Outsourcing from the Vendors’ Perspective Matt Wanford

Leave a reply

Toronto Computer Lawyers’ Group Session on Outsourcing from the Vendors’ Perspective Matt Wanford

On April 3, the Toronto Computer Lawyers’ Group held its annual session on outsourcing at the offices of Osler, Hoskin & Harcourt LLP. The panel of speakers comprised Eric Notkin (VP Legal Affairs, CGI), Peter Miscevich (AGC, Bell Canada) and Nagendra Krishnamurthy (Head of Legal, TCS), and the discussion was moderated by Wendy Gross, (Partner and Co-Chair of the Technology Group, Osler, Hoskin & Harcourt LLP). Sharing the view that a better understanding of the vendor’s perspective can assist customers in more effective deal-making, the panel considered the following:

Sourcing Trends

The panel began by recounting how sourcing trends have been sector specific. While the panel has observed an increase in multi-vendor/dual-track sourcing in some sectors, other sectors such as the U.S. private health sector have been reverting back to sole-sourcing. Sole-sourcing can be more cost-effective, faster, and result in a better deal. While the default approach for many in the Information Technology (IT) sector has been to employ multi-vendor sourcing, the panel commented that many U.S. studies on IT outsourcing have shown that multi-vendor sourcing does not necessarily lead to the best outcome. Ultimately, the sourcing decision must be considered on a case-by-case basis.

Challenges with the RFP Process

The panel also considered common frustrations with the RFP process and in particular, the strict and rigid nature of RFPs. RFPs commonly prescribe a template or structure for responses, placing vendors in the unenviable position of choosing between the submission of a suboptimal proposal that conforms to the RFP requirements or the submission of a non-conforming, but more befitting, proposal that risks disqualification. In the end, the RFP process becomes less about discovering the best business solution and more about applying rules and protocols, emphasizing form over substance.

As a consequence, the panel urged customers to exercise flexibility during the RFP process, recognizing that outsourcing transactions are complex and professional services are frequently bespoke. The panel also encouraged customers to evaluate whether the RFP process is the most suitable approach for procuring a given service. For instance, it may be advantageous for customers to engage a consultant to advise what the best solution is, and who the best service provider is for such a solution. Such a consultant could also act as a trusted advisor to help customers resolve tough dilemmas such as whether having the best price or having the best solution is more important. This decision is not easily resolved within the RFP process, and the panel has encountered numerous occasions where frustration has stemmed from a misalignment between what the client can afford, what the client asks for, and what that client actually needs.

The Importance of Clear Technical Requirements

Lastly, the panel went on to discuss the difficulty of drafting clear requirements after the service provider has been selected. As if articulating technical concepts were not challenging enough, competing interests are at play. Ambiguous requirements tend to favour the service provider, whereas clear and specific requirements favour the customer who desires accountability from the service provider.

The reason technical requirements are poorly written, the panel explained, is often because clients draft requirements in isolation without reference to the service provider’s capabilities or how the solution can be implemented. High quality technical writers are a prerequisite for producing clear requirements. These writers may not be lawyers, but they must truly understand the technical solution, how the solution can be delivered, and be able to define the required services clearly and up-front.

Conclusion

As the session concluded, a theme emerged from the discussions: an outsourcing relationship is one that is long-term, requiring trust and flexibility on the part of both parties for mutual success.

Matthew Wanford was the program planner for this TCLG session. Post prepared with assistance from Sam Ip, Osler.

 

 

 

Bullet-Proofing Your IT Law Practice: Professionalism and Ethics

Leave a reply

OBA: Bullet-Proofing Your IT Law Practice: Professionalism and Ethics

On October 30th, 2013, the OBA Information Technology and E-Commerce Law section hosted a panel on professionalism and ethics. The speakers included distinguished technology lawyers Amy-Lynne Williams (Deeth Williams Wall LLP), Donald B. Johnston (Aird & Berlis LLP), and Alan Gahtan (Gahtan Law Office). In a stimulating and thought provoking discussion, amongst other topics, the panel considered the following:

Use of Document Comparison Tools

The panel began with a discussion of the issues arising from the use of document comparison tools, and in particular “tracked changes”,  a software feature used to show editing changes that have been made to a document. Because use of this feature can be inconsistent (e.g., if revisions are made before the feature is switched on) the panel cautioned against relying on tracked changes provided by the opposing counsel. The panel recommended that lawyers create their own blacklines for comparison. The panel also shared their experiences where popular tools used to create tracked changes have failed. To mitigate against these shortcomings, the panel discussed the use of “issues lists” at the appropriate time during negotiations, to reduce the need to exchange drafts in certain circumstances, an approach that has the added benefit of focusing the parties on the issues, rather than the specific changes that have been made.

