During the past few years, many organizations have implemented internal technological tools and developed electronic platforms which enable them to carry out their activities through teleworking. For some of these organizations, the arrival of the current pandemic has accelerated this process and they are now turning to technology service providers to ensure the maintenance of their operations and procure cloud services.
Technological tools are essential for an organization, especially during a period of sustained teleworking, it is important to carry out an in-depth analysis of certain elements before concluding a service contract. This article will detail the 6 elements to consider in the analysis.
1. Service Levels
All service provider contracts contain a section relating to what is commonly known as a Service Level Agreement (SLA). This agreement defines the levels and availability of services that the provider undertakes to guarantee during the term of the contract and describes its network capacity and maintenance procedures. This service agreement may also contain provisions limiting the client’s use of the services to certain hours or to a certain usage of the network to ensure its proper operation.
Current industry practice is to offer the customer service credit if the supplier does not meet the thresholds described in the SLA. However, it is the customer’s responsibility to request it.
The client should validate that the following elements are covered in the contract:
- the service level agreement
- the provider’s undertaking with respect to the amount of time it takes the organization to identify a failure within their network environment (i.e. the Mean time to respond “MTTr”)
- the provider’s undertaking with respect to the average time to repair the network and restore its functionality (i.e. the Mean time to repair “MTTR”)
- the scope, the time and the duration of maintenance periods and the conditions of advance notice to the client
- the value of the credits that may be issued to the client upon default of the provider, the limitations (either in value or as to the number of credits that can be issued) and the method by which the client can obtain them
- the option for the client to terminate the contract without penalty upon recurring default of the provider
2. Termination Rights
Technological service contracts generally limit the client’s termination rights and may also contain automatic renewal provisions.
It is therefore important that the client address these considerations at the onset of its due diligence to verify:
- that it may terminate the contract if the service provider is in default
- that it will retain its recourses against the provider upon termination
- what, if any, will be the cost of early termination of the contract if the provider is not in default
- if it may prevent automatic renewal of the contract
- if the service provider can terminate the contract upon the client’s default and if so, under which advance notice conditions
The consequences of an early termination should also be carefully considered. If the continued commercial operations of the client depend on the procurement of technological services, then the following essential questions should be addressed:
- Does the client’s business require the service provider to commit to maintaining the service (even in the event of default or termination) until the service is transferred to a new supplier?
- Does the client require a licence or source code access to carry out its operations?
- Does the client suffer a loss or incur significant costs to transfer the service to another provider?
3. Contractual Definition of Force Majeure
The service contract normally contains provisions relating to the absence of liability of the service provider in the case of force majeure. The client should carefully review the events which will be contractually considered to be events of force majeure to establish the absence of responsibility. We refer, namely, to default by a subcontractor, network sabotage, delays in the delivery of materials or events such as a strike or a lock-out. A force majeure must be unavoidable in nature and beyond the control of the service provider.
In any event, the client must take into account the guarantees offered to him by the service provider in the event of a force majeure and the means that are put in place to compensate for any interruption in service.
When a service contract is signed during a pandemic period, the supplier undertakes to offer his services in a very specific context and he cannot subsequently refer to them as force majeure.
4. Network Owner or Reseller
Before concluding a service contract, the client should confirm the role of the service provider. Is the latter the owner of the network or reseller of service? When there is a client/reseller relationship, some additional important considerations should be addressed.
First, in a client/reseller relationship, the client will generally become part of a tripartite relationship in which he will have no control on the contractual relationship between the reseller and the initial service provider. As a result, the client may become a victim of such a relationship if the reseller is in default with the original provider or becomes insolvent.
Also, the client’s ability to negotiate with a reseller is often more limited. The reseller risks systematically offering the terms granted to him by the original provider and it will, therefore, become more difficult for the client to negotiate better service level agreements or maintenance periods or more substantial credits.
The client should also ensure who is responsible for technical support: the reseller or the initial service provider? Also, the reseller must retain a contractual liability for the services provided, without the possibility of transferring the liability upon the initial service provider with whom the client has no contractual link.
Finally, the presence of a reseller is also a question to be examined when negotiating a termination clause, as mentioned above. Does the reseller have the option to demand reimbursement from the client the termination fees billed to him by the initial service provider? Will the client have access to his data or his account with the initial supplier if the reseller finds himself in default or becomes insolvent?
5. Limitation of Liability/Damages
The client should consider the limitations of liability that are offered by the service provider. As most service contracts generally exclude any type of guarantee or representation not expressly provided therein, the client should ensure that the contract does reflect the negotiations and discussions between the parties before its execution.
Liability limitations clauses sometimes limit the amount of damages that might be payable by the service provider to the client. These amounts are often established by a precise calculation which is based on the monthly instalments payable by the client under the terms of the contract. The latter should, therefore, ensure that the amount ultimately payable by the service provider can reasonably cover the damages suffered.
6. Data Centers
Datacenter operations have grown dramatically in recent years due to a substantial increase in data processing centers for multiple industries. For more information on essential questions to consider before entering into a colocation agreement, we invite you to read our blog on the subject.