN
         THE MOUTH …



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39




     36
What if a contract
  is breached?




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Remedies for Breach of a
Contract
 Money Damages
   Compensatory: actual or real damages;
   Compensatory
   compensate for the injury sustained and nothing
   more
   Punitive damages: financial compensation
            damages
   designed to punish the party that cause the injury
   Nominal: token amount of money because of
   Nominal
   technical wrong but no actual damages



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                                                        38
Remedies for Breach of a Contract
(cont.)

  Money Damages (cont.)

    Consequential damage: loss or injury that
    doesn’t flow directly and immediately from
    the act, but only from some of the
    consequences or results of such act

    Liquidated: specific sum of money
    expressly stipulated by the parties in the
    contract to cover damages

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Remedies for Breach of a Contract
(cont.)

   Specific Performance
      Money damages aren’t adequate to give
      the plaintiff the “benefit of the bargain”
          Remedy used if the item is unique, such as a
          piece of property or artwork
      So, the defaulting party is required to
      perform its obligations under the contract



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                                                         40
Things to Remember…
 Use your company form contracts,
 even company Purchase Orders,
 whenever possible


 Be as specific as possible




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                                         41
Question
 In deciding who will sign a contract on
 behalf of a company, which is better:
   A staff member, who read and negotiated
   the contract signs?
   Vice President, who has never read the
   contract?




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Who May Sign A Contract?
 Only those individuals who have been
 expressly delegated signature authority
 by the Board of Trustees or senior
 management

   Unauthorized individuals who sign contracts
   on behalf of the company expose
   themselves to possible personal liability

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                                                 43
10 Commandments
  of IT Contracts




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                         44
Dilbert on Software
Development




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                           45
Dilbert on Software
Development




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Dilbert on Software
Development




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Dilbert on Software
Development




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                           48
1st Commandment of IT
Contracts

I – No Computer Project is ever
    completed on time!




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                                       49
ERP Systems Implementations
         Underestimate complexity
         Too many options and variables
         Customer has too many culture
         changes
         Change is inevitable




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SCHEDULE OF EVENTS
 Should be part of every agreement
 May be modified by mutual agreement
   Cannot allow vendor to unilaterally change schedule




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SCHEDULE OF EVENTS                              (cont.)

 Milestone events should be significant
   finish major component
   Accounting software completes month end, or data
   converted or complete W-2 forms
 Payments may be tied to milestone events
   Percentage of completion
   Always keep a holdback until 60 days to 1 year
   after last milestone



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Change Orders
 Permits changes during course of
 contract life
 Requires written approval




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                  2nd Commandment
                  of IT Contracts



I – No Computer Project is ever completed on time!
II – No Computer Project is ever complete!




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Projects
 Project plan
   must be mutually agreed to
 Vendor’s proposals for each phase
   should be broken into reasonable phases
 Customer acceptance of design
   If no agreement on design, the ultimate system
   is doomed



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Projects (cont.)
 Testing
   Customer must conduct its own testing
 Acceptance of each phase
   Milestones which should be included in
   schedule of events
 Acceptance of entire system as a whole
   It is possible that the entire system will
   not work as a whole

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Acceptance Procedures
 Agreed testing procedure
   HARDWARE
      standard manufacturer’s diagnostic-
      customer must see
   SOFTWARE
      OS
      standard tests are possible
   APPLICATION
   prepared software vs. Customized




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                                                 57
Acceptance Procedures                    (cont.)

 Written acceptance or rejection
   If rejection, vendors has opportunity to
   rework deliverables
     benefits vendor and customer

 Payments should accompany acceptance
   Pay on performance



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                   3rd Commandment
                   of IT Contracts



I – No Computer Project is ever completed on time!
II – No Computer Project is ever complete!
III – If you cannot see the software, it does not exist!




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Deliverables
 Software
   Operating Systems
   Databases
   Utilities
   Applications
 description version numbers
 license specifics, source
 and/or object

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New features in future versions of software
  but until that software is actually operational you
  cannot be sure how it works.
To solve this problem, if you are buying a
software license for new software, make sure
that you actually see it in operation and that it
really has the specific features that you think
important.
Do not buy vaporware
  (Computers) software that was announced by a company far in
  advance and has not yet been released (and may never be)

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Show it in RFP & Proposal
 Have contract terms in RFP?
 Include in the IT Contract?
 Best to state in the RFP
 Proves what was represented




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                     4th Commandment
                     of IT Contracts



I – No Computer Project is ever completed on time!
II – No Computer Project is ever complete!
III – If you cannot see the software, it does not exist!
IV – New versions of operating systems never work!


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Operating Systems

            Windows
            Unix/Linux




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NEW OS Bugs!
 The newest version of Windows or unix
   unlikely that it will work properly on the day it is
   announced.
   Remember the 1st and 2nd Commandments.
 Wait until the newer versions of operating
 systems have corrections.
   Usually, the manufacturers release these
   corrections soon after the initial wave of
   deliveries.


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                     5th Commandment
                     of IT Contracts



I – No Computer Project is ever completed on time!
II – No Computer Project is ever complete!
III – If you cannot see the software, it does not exist!
IV – New versions of operating systems never work!
V – There are no Industry Standards!
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Standards?




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Why its important?
 Of course there are standards, just not
 standards adopted by everyone.
   IBM wants everyone to adopt its standards, as
   does Hewlett Packard, and Dell.
 When a vendor warranty that its technology
 complies with industry standards is a very
 weak warranty.
   Contract warranties should be specific as to
   features and functions, and not a vague
   standard that would be difficult to establish in
   court.