Confidentiality

The panel contemplated the scenario where a lawyer is negotiating against a large corporation that he or she had previously acted against, and how best to respond if the client asks whether the terms they have been offered are the best they can achieve.  On the one hand, the lawyer remembers how the corporation structured the previous deal and knows the concessions that the corporation was willing to make. On the other hand, use of this knowledge must be weighed against the lawyer’s confidentiality obligations. In these circumstances, the panel recommended that the lawyer consider advising the client to push harder on the point, but without explaining why.

The panel also considered circumstances where a lawyer may be permitted to use his or her prior knowledge. For example, if a lawyer is acting against an opposing lawyer and it is known that the opposing lawyer always requests the same exhaustive list of items, then the lawyer should be able to prepare his or her client for the impending request. Equally, if in a lawyer’s experience it is known that the opposing counsel is difficult and needs to win every point in a negotiation, the lawyer should be able to use this knowledge to explain the impact on costs to the client.

Limited Scope Retainers

Last, the panel went on to discuss limited scope retainers, where clients request that a lawyer review only one document amongst a constellation of documents, or merely want help with a specific intellectual property or technology provision in an agreement.

The panel did not view limited scope retainers as an issue if the client is adequately informed of particular limitations and exclusions. Often sophisticated clients are better served when they have other experts review specific aspects of a complex transaction, and have the technology lawyer focus on the technology component. Still, the panel cautioned that lawyers need to be vigilant when considering each limited scope retainer. The lawyer should clearly define his or her role with the clients, take steps to mitigate any potential risks, and monitor the progress of the retainer against the limited instructions.

In situations where multiple jurisdictions are involved, and a lawyer is asked to provide jurisdiction specific advice, the panel cautioned that lawyers should clarify with their client that the agreements have only been reviewed from an Ontario or Canadian law perspective.

For more information on this session, please visit the webcast. Originally published on the OBA Technology and Intellectual Property page http://www.oba.org/Sections/Information-Technology-and-E-Commerce-Law/Articles/Articles-2013/December-2013/OBA-Bullet-Proofing-Your-IT-Law-Practice-Professio

Matt Wanford, with assistance from Sam Ip.

Legal Issues Facing Early-stage Technology Companies

Leave a reply

Legal Issues Facing Early-stage Technology Companies

On September 26, 2013, the Toronto Computer Lawyers’ Group held a lunchtime event with Anthony de Fazekas of Norton Rose Fulbright Canada LLP, Chad Bayne of Osler, Hoskin & Harcourt LLP, and Matthew Leibowitz of Plazacorp Ventures. The trio shared their experiences working with, advising, and investing in start-up ventures. A summary of their comments is provided below.

  1. Choosing Your Clients

According to the speakers, the start-up ecosystem in Toronto has changed dramatically over the last few years as the number of start-ups and start-up incubators have multiplied exponentially. This has led to increased investment opportunities and legal work, but it has also made it more difficult to sort through the myriads of start-ups and find promising ventures. In this regard, it has become particularly important for start-up lawyers to choose their clients carefully: only a relatively small number of start-ups grow to the point that they generate a regular book of business for the lawyers that advise them.

  1. Lifecycle of a Start-up and the Lawyer’s Role

According to the speakers, a start-up lawyer’s role will differ depending on the stage the start-up is at. In general, start-ups go through several phases as they grow and mature:

