Originally appeared in Kaye Scholer’s Fall 2016 Consumer Products: Adapting to Innovation Report.
Cloud-based services and data services are creating new contract challenges for service providers— and their customers. Many of these issues relate to the myriad changing pass-through terms required by a service provider’s own network of underlying agreements with the sub-providers of the services and data needed to make the service provider’s cloud-based services operate. These agreements may include arrangements with cloud infrastructure providers, software providers and data providers that often require the service provider to ensure that its customers comply with acceptable use policies, limitations of liability, indemnification and intellectual property licensing or other content requirements.
In such a layered operating environment, how can a service provider easily, efficiently and effectively incorporate these terms into its customer agreements? Frequently, the answer is for the service provider to embed hyperlinks to these contract terms in its customer agreements.
Hidden Problems with Hyperlinked Contract Terms
Despite how seemingly straightforward the hyperlink solution appears, challenges exist on both sides of the coin. Increasingly we are seeing that this convenient solution for the service provider can be difficult from their customers’ perspective. The convenience of being able to change the terms as the provider needs, in order to keep them up-to-date, is an issue for the customer because the terms they thought they understood and had previously agreed to, have been changed unilaterally—often without the customer even being aware of the occurrence. Service providers may believe they are providing an easy way to keep all parties informed; their customers may feel they are swimming in quicksand as they try to keep abreast of changing contract terms to which they find themselves already obligated. The service provider needs to ensure that it is diligent about how it rolls out any updated terms or, if the links themselves change from what is represented in a customer’s agreement, the contracts may no longer be enforceable. For the customer, even finding the correct referenced term can be a challenge as oftentimes the provided URL goes to the service provider’s main website where customers are on their own to hunt in search of the specific references and left to guess if they’ve found the appropriate terms.
Both the service provider and the customer face other difficulties as well. There may be inconsistencies in the terms between the contracts that are layered within the URLs, including conflicting terms around termination, renewal costs, changes in authorized users, location changes (to a different jurisdiction and/or provider) of the servers storing information such as software needed by the customer and even customer-owned data, changes to server access locations and inconsistencies in the use of defined terms. The list of possible inconsistencies in today’s dynamic business environments is a long one, and these possible gaps can cause confusion for both the customer and the service provider around their respective rights and obligations. Businesses on both sides of a service contract are finding their needs becoming more worldwide, and understanding the laws impacting service delivery and use is becoming even more challenging on a global scale (e.g., export, labor, security, etc.). Negotiating changes to such contracts may be necessary as laws change. However, this also poses its own dilemma for both parties. The service provider is likely passing on to their customers the contract terms from their agreements with suppliers. Understandably, the service provider is not going to be enthusiastic about making changes to terms to which it is obligated to a third party. Customers, on the other hand, are not going to be happy hearing they must accept responsibility under terms that are not satisfactory to them for services for which they are paying!
Service providers may believe they are providing an easy way to keep all parties informed; their customers may feel they are swimming in quicksand as they try to keep abreast of changing contract terms to which they find themselves already obligated.
Solving the Quagmire
Despite these circumstances, finding a compromise solution is not impossible! From the customer viewpoint, one workaround is to remove the URL reference and change the language in the agreement so that instead of pointing to a hyperlinked page, the reference in the agreement points to a printed version of the URL-referenced pages that becomes an exhibit to the contract. This ensures that both parties are aware of the terms at the URL reference. If the URL reference must stay or if the service provider insists on allowing the terms found at the URL reference to change without an amendment to the agreement, a solution could be to add language ensuring that the terms of the agreement around data protection, confidentiality, limitations of liability and indemnification always have precedence and control over any conflicting terms found at the URL reference. In addition, if changes to any of the terms found at the URL reference would have a material impact on the services provided, reduce the amount of services provided, impact any personally identifiable information or data protection obligations or increase fees or liability, then the customer may demand the right to terminate the agreement with no termination charge.
Service providers also need to consider carefully if they want to pass all of their obligations on to their customers. Service providers may take the view that it is unreasonable to expect their customers to comply with certain obligations or to take on certain liabilities, or that it is not commercially viable to do so. Contractual provisions such as limitations of liability and damages caps should be considered carefully before automatically requiring customers to take on the same liabilities. Accepting certain liabilities without passing them onto their customers may be a cost of doing business for certain service providers.
In summary, for the service provider, managing these multilayered contracts and keeping its customer base contracted under the same updated versions requires a good contract management system. A dedicated staff that is diligent about checking all references contained within the embedded contracts to ensure consistency and compliance with all contractual terms whenever the supplier agreements are updated should also be part of the process to ensure that your company understands its rights and obligations under all of these agreements, and which terms it truly wants to impose upon its customers.