Systems integration agreements lawyers

The term systems integration agreement is used to describe a contract for the acquisition, development and integration of hardware and software which is necessary to produce, in conjunction with the customer’s business data, an entire computer system. In a systems integration agreement a purchaser agrees to purchase a new IT system. This purchase may include integration services, software, hardware, licence or intellectual property rights, and ongoing support and maintenance services.

A systems integration system may be turnkey in nature or may involve the integration of components that have been purchased separately by the user. A turnkey system means that the user only has to “turn a key” to have a fully operable computer system.

There are many advantages to turnkey agreements. A customer will normally be better able to insist on useful contractual protection, such as warranties as to the functionality and performance of the system, if they buy a complete system from a single supplier, rather than acquiring components from separate suppliers. The remainder of this note will focus on turnkey agreements.

Systems integration agreements – Acceptance tests

Acceptance tests allow a business to test a system for acceptability. Acceptance tests are usually prepared and run by the supplier, but the customer may want to do this themselves, or at least have an involvement. The two parties need to reach a compromise between their competing interests in agreeing the tests and required performance.

The customer will prefer testing to go on for a long time to ensure that all problems are identified and accepted before the system is accepted. The supplier will prefer short and simple tests leading to early acceptance, leaving any problems to be ironed out later under the maintenance agreement.

Systems integration agreements – System acceptance

Acceptance of the system will generally be deemed to have occurred when the customer signs an acceptance certificate. Acceptance may also be deemed to have occurred by the use of the system in the normal course of business or after completion of the acceptance tests, unless the customer has given written notice to the contrary to the supplier.

The customer has an interest in delaying acceptance until it is happy with the system because once the system has been accepted, it loses the right to reject it and get it money back, and its only remedy is damages.

However, delay in acceptance is of great concern to the supplier in a fixed-price contract, or where a significant proportion of the price is payable on formal acceptance. To address this concern, the customer will usually agree to carry out its obligations in the acceptance testing process in a time-efficient fashion.

Systems integration agreements: Intellectual property rights

Software is protected by intellectual property rights. Intellectual property rights should be considered for three types of software in a systems integration agreement:

  • Pre-existing software used without modification.
  • Pre-existing software which is to be modified.
  • New software which is to be developed for the customer.

Each party should carry out due diligence before entering into the agreement. The due diligence burden may fall on either the supplier or the customer, or potentially both. The parties should find out what the intellectual property rights position is and in particular what licences are necessary for the project to go ahead. The supplier should also establish what it needs to provide the services, particularly in terms of licences from the customer, third parties and its own software.

To use pre-existing software, the customer needs a licence from the owner of the rights in the software. Since the mere act of loading software into a computer involves copying it into the computer’s memory, a licence is required even for the most basic use of a computer program. The scope of this licence is a matter for negotiation between the parties.

Systems integration agreements – Ownership

The issue of ownership of the rights in any newly developed software can be difficult to resolve. The default legal position is that the supplier will own these, despite the customer having paid for the software to be developed. There are a number of approaches to solving this issue. If the customer does not want the software to be sold to a competitor, it could ask the supplier for an exclusive licence to use the program as a whole, but a non-exclusive licence to use the standard modules embedded in the program. The supplier could then re-use parts of the program at a later date. If the customer wants to maintain the software itself, it should ask to be given a copy of the source code along with a licence that covers maintenance. Where the customer wants to commercially exploit the software itself, the best compromise may be for the supplier to give the customer wide rights to sub-licence. The customer should seek to have these rights free from restrictions, although again this will be a matter for negotiation between the parties.

For any questions, our systems integration agreements lawyer Neil Williamson will help you.