  1. Basement stage: The basement stage represents a start-up’s first main phase of development. At this stage, the founders of the start-up generally have a well-developed business idea and product, but they have not yet created a formal business entity or governance structure. In addition, while basement stage companies sometimes raise a small amount of financing from friends and family, most have not yet reached out to larger investors. At this stage of the start-up’s development, the start-up lawyer should focus on the following foundational legal issues:
  • Intellectual Property: In many cases, the start-up’s intellectual property (IP) is its main asset. It is therefore critical to trace the IP chain of title and determine which persons or entities need to assign their IP ownership rights to the start-up. Troublesome ownership issues may arise if the IP was created through a university project or while the founders were employed by their university or by a professor. In such cases, the lawyer should ensure that he or she receives all documentation and information regarding the creation of any IP. In addition, the lawyer should determine whether the founders have borrowed or used IP from any other source, such as non-founder collaborators, commercial programs, or other companies’ websites. The lawyer may also need to conduct trademark searches and register the start-up’s trademarks. In all cases, the lawyer should ensure that any IP ownership issues are resolved at an early stage.
  • Company ownership: While founders often have a clear business idea, they may not have a developed sense as to how the start-up will be owned. The lawyer should therefore work out start-up ownership issues with the founders and determine whether the start-up should use restricted shares or vesting shares to help retain key persons during the first few years of the start-up venture. Once the founders decide on an ownership structure, the lawyer should then help draft and execute a binding shareholders’ agreement. When determining company ownership, the lawyer should also make sure that he or she has been given all relevant documentation and information. In particular, the lawyer should make sure that the founders have not inadvertently conveyed ownership rights in the start-up through informal or oral agreements. In this regard, diligence at an early stage can help preempt any ownership disputes that may arise as the start-up becomes larger and more profitable.
  • Company governance and organization: The lawyer should also help the founders determine how the start-up will be run. In addition to drafting organizational documents like articles of incorporation and by-laws, the lawyer should help the founders create and maintain up-to-date corporate records. Such records become particularly important later on, when potential investors will scrutinize the start-up’s minute books and resolutions to make sure that they are in order. In many cases, improper or incomplete documentation can delay or even derail a potential financing.
  • Privacy and Contractor Issues: If the start-up has an online presence, the lawyer should help the founders draft a website privacy policy. In addition, if persons other than the founders will be developing software or contributing to the start-up’s IP, the lawyer should help the company draft an effective independent contractor agreement that assigns IP ownership and rights to the start-up.
  • Tax Issues: At a minimum, the lawyer should ensure that the start-up is structured in a tax-efficient manner, files its tax statements regularly, and complies with any applicable rules on employee deductions or withholding taxes. While tax issues may not be foremost on the minds of the founders, they are critical to consider at an early stage as they can be extremely difficult and very expensive to correct later on.
  1. Growth stage: Following the basement stage, successful start-ups will transition into a growth phase. During this stage the company will begin to expand, add employees, and generate increased revenue. At this stage in the start-up’s lifecycle, the lawyer should continue to work with the founders to maintain corporate records and governance structures. In addition, the lawyer should help the start-up draft customer agreements and employment agreements, with the goal of creating template agreements that the start-up can use as it continues to grow.
  1. Financing stage: If the start-up continues to generate revenue and grow, it will begin to attract outside investors. At this stage, the lawyer should focus on helping the start-up prepare for and negotiate private financing arrangements. In a small number of cases, the lawyer may also help the start-up make an initial public offering.
  1. Mature stage: At some point, usually after several rounds of financing or an initial public offering, the company will begin to evolve from a start-up into a mature, established company. The lawyer’s role will also evolve in response to these changes. Generally, the lawyer’s work will shift to providing regular corporate services for the company. On some occasions, the lawyer may also be called upon to represent the company when it is acquired.

III.       Building a Start-up Practice

Lastly, the speakers provided a list of pointers for lawyers who are interested in building a practice in the start-up space:

  • Focus on relationship-building: In particular, the speakers emphasized the difficulty of building a viable start-up practice. Most start-up clients cannot afford the lawyer’s hourly rates. In fact, the speakers mentioned that they often defer or write off a significant percentage of fees. In general, start-up clients only begin to generate a steady book of business once they undergo a private financing or generate enough revenue to afford regular legal services. Therefore, it is critical that the lawyer focus on building relationships with promising start-ups at an early stage and maintaining this relationship as the client grows and develops.
  • Maintain regular contact: In addition, the speakers empathized the importance of checking in with start-up clients regularly. Founders may not always check with their lawyer before signing a contract or making important decisions. This can result in one-sided or badly drafted agreements, which can create many problems for the start-up. Many of these problems can be avoided in advance by keeping abreast of the client’s activities.
  • Never give anything away for free: While the lawyer may write off a significant percentage of his or her fees, it is important that the client understands that fees are being waived, and the services that the lawyer provides are not free. In addition to making the start-up sensitive to the fees it may need to pay at a later point, this process can help weed out clients who are not serious or do not have the necessary commitment to make the start-up succeed. A client’s reluctance to pay a percentage of the lawyer’s fees can be a warning sign as to the long-term success of the company and the lawyer’s continued relationship with it.
  • Determine and market your ‘value-add’: In addition to legal services, experienced lawyers may also be able to provide other valuable advice and services to start-ups, including: access to professional networks; introductions to potential customers and investors; and general business advice and coaching. The lawyer should be aware of such opportunities and make them available to promising start-up clients as part of his or her services.
  • Keep a balanced business book: Lawyers who advise start-up clients should also keep a business book that includes established clients. This will give the lawyer the flexibility to waive or defer promising start-up clients’ fees without having to worry about the financial stability of his or her own practice.

