HW Delivery Pitfalls

Tomas Nielsen, eFocus Magazine

Companies operating in the ICT market (information and communication technologies) often deliver not only PC programmes or software but also hardware. In considering these deliveries quite banal and trivial (regardless of the value of the hardware involved) and thus paying less attention to them (compared to their other projects, e.g. implementation of information systems or provision of software licences), these companies may risk a complete project failure.

Whereas the complex legal arrangements of contracts and agreements on implementing information systems or acquiring proprietary software are hardly questioned by anyone, the importance of legal arrangements of agreements on delivering hardware, namely commodity products such as PCs, servers, etc., is still underestimated by a number of companies. Quite often, contracts and agreements worth tens or even hundreds of thousands of Euros are drafted on the basis of templates that are either downloaded from the Internet or used by business entities to purchase ordinary stationery.

Unlike information systems, hardware benefits from its relatively simple specification. One would thus expect the subject-matter of the performance of hardware sale agreements to be identified without any major problems. This, however, is not true, as the importance of having something as elementary as hardware parameters specified in detail is often underestimated by suppliers. Disputes, however, most often arise in connection with the insufficient definition of "hardware installation". Whereas customers, quite logically, expect the workstation (or server) installed to be compatible with their information system, suppliers (quite logically, too) interpret hardware installation as plugging the device into the power supply and checking that the device runs well (arguing that the agreement did not provide for system integration, etc.). It is thus more than appropriate to clarify in the agreement what will be included in the installation, what service will be provided, and under what conditions the parties will consider the installation complete.

In hardware agreements, it shall also be specified whether or not the hardware will be delivered with a relevant operating system and other software. Whereas the "firmware" helping hardware devices to work is expected to be delivered automatically, whether or not the PCs are to be delivered with operating systems is not that clear. It is also unclear whether or not the suppliers are to be liable for the proper functioning of the operating system or its communication with the customer's IT environment.

Another specific issue whose importance the parties often realise quite too late is the warranty. At present, there are a number of misconceptions about hardware warranty terms and conditions, the most common being on the subject of the mandatory two-year warranty for defects. In this respect, it shall be noted that the mandatory two-year guarantee does not apply to relationships between two business entities (or between a business entity and a public administrative body in the case of addressing public needs); the mandatory two-year guarantee is an institute established in respect of consumer protection that, however, is not common to business relationships. Nonetheless, this does not mean that the seller shall not be liable to the purchaser for any defects - the sale of hardware (executed under a sale agreement or a sale agreement combined with a contract for work) is subject to a rather comprehensive statutory liability for defective goods (that, however, is not only comprehensive but also quite complex).

In simple words, the seller is liable to the purchaser for defects in the delivered device with the risk of damage being passed on to the purchaser (usually when physically delivered), regardless of whether or not the defects are revealed at the delivery or if they occur later. The seller is further liable to the purchaser for defects that occur later, provided that these arise as a result of the seller's failure to fulfill its obligations.

The provision governing the liability for defects does not end here. The purchaser is required to inspect the goods at the moment of delivery; should any defects be revealed, they shall be notified to the seller without undue delay, otherwise no claims raised by the purchaser in respect of the defective goods (namely the right to the removal of defects, the right to a discount, or, in some cases, the right of withdrawal from the agreement) shall be granted by court. Applying to open defects, this provision requires the purchaser to inspect the goods with due care.

In addition, the respective act provides for a two-year warranty period within which the purchaser is entitled to raise claims in respect of latent defects (whereas these shall be notified to the seller without undue delay from the moment they are revealed by the purchaser acting with due care). After that, the potential claims raised by the purchaser are no longer entitled to court protection. The Czech Commercial Code attempts to protect fair trade by providing for an exemption from this provision, saying that where the defects result from facts that the seller was aware of at the moment of delivery (and that were intentionally concealed by the seller from the purchaser), the claims raised by the purchaser in this respect shall not be deprived of court protection; nonetheless, since it is quite difficult (almost impossible) to prove that the seller was aware of such facts, this exemption can hardly be enjoyed by the purchaser.

The Czech Commercial Code further requires the parties to arrange for a quality warranty (which may also be provided by the seller unilaterally) which, in principle, substitutes the provision described above. By providing such a warranty, the supplier (the seller) undertakes to remove defects arising within the warranty period. By this, the statutory provision concerning the seller's liability for defects occurring both at the moment of delivery and revealed later is thus broken down. By providing the quality warranty, the seller de facto guarantees that throughout the warranty period, the goods will keep the arranged or (when these are not arranged) common characteristics, or that they can be used for the arranged (common) purpose, whereas the duration of the warranty period shall be at the discretion of the parties. In addition, the quality warranty also affects the period within which the purchaser is entitled to claim its rights in respect of latent defects, as the Czech Commercial Code expressly states that the abovementioned two-year period shall only apply to defects that are not subject to a quality warranty (whereas where a quality warranty is arranged, the two-year period shall be overruled by the respective period of the quality warranty arranged).

Another major stumbling block that parties often encounter is the arrangement for hardware maintenance services. Unlike the statutory liability for defects, such maintenance services are often provided for consideration. Should the hardware be provided along with maintenance services, the defects that are subject to maintenance and servicing shall be expressly defined in the respective agreement so that the parties can clearly differentiate between defects that shall be mandatorily addressed by the supplier pursuant to law (subject to liability for defects) and defects that shall be addressed within maintenance support, that is, for consideration. The easiest solution is to agree on a quality warranty that is provided within the hardware purchase price and followed by maintenance services that are provided after the warranty period expires. Should the maintenance services be provided simultaneously (throughout the warranty period or within the two-year period set for claiming latent defects), the parties are recommended to clarify the mutual relationship between performance given within the warranty provided and performance given by virtue of maintenance services, thus avoiding disputes over whether or not the seller (the hardware supplier) shall be entitled to the payment for support services, as well as disputes over whether or not the stricter conditions (namely the deadlines for addressing the defects) that were agreed with respect to paid support shall apply.

Albeit not often fully adhered to, agreements on the way defects shall be claimed by the purchaser as well as agreements on whether the claims shall be raised with the seller or the manufacturer shall also be considered a matter of course. Whereas claims relating to the statutory warranties shall de facto always be raised with the seller, claims raised in respect of the maintenance services shall be subject to a clear agreement of the parties. Such an agreement allows the customers to raise their claims with respect to the paid services in a due and timely manner, and the supplier to avoid any potential difficulties relating, for instance, to the costs and expenses of communication with the customers and manufacturers, defect analysis, etc.

In delivering hardware, both parties shall always thoroughly consider whether the hardware is sold and delivered autonomously or whether additional services (installation, support) are included. This shall be absolutely clear from the agreement. So shall be the duties and obligations of the parties with respect to the provision of services. In addition to the abovementioned issues, other questions that shall be addressed and regulated in the agreement, such as the customer's assistance and co-operation and consequences of the failure to do so (e.g. providing access to the power supply for the purposes of hardware installation or obtaining licences to their operating programmes, etc.), may arise and come into play. With no specific terms and conditions of co-operation and assistance agreed on by the parties, something as banal and trivial as the purchase of hardware may result in a nightmare.