Are your contracts as adaptable as the rest of the company?

During the corona pandemic, digitalisation, and new technologies such as artificial intelligence, IoT and virtual reality have been boosted – i.e., because they make it possible to change and streamline work processes in a very short time.

Adaptability has become a competitive parameter in line with price and quality, and it is therefore important that you also consider adaptability in your legal contracts. The contracts should be designed so that you can react quickly, flexibly, and cost-effectively when new requirements, opportunities and risks arise in your market. 

Here are three tips for anyone who’s work includes negotiating contracts in a digital world.

1. Consider the minimum period of the contract

A contract with free termination and short notice of termination gives both parties a high degree of flexibility. Conversely, it can also create delivery uncertainty for the customer and uncertainty about earnings for the supplier.

Contracts for current deliveries such as outsourcing are often non-cancellable for longer periods or have long notice periods. Here you can advantageously combine one party’s right to non-termination with the other party’s right to terminate the contract ahead of time if they pay an amount for the withdrawal. It must ensure the supplier a reasonable compensation for the remaining non-cancellation period. Conversely, if the supplier terminates the contract, the notice should always be long enough for the customer to find a new supplier.

Flexible minimum contract periods ensure that you can get out of a contract relatively quickly in return for paying compensation that is significantly lower than the amount you should have paid during the remaining non-cancellation period.

1. Choose the right level of IT security

Unfortunately, increasing digitalisation has led to more cybercrime, and the IT criminals today are professional IT specialists, often sponsored by criminal networks or states. Any system connected to the internet can probably be hacked. All contracts for outsourcing of operations and monitoring of systems, data and digital processes should therefore describe the requirements for IT security that the supplier must meet.

Many suppliers offer the customer to choose from several security levels. The more security, the higher the price. The level of security you choose should balance the risk assessment you have made of the customer’s systems, data, and digital processes. Relevant questions that the supplier should answer in this connection in the contract are, for example:  

• What level of access control must we meet?
• What requirements for continuous updating (patching) of the systems do we have to meet?
• What requirements for logging access and behaviour on systems and IT infrastructure do we have to meet?
• What requirements for manual and digital monitoring of the operation and access to the systems, including the use of antivirus programs and firewalls, must we meet?
• What requirements for response and remediation when compromising systems, data or digital processes do we have to meet?
• What special security requirements must we meet to continuously document that we comply with the agreed level of security?
• Effective resolution of disputes over contracts

1. Effective resolution of disputes over contracts

No companies should waste time and money on contract disputes. They can drag out for years, and when they are finally settled, the parties have missed the options that were in the contract before it went wrong.

In line with digitalisation, the business community is demanding more effective methods of conflict resolution when negotiating new contracts. Ideally, courts or arbitration should be last resort to resolve a conflict in particular, the conflict resolution method mediation has proven to be very effective – both in small conflicts between two parties and in more complicated disputes with many parties involved.

A mediation clause can be incorporated into any contract and is binding on the parties if a dispute arises. You can, for example, agree that a party may not bring legal proceedings until the dispute has been resolved through mediation meeting of one day duration, where parties with help from an independent mediator negotiate a legally binding settlement. With mediation, disputes can in many cases be resolved within a month, and the costs are limited to the remuneration of the mediator.

The article was first published in Ind§igt 25 in December 2021