Legal agreements establish performance standards and help resolve disputes

Jennifer Jackson Spencer, founding shareholder, Spencer Crain Cubbage Healy & McNamara pllc

As published in Scotsman Guide's Residential Edition, April 2009.

Purchasing information  technology -- the computers and software used to store, transmit, and analyze essential customer and transactional data -- is one of the most-important decisions mortgage brokers or their companies can make. But acquiring and using information systems raise numerous contractual and legal concerns, particularly when the technology serves multiple facilities. These concerns should be documented and resolved in a legal contract.

For example, a mortgage broker or mortgage company purchasing a new information-technology system should ensure that the contract clearly documents vendor representations on how well the entire system should perform, particularly in terms of integrating hardware and software from multiple sources. The contract also should stipulate the scope of testing and warranties, clearly state vendor liability and indemnification, and specify remedies for varying degrees of breach of warranty or system failure.

The documentation of an information-technology-purchase contract can lay the basis for later disagreement if either party alleges fraud or misrepresentation arising from complex questions of contract interpretation.

The looming possibility of contract enforcement through litigation or other dispute-resolution alternatives highlights the importance of certain contract terms. These terms come up in many contract situations, but mortgage companies that purchase information-technology systems should particularly pay heed. Important terms include each of the following.

• Choice of law: In the event of litigation, a choice-of-law provision will come into play by establishing the state law that will govern contract terms during a dispute. Before brokers or mortgage companies sign an information-technology contract, they should have an attorney review the agreement and determine the most favorable state law. If you have any sort of bargaining power on this issue, negotiate the choice-of-law provision to your company's advantage.

• Choice of venue: This provision will determine where a dispute will be litigated. Mandatory-venue clauses, like choice-of-law clauses, are generally enforceable unless they are overreaching, unjust or secured by fraud. If possible, it makes sense for brokers or mortgage companies to choose the venue where they are located or do business. This can decrease travel costs, diminish inconvenience and improve chances of success at trial if you have a good reputation in the area.

• Alternative dispute resolution: Some contracts contain a provision for alternative dispute resolution. This details how contract parties attempt to resolve disputes by means other than the traditional judicial process.

Methods of alternative dispute resolution include nonbinding mediation, in which a neutral third-party facilitates but does not impose a settlement; arbitration, in which one or more private third-parties impose a resolution; and binding mediation, which has the finality of arbitration but allows the parties to work together to reach a fair settlement with help from a trained mediator. Nonbinding mediation is a good choice. Arbitration can be more expensive because the parties must pay the arbitrator. Then again, arbitration can offer faster resolution and greater privacy than traditional litigation. This is a plus if sensitive financial or customer information might come into play.

• Warranties: Parties in an information-technology contract may make certain warranties to each other. Vendors may make certain representations regarding hardware, software or services.

Pay particular attention to any warranties that a vendor seeks to avoid. Warranties establish your right to recourse. On the other hand, you also can negotiate to modify or strike warranties by which you do not wish to be bound.

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