When a Contractor Relationship Goes Wrong: 5 Contract Risks Every IT Contractor Should Consider

 

For many UK contractors, winning a new assignment means concentrating on the day rate, project, IR35 status, business insurances and start date. But the contractual details governing intellectual property, confidentiality, liability, access to systems and what happens when the engagement ends can be just as important.

A current High Court dispute provides a timely reminder.

Data Kraken Consultancy Ltd is suing Torry Harris Business Solutions (Europe) Ltd, alleging that confidential information, including source code, was misused when replacement software was developed for a customer. Torry Harris denies wrongdoing and says the replacement was developed independently. The proceedings are ongoing and the allegations have not been determined by the court.

Contractors don’t need to be involved in multimillion-pound technology projects for the underlying lessons to matter.

 

1. Know Who Owns What You Create

Intellectual property clauses can be among the most important provisions in an IT contractor’s agreement.

A project can potentially involve source code, databases, documentation, configurations, processes, customer data and pre-existing software belonging to different parties.

Contractors should understand whether intellectual property created during an assignment belongs to them or transfers to the client, and whether any pre-existing tools, code or methodologies they bring to the project remain theirs.

The Data Kraken dispute illustrates how complex these distinctions can become. The reported issues include source-code copyright, database rights and the extent to which different parties were entitled to use particular materials.

The lesson is simple: don’t wait until a dispute occurs to establish ownership.

 

2. Pay Attention to Confidentiality and System Access

Technology contractors frequently receive privileged access to systems, databases, code repositories and commercially sensitive information.

A contract should clearly establish what that access can be used for.

The current High Court dispute reportedly includes arguments about administrator access and whether access provided for one purpose was used for another. The case has not yet determined the competing claims.

For contractors, maintaining clear records can therefore be important.

Where appropriate, retain evidence of instructions, permissions, project scope and agreed deliverables. If a client requests something significantly outside the original scope, obtaining written clarification can avoid ambiguity later.

 

3. Understand Your Liability Before Signing

Contractors should also pay close attention to contractual liability.

What happens if the client alleges that your work caused financial loss? What if software fails, confidential information is accidentally disclosed or an error delays a major project?

A contractual indemnity or uncapped liability clause can potentially expose a small contractor company to a claim far greater than the value of the assignment.

This is one reason Professional Indemnity Insurance is particularly relevant for consultants, developers and other professional contractors.

Professional Indemnity Insurance provides protection against claims arising that alledge professional errors, omissions or negligence, subject to the policy’s terms, limits and exclusions.

However, contractors shouldn’t assume insurance makes every contractual liability acceptable. The contract and insurance protection should be considered together.

 

4. Treat the End of an Engagement as a Risk Point

Contractors understandably focus on starting assignments. The end can be equally important.

The Data Kraken dispute arose in the context of a customer moving from one technology supplier to another. ContractorUK’s analysis highlights transition periods as particularly sensitive because incumbent suppliers, replacement providers and customer teams may simultaneously require access to systems and information.

Contractors should understand what their agreement requires when they leave.

That might include returning confidential material, removing access credentials, deleting specified information, transferring documentation or providing agreed transition assistance.

Keeping evidence that these obligations have been completed is also be sensible.

 

5. Your Contract Should Reflect the Real Engagement

Contracts aren’t only important for commercial liability.

For limited-company contractors, contractual terms can also form part of the evidence relevant to IR35 status.

HMRC confirms that the off-payroll rules apply where somebody providing services through an intermediary would have been an employee if they had provided those services directly.

For medium and large private-sector clients and public-sector organisations, the client generally makes the status determination. HMRC also states that clients must take reasonable care and shouldn’t simply apply blanket determinations irrespective of contractual terms and actual working arrangements.

Contractors should therefore examine both the commercial and IR35 implications of their agreements.

An IR35 Contract Review can help identify clauses that could affect employment status before an engagement begins or when terms are renewed.

Contracts and Insurance Should Work Together

The broader lesson is that risk management shouldn’t start after a claim or HMRC enquiry arrives.

Before signing an important contract, contractors should understand their obligations, liability limits, intellectual-property provisions, confidentiality requirements and IR35 position.

They should then consider whether their insurance protection appropriately reflects the risks they are accepting.

For many professional contractors, Professional Indemnity Insurance is particularly important because it addresses allegations connected with professional services. Public Liability Insurance addresses separate risks involving third-party injury or property damage, while Employers’ Liability Insurance may be relevant or legally required depending on the company’s circumstances.

Separately, IR35 Insurance can provide protection against specified risks associated with an HMRC IR35 investigation, while an IR35 Contract Review can help contractors identify status issues before they become larger problems.

The Data Kraken case may ultimately turn on highly specific facts and legal arguments. But its broader lesson is useful for contractors of every size:

The best time to understand your contract is before something goes wrong.

Roots Contractor Insurance provides specialist Professional Indemnity, Public Liability, Employers’ Liability and IR35 Insurance, together with IR35 Contract Reviews, for UK contractors.