For information about the Toronto Computer Lawyers’ Group and its upcoming events, see http://www.tclg.org/events/.

Originally prepared with assistance from Matt Snyder, Osler, Hoskin & Harcourt LLP

Fabutan: Renewal, Termination and the Duty of Good Faith

Leave a reply

This article was first published in the Osler franchise quarterly (April, 2013) (all comments and views expressed are my own)

Background to the Dispute

Against the backdrop of a bitter family dispute, the Fabutan decision reinforces the maxim that business and family often do not mix. This case considered whether the tanning system franchisor, Fabutan Corporation, run by the president (Mr. McNabb), was justified in refusing to renew a franchise agreement held by the president’s sister (Ms. McNabb).

Ms. McNabb held two Fabutan franchises, but was also a creditor of Fabutan. Ms. McNabb and Mr. McNabb fell out over a dispute regarding a franchise system competition that was won by Ms. McNabb and that led to bitter personal accusations. Ms. McNabb eventually requested that her loans to Fabutan, as well as some unconnected loans, be repaid.

In the midst of this dispute Ms. McNabb requested that one of her franchise agreements be renewed. Dispensing with standard renewal protocol, Mr. McNabb refused to renew the franchise agreement. Adding to the dispute were a significant dividend payment to Ms. McNabb relating to an unconnected tanning franchise, the siblings’ estranged father’s inflammatory comments, and damaging communications sent by the siblings to the Fabutan franchisees. Certain franchisees also attempted to mediate the dispute.

Fabutan made a half-hearted attempt to settle and agree to renew the franchise agreement on the basis of seven onerous terms and conditions, including requesting from Ms. McNabb a security agreement that required registered liens on all assets, a $50,000 security bond, a non-standard assignment of leases to the franchisor, an acknowledgment with respect to past, present and future communications relating to the estranged father, and terms regarding the unconnected franchise dividend payment. Counter proposals followed, eventually resulting in Fabutan formally terminating Ms. McNabb’s two franchise agreements and disconnecting her franchises from the Fabutan IT network and, in so doing, deleting client information.

A subsequent court order restored the status quo, restrained both parties from making disparaging comments, enjoined Fabutan from terminating the agreements, reinstated the Fabutan software and restored the Internet connections of the franchisees.

Analysis

Madam Justice Romaine considered that the only aspect that may have been relevant to Fabutan’s right to terminate the franchise agreements was the failure to meet the standards of cleanliness, subject to notification and an opportunity to cure. Fabutan purported to use this as a reason for termination, but no opportunity to cure was given; nor was any evidence led to establish this as a valid ground for termination. Therefore the issue was whether the various rationales for termination posed by Fabutan were “good cause,” under the terms of the franchise agreements, sufficient to allow Fabutan to terminate the franchise agreements in accordance with their terms. Justice Romaine decided that they were not and, unsurprisingly, it was held that Ms. McNabb’s conduct as a creditor, in validly exercising her right to call loans, did not constitute good cause to terminate the franchise agreements, which were unrelated contracts.

Justice Romaine found that other Fabutan franchise agreements were always renewed for 10-year terms using the current standard form of renewal agreement. Therefore the issue remained whether the form of renewal contract and seven onerous terms and conditions that Fabutan required from Ms. McNabb met the requirement of being a standard form of renewal agreement in use at the time. The duty of good faith was central to this analysis.

