Floating Terms in Vendor Contracts: Cloud Services, Software Licenses, and Communication Agreements

Description

In many modern vendor engagements, both the customer's data and several key areas of the vendor contract are stored in the cloud, including provisions on service level standards, security measures, support obligations, and service descriptions.

This means that key contract terms "float" in the cloud and can be changed at any time by the vendor, frequently without notice to the customer. Even if the customer is given notice, the customer often has no right to object to the changes.

Other challenges of floating contracts include their "as-is" nature, making them less susceptible to negotiation; the customer's inability to access key functionality and performance during the term of the contract; and the customer's limited ability to terminate the agreement, even if key terms change to its disadvantage.

Negotiating floating contracts is extremely difficult. Approaches to mitigate risks include requiring the floating terms to be in writing and attached to the agreement as actual, fixed exhibits, including language that the vendor cannot materially decrease the overall levels of performance and functionality reflected in the floating terms as of the date the contract is signed, and negotiating clear termination rights in the agreement.

Listen as our authoritative panel discusses best practices for mitigating risks to businesses entering "floating" engagements.