Practical tips on preparing effective

IT contracts for police

James Smart | Partner

13 March 2014

Introduction

Key issues for police to consider when

drafting and negotiating IT contracts

How to ensure you can deliver a

successful project: scope/time/budget

Understanding IT contracts in a

police/emergency services context

Victorian Ombudsman report (2011)

– key points

IT projects are often poorly managed and failures are

common

The public sector does not manage IT-enabled

projects effectively

Examined 10 major IT-enabled projects: each failed to

meet expectations, most failed to meet delivery

timeframes and all ran over budget

58 recommendations to improve the way IT-enabled

projects are planned and delivered

Key reasons for failure in IT projects Failing to understand the complexity and cost of a project

Poor business cases

Failing to identify and manage risk

Poor project management and governance structures

Poor procurement and evaluation processes

Poor contracts

Inadequate contract management and performance

monitoring

Staff with inadequate expertise

Promoting good performance

Link payment to performance: link payment with the

acceptance of milestones or KPIs. KPIs should be clear,

relevant, measurable and reported against

Set-off clauses: which allow payments owing to the

contractor to be set off against any amounts claimable as

a result of the contractor failing to meet its obligations

under the contract

Liquidated damages: this avoids the need to litigate and

prove loss. Entitlements to LDs will be most useful in

situations where you are able to calculate what the actual

loss will be for breach of a contractual obligation. If the

entitlement to liquidated damages is a ‘penalty’ it will be

unenforceable

Liquidated damages: tips for drafting

Include a clear method for calculating LDs

Ensure that the amount of damages is not

excessive or out of proportion to any damages

that are likely to be suffered as result of a

breach

Consider how payment will be received. A

deduction by the government body on the next

amount payable is generally the preferred

option

Andrews v ANZ

Caution when drafting

performance/abatement clauses

Need to estimate the likely loss or the

clause may be unenforceable as a

penalty

Contract governance

It is important to ensure the level of service

you will receive is satisfactory – ‘normal’

service vs services required in emergency

situations

Establish a clear governance framework, eg

a steering committee and reporting

protocols and a dispute resolution process

Ensure it is clear how rights and obligations

will be performed

Step in rights

Step in rights ensure that if the contractor's

performance becomes an issue, you can step in

and take over their role

Step in rights should be included:

– in major IT contracts

– in contracts which are crucial to the performance

of your statutory duties

Drafting step in clauses

When drafting step-in clauses, you will need

to consider:

– circumstances

– the need for level of expertise

– the costs and any necessary compensation

– step out procedure

– no liability

Indemnities Why use them?

An indemnity is a primary obligation to provide

compensation and operates like a debt

Consider and allocate risks:

– what are the key risks in the project?

– which party is best placed to manage those risks?

– what types of loss will be covered by the indemnity

and are all relevant losses covered?

– what insurance does the contractor have in place to

guard against the risks?

Indemnities Contractor indemnity: key areas eg breach/negligence

Liability caps – exclude:

– personal injury or death

– confidentiality and privacy

– third party IP rights

Circumstances in which the indemnity will not apply?

– exclusion of consequential loss

– actions by you or third parties

Indemnity by your organisation?

Insurance

Types of insurance

Evidence of insurance

Linking a liability cap to the amount

that can be recovered under insurance

Variations

It is crucial that, when a supplier does not comply with a contract, you take proactive steps to manage the problem

Variations should:

– be in writing

– be in specific terms

– identify all relevant conditions

– identify all other consequential amendments that are necessary

– obtain a benefit for your organisation where

possible

Variations

Manage variations carefully

Conduct a risk assessment for each

proposed variation

– what is the reason for the change?

– will it alter the parties’ obligations under the

contract?

– will it have any financial impact?

– will it have any impact on timing?

Variations

– will it impact on any key documents?

– do you have authority to make the change?

Follow the specific variation procedure in

the contract

Ensure you have not waived future rights

Ensure the contract is kept up to date

following each variation

Planning an escape mechanism

When parties are in dispute and termination is

being contemplated, it is important that the

contract is clear about your rights

Consider whether the following types of clauses

are sufficiently clear in your contract:

– termination for convenience

– termination for breach

– transition out clauses

Termination for convenience

Based on doctrine of executive necessity – eg change in

government or government policy

For reasons of flexibility, you should generally require a

termination for convenience clause

Your sole discretion – no fault needs to be proved

To protect both parties, the contract should usually contain a

clause requiring you to compensate the contractor for loss

caused by the early termination:

– capped amount

– reasonable losses directly resulting from the termination

– exclusions, eg consequential loss

– requirement to mitigate

Termination

Before terminating, ensure you have complied with all of

its obligations

Consider termination as a last resort

Does the contract involve a critical element of your

functions?

Consider long term relationships/intra-government

arrangements

Avoid wrongful termination as this might make you liable

for damages

Termination takes time and costs money and an

alternative supplier will still be required

Transition out

Consider what, if anything, you will require from the

contractor at the expiry or termination of the agreement

Transition arrangements should address issues such as:

– service continuity during transition to a new provider

– access to the contractor's documents, software, IP,

equipment, confidential information and data

– access to personnel

– co-operation with new contractors

– a specified timeframe for the transition

– provision of material to form part of a new RFT

Key legislative obligations

Privacy: contractors must protect personal

information. Contracts should require

compliance with the IPPs/APPs and contractors

should be directly liable for any breaches

Freedom of information: contractors should be

required to provide you with documents in

accordance with FOI legislation

Key legislative obligations

Record keeping legislation: obligations on police

to keep records – eg Public Records Act 1973

(Vic), Archives Act 1983 (Cth)

Audits: requirement for Auditors-General to

access documents of contractors in some

circumstances

Ombudsmen: power to review your actions or

decisions which may extend to actions taken

under contract

Conclusion

Plan and scope each IT project carefully

Understand the context in which the technology or software will be provided

Ensure the services or functionality are documented

Use a contract that is designed for the specific project

Ensure all key risks are identified and appropriately allocated under the contract

Conclusion

Aim is to minimise risk and deliver a

successful project

Important to ensure that the technology or

software is delivered under the contract as

required

Also important to avoid criticism of the way

the contract was managed

Practical tips on preparing effective

IT contracts for police

James Smart | Partner

Direct 61 3 9258 3632

Mobile 0419 148 796

james.smart@maddocks.com.au