Duty of Good Faith and Renewal

The Franchises Act, R.S.A. 2000, c. F023, s. 7, imposes on each party to a franchise agreement a duty of fair dealing in its performance and enforcement. Justice Romaine cited Shelanu Inc., which serves as a useful reminder of some of the key requirements of the duty:

  • The franchisor must take into account the interests of the franchisee in the exercise of its discretion.
  • A decision by a franchisor not to renew for alleged good cause is an exercise in discretion.
  • Whether or not a party under a duty of good faith has breached the duty will depend on the circumstances of the case, including whether the party subject to the duty conducted itself fairly throughout the process.
  • Compliance with the terms of a franchise agreement does not necessarily mean that a franchisor has discharged its duty of good faith.
  • A franchisor cannot exercise its power or discretion out of vindictiveness or to gain leverage or a bargaining advantage over a franchisee.

Application of the Duty of Good Faith to the Facts

Applying the duty of good faith to the facts of the case, Justice Romaine held that the conduct of Fabutan, through its president Mr. McNabb, breached the obligation of good faith. Examples of bad faith included the following:

  • the circumstances of the initial denial to renew the franchise agreement;
  • the constantly changing decisions on the renewal and the variety of largely unsubstantiated reasons for non-renewal;
  • the attachment of onerous terms of renewal that were not imposed on other franchisees in the absence of reasonable or rational grounds;
  • the failure to provide Ms. McNabb with a proposed form of standard agreement until well into the process, and then only when accompanied by onerous terms and conditions;
  • the imposition of unreasonable time periods to review documentation;
  • the unjustified linking of the renewal to the dividend and buy-out issue relating to an unconnected franchise;
  • the misrepresentation of Ms. McNabb’s position to other franchisees; and
  • the conduct of Fabutan personnel when purporting to terminate the franchise agreements under notices to terminate that Fabutan conceded were invalid.

Justice Romaine found the following:

  • The requirements for renewal and the imposition of seven onerous terms and conditions did not meet the contractual requirement for renewal to be based on the standard form of franchise agreement in use at the time.
  • Mr. McNabb, without reasonable justification, acted in a way that would “substantially nullify the bargained objective or benefit contracted for by the other, contrary to the original purpose and expectation of the parties.“
  • It was legitimate for Ms. McNabb to question whether the franchise agreement that she finally received was a standard franchise agreement in use by Fabutan, and to question the imposition of the seven onerous terms and conditions.
  • While Ms. McNabb’s conduct was inappropriate, it did not justify the severe penalty of termination of her franchise agreements.
  • Fabutan did not establish “good cause” to terminate the franchise agreements and refuse the renewal of the franchise agreements.

Specific Performance

Notwithstanding the bitter family dispute, Justice Romaine determined that the business relationship between Ms. McNabb and Fabutan could continue, particularly if Mr. McNabb ceased interfering in decisions and communications that would, in the normal course, be within the scope of employment of others at Fabutan. Accordingly, Justice Romaine ordered specific performance to require renewal of the subject franchise agreement for 10 years upon the terms and conditions contained in the standard form of Fabutan’s franchise agreement, with no requirement for additional security and no assumption of the leases by Fabutan. The purported termination of the second franchise agreement was vacated, with no additional security measures.

Notes

Fabutan’s arguments were not helped by some unclear termination and renewal provisions in the franchise agreement, particularly in light of the court’s strict construction. The following practical points should also be noted by franchisors to keep onside the duty of good faith:

  • Be cognizant at all times (including when renewing franchise agreements) of the duty – and acknowledge the need – to consider the interests of the franchisees, even if this means putting aside personal grievances.
  • Ensure that decisions to renew are made in accordance with standard processes, and not based on personal judgments.
  • Once a decision is made it should be consistently followed and based on substantiated reasons that accord with the franchisor’s rights under the franchise agreement.
  • Do not impose non-standard and onerous terms of renewal on a franchisee that are not required of other franchisees in the absence of reasonable or rational grounds.
  • Promptly provide the form of renewal franchise agreement when a decision to renew has been made.
  • Allow the franchisee a reasonable period to review documentation and, at a minimum, in accordance with applicable franchise legislation.
  • Do not link renewal of the franchise agreement to unconnected matters.
  • Avoid making statements to the franchise network that could be reviewed as misrepresentations, particularly in the midst of a dispute with franchisees.
  • In light of Justice Romaine’s analysis, be aware that franchise agreements, as contracts of adhesion, must be interpreted strictly against franchisors as drafters, regardless of whether there is any ambiguity. Therefore, franchisees are entitled to the benefit of the most favourable interpretation.