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               6th Commandment
               of IT Contracts




VI – Do not buy brand new hardware!




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Deliverables
 Hardware
   Mainframes
   Servers
   PC’s
 description, model number,
 manufacturer
 hardware specifications
    Mainframe require more detail
    about the same amount as
    Servers
    PC’s may be generic or specific to
    a brand

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Inevitably computer hardware goes to
market before the engineers work out all
the bugs and problems.
  There is a very high probability that brand new chip
  or innovative technology will have problems.

Wait until the manufacture offers fixes to
the new technology.




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                7th Commandments
                of IT Contracts



VI – Do not buy brand new hardware!
VII – Do not buy brand new software!




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NO new software
 Similar to operating systems and hardware
 New computer applications often do not
 work properly when initially delivered.
   Microsoft Internet Explorer (IE)
   Serious security issues for which now Microsoft
   has offered patches.
 Expect having problems in a new computer
 software package
   Watch for the vendor to offer some fixes!

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                  8th Commandment
                  of IT Contracts



VI – Do not buy brand new hardware!
VII – Do not buy brand new software!
VIII – Sales people have answers to every question!




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Sales people and
How to avoid them
 Individuals who sell computer technology generally will have
 answers,
    whether the answers are right or wrong.
 Solution:
    Insist that technical support people be present to answer technical
    questions.
    Contact or see other customers who use the same products.
       How accurately the sales representations were
       How long the project actually took, the amount of training, and if
       there are one or two key individuals that you should require to be
       part of the project team.




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                                                                            75
                 9th Commandmenat
                 of IT Contracts



VI – Do not buy brand new hardware!
VII – Do not buy brand new software!
VIII – Sales people have answers to every question!
IX – Sales people know absolutely nothing!


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                                                      76
Again sales people
 A bit of an exaggeration,
   but really a variant to the 8th Commandment.
 Sales people know more about their
 products than you, but their knowledge
 may be very superficial.
              superficial
 Another reason to speak to other
 customers.



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                  10th Commandment
                  of IT Contracts



VI – Do not buy brand new hardware!
VII – Do not buy brand new software!
VIII – Sales people have answers to every question!
IX – Sales people know absolutely nothing!
X – Individuals who negotiate contracts are never
    around later!
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10th Commandment of
IT Contracts (cont.)
 High mobility in the IT industry
   Assume that a year after you negotiate an IT
   contract, the people you negotiated with are long
   gone.
 All important items negotiated and relied upon
 by you when you committed to your purchase
 should be included in the IT contract.




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                                                       79
      Software Contracts:
    10 most litigated clauses
1. Scope
     what is licensed or purchased,
        is it exclusive?
        who else can use it?
        what conditions for 3rd party assignments?

2. Ownership Rights
     who owns the software?
     who owns derivatives created by user/licensee?
     Consider the contractor own the source code, what
     happens if it fails to maintain and update the
     software as promised ?




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                                                               80
Source Code Escrow
 Source code escrow: deposit of the source code of
               escrow
 the software into an account held by a third party escrow agent
    to ensure maintenance of the software.
    The software source code is released to the licensee if the licensor
    files for bankruptcy or otherwise fails to maintain and update the
    software as promised in the software license agreement.
                                                   agreement
 Validation process
    Updates may be blank, incomplete, use diff compilers
 Licensee access to source code
    If bankruptcy trustee will provide source, unless customer has
    direct contract with trustee… maybe not then
    ONLY BY COURT ORDER -trustee has fiduciary duty to protect only
    assets of debtors

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                                                                           81
Source Code Escrow: Solution
 Best option is to get source code
   Ability to verify source code
     Load on computer to verify, and if
     incomplete tell vendor immediately
     then remove and put in secure location
   BUT License fee may be higher
     Safety issue to confirm success of
     customer’s business


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                                                    82
Software Contracts:
10 most litigated clauses            (cont.)


3. Specifications
    What does the software do?
    How does it do that?
4. Delivery
    Where, when and how is software to be
    Where
    delivered?
    How about partial deliveries?
    How are delays to be dealt with?

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                                                  83
Software Contracts:
10 most litigated clauses               (cont.)


5. Testing
    If software is to meet certain specs, how
                                   specs
    does licensee determine specs are met?
    What criteria for testing?
    What happens if testing fails to meet entire
    criteria?
    Who handles fixes?
                fixes


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                                                   84
Software Contracts:
10 most litigated clauses                            (cont.)

6. Marketing/Distribution Obligations
     Is licensee/distributor required to spend specific TIME or
     MONEY to promote software?
     What happens if software does not sell after reasonable
     time?
     If unsatisfactory, how does relationship end?

7. Royalties & Accountings
     How is royalty computed?
     What happens where software bundled with hardware
     and 3rd party materials, how is royalty computed?

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                                                                  85
Software Contracts:
10 most litigated clauses                                (cont.)

8. Warranties & Sharing of Liabilities
     Who and how are defective software fixed?
     What if damage fatal?
                    fatal
     What if tech fails entirely and bankrupts
     business or cause collateral damages to 3rd
     party systems for instance,
       How about personal injuries, in a multi-platform mixed vendor
       situation,
       How do you determine who and what caused problems



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                                                                       86
Software Contracts:
10 most litigated clauses                        (cont.)

9. Confidentiality & Trade Secret
      What obligations are imposed on licensee and its
      employees during tenor of license?
      How are obligations enforced?
      What are the consequences of breaches of these
      license provisions?
10. Dispute Resolution & Jurisdictional Issues
      Where and how are disputes over contract
      provisions to be resolved?
      What law applies to deal?

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