What are the Situations for Applying the 'Deemed Acceptance Inspection Clause' in System Development?

One stage in system development where legal issues often arise is the “acceptance inspection” phase.

“Acceptance inspection” refers to the obligation of the ordering party to inspect and check the deliverables when the contractor delivers them. If the ordering party does not perform the “acceptance inspection” for a long time after delivery, the contractor, or vendor, will be placed in a legally unstable position.

To solve such problems, contracts often include a clause for “deemed acceptance inspection”.

In this article, we will explain when “deemed acceptance inspection” is applied, based on actual case examples.

What is Acceptance Inspection in System Development?

Firstly, “acceptance inspection” in a system development project refers to the process where the user, as the orderer, inspects and checks the deliverables (in this case, the IT system) provided by the vendor, who is the contractor, to see if they meet the specifications suitable for the ordered purpose.

From the developer’s perspective, it works as a testing process, to confirm whether the deliverables have actually been completed.

The job of developing an IT system, due to its nature of the work, often allows the vender as a contractor have a large amount of discretion. Therefore, there is a possibility that a discrepancy may occur between the product that has been actually created and what the user has requested.

In a very general sense, passing acceptance inspection means that the user has confirmed that the deliverables that have actually been delivered match what the user wanted (or the purpose for which they requested the system to be developed).

Even in actual contract practices, although it is conceivable that defects in the system may be discovered later, many cases can be observed where passing acceptance inspection is imposed as a condition for payment of remuneration.

Be Aware of the Deemed Acceptance Inspection Clause

Once a problem arises during the acceptance inspection phase, both the user and the vendor may find themselves in a difficult situation.

For example, what happens if the vendor has created the deliverables and already presented them, but the user’s representative does not comply with the acceptance inspection due to their circumstances?

In anticipation of such situations, system development contracts often include what is called a “deemed acceptance inspection clause”.

What is a Deemed Acceptance Inspection Clause?

(Acceptance Inspection of the Software in Question) Article 28
For the software in question among the deliverables, the party A must inspect it based on the inspection specifications of the previous article within the period specified in the individual contract (hereinafter referred to as the “inspection period”), and check whether the system specifications and the software in question match.

2. If the software in question conforms to the inspection in the previous paragraph, party A shall sign and seal the inspection certificate and deliver it to party B. Also, if the software in question does not pass the inspection in the previous paragraph, party A shall promptly deliver a document specifying the specific reasons for the failure to party B, and request correction or completion, and when the reasons for the failure are recognized, party B shall correct it with free of charge within the deadline determined through consultation and deliver it to party A, and party A shall re-conduct the inspection specified in the previous paragraph to the necessary extent.

3. Even if the inspection certificate is not delivered, if party A does not object in writing with specific reasons within the inspection period, the software in question shall be deemed to have passed the inspection specified in this article.

4. The acceptance of the software in question shall be completed with the inspection acceptance specified in this article.

https://www.meti.go.jp/policy/it_policy/keiyaku/model_keiyakusyo.pdf

The phrase “deemed” in paragraph 3 is a point to note. When viewed as legal terms, “deem” and “presume” have completely different meanings.

Deem・・・
→Even if it is not actually 〇〇, it is treated as if it is 〇〇 under the law.

(Example) If you operate a smartphone during a test, it is “deemed” cheating.
→Whether or not the operation of the smartphone was actually cheating, the same measures as in the case of cheating are taken.

Presume・・・
→Unless there is specific evidence to deny the fact of 〇〇, 〇〇 is treated as a fact.

(Example) If you were looking at a smartphone during a test, it is “presumed” cheating.
→It is judged as a principle that there was cheating, but if you can prove that it was for a purpose other than cheating, the judgment can be overturned later. (However, you would not normally hear such an announcement at a test venue.)

In other words, the hurdles to overturn “presume” and “deem” are vastly different. The implication here is that “regardless of whether or not the acceptance inspection was passed, it is treated the same as if it had passed”.

Court Cases Related to the Deemed Clause Provision

There have been past cases where the deemed acceptance inspection clause provision had a decisive meaning in court. For example, the judgment quoted below is a case where the user filed a lawsuit claiming that the necessary functions were not implemented afterwards, without complying with the acceptance inspection within the specified period. However, the court ruled that the delivery had already been completed based on the deemed clause provision.

In this contract, it is stipulated that the Y company shall inspect the system without delay after delivery and notify in writing of the acceptance within 10 days, and if no notification is made by the above deadline, it shall be deemed to have passed the acceptance inspection, and as it is not recognized that there was a notification of non-conforming parts in the inspection in this case, it is possible to recognize the fact of delivery and acceptance.

Tokyo District Court, February 29, 2012 (Heisei 24)

On the other hand, there are also court cases that denied the application of this deemed acceptance inspection provision and recognized the vendor’s breach of obligation.

The case of the judgment quoted below differs from the previous court case in that the vendor’s cooperation was necessary for the acceptance inspection in the first place, but the vendor neglected that cooperation.

The plaintiff (vendor) argues that because the defendant (user) did not notify the inspection results within 10 days from the date of delivery of the deliverables, the software development contract Article 9, Paragraph 4 is deemed to have accepted the deliverables. However, in order for such a result to occur, the cooperation of the plaintiff is essential, and it is recognized that the plaintiff did not cooperate with the defendant for such inspection. Therefore, in this case, even if the defendant did not notify the inspection results within 10 days from the date of delivery of the deliverables, the software development contract Article 9, Paragraph 4 does not deem the defendant to have accepted the software.

Tokyo District Court, June 23, 2004 (Heisei 16)

The purpose of the deemed acceptance inspection clause itself is thought to be to quickly release the vendor from an unstable position where even they want to proceed with the acceptance inspection quickly, they cannot do so because of the unilateral circumstances of the user side, resulting the work to stagnate, and to keep the relationship between the two parties fair.

Therefore, it is not possible to say, “Let’s use the deemed acceptance inspection clause as a shield, somehow buy time, delay the acceptance itself, and push anything, even defective products, onto it”, which deviates far from such a purpose.

If the acceptance inspection is “deemed” to have passed, the user must pay the consideration for system development. Considering this seriousness, the court aims to make a fair judgment by taking into account of the cooperation situation of the vendor side.

As something that supports such a judgment, the minutes accompanying the progress of system development may also be important evidence.

Even if the acceptance work is something that the user side should do in principle, the vendor side should also cooperate with the acceptance in various ways as a system development expert.

Patterns of Defects Found During Acceptance Testing

However, it is possible that defects in the system (often referred to as “defects” in legal terms) may be discovered during the acceptance testing stage.

Summary

In system development, the “acceptance inspection” process, which in principle signifies the completion of the vendor’s obligations, can be said to be extremely important for both the user and the vendor. To avoid serious trouble at this stage, both the orderer and the contractor should have a good understanding of the “deemed acceptance inspection clause”.

Furthermore, in anticipation of any unforeseen circumstances where the acceptance inspection process does not proceed smoothly, it is considered important for both parties to carefully align their understanding, especially regarding provisions related to acceptance inspection, from the contract stage.