Legal Arrangements with Technology Service Providers

An innovative law firm that tackles legal aspects of technology and internet businesses to optimize their commercial potential and profitability, while managing a highly demanding legal environment.

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Technology services continue to play an ever greater role in most commercial enterprises, such that it becoming increasingly important that corporate businesses not only engage the appropriate technology service providers, but also enter in legal agreements the optimize the output received from the technology service provider, while providing appropriate legal protections and safeguards. Key legal considerations when contracting technology services for your business, include:

A. Comprehensive Contractual Framework:

Master Services Agreement (MSA): This foundational agreement sets the overall legal terms governing the relationship. It should cover:
- Scope of Services: Broadly defines the types of services the TSP will provide (e.g., software development, cloud hosting, IT support, cybersecurity services). Specific projects will then be detailed in SOWs.
- Roles and Responsibilities: Clearly delineates what you (the client) are responsible for and what the TSP is responsible for.
- Term and Termination: Specifies the duration of the agreement and the conditions under which either party can terminate (e.g., material breach, non-payment, insolvency, change of control). Importantly, include a robust "exit strategy".
- Governing Law and Jurisdiction: Given you're in Calgary, Alberta, typically you'd want the agreement to be governed by the laws of Alberta and subject to the jurisdiction of Alberta courts. If the TSP is outside of Alberta or Canada, this becomes even more critical.
- Dispute Resolution: Outlines the process for resolving disagreements (e.g., negotiation, mediation, arbitration before litigation).
Statements of Work (SOWs): Each specific project or service delivery should have a detailed SOW, which references the MSA. An SOW must include:
- Detailed Scope of Work: What exactly will be delivered (e.g., specific software features, hosting environment configuration, support hours).
- Deliverables: Tangible outputs or results.
- Timelines and Milestones: Clear schedules for project phases and completion.
- Pricing and Payment Schedule: How and when the TSP will be paid for this specific project.
- Acceptance Criteria: How you will determine if a deliverable meets the requirements and is accepted.
Service Level Agreements (SLAs): These are critical for managing expectations and ensuring performance, often as an appendix to the MSA or SOW.
- Measurable Metrics: Define clear, quantifiable metrics for performance (e.g., uptime percentages for cloud services, response times for support tickets, bug fix times).
- Remedies/Service Credits: What happens if the TSP fails to meet the SLAs (e.g., financial penalties, service credits, right to terminate for repeated failures).
- Reporting: How the TSP will report on their performance against the SLAs.

B. Data Privacy and Security:

This is perhaps the most critical area, especially with the increasing volume of sensitive data handled by TSPs.

Data Processing Agreements (DPAs): Often required by privacy regulations (like PIPEDA, Alberta's PIPA, and potentially GDPR or CPPA/Quebec Law 25 if data touches those jurisdictions). A DPA specifies:
- What Data is Processed: Type of personal information.
- Purpose of Processing: Why the TSP is allowed to process the data.
- TSP's Obligations: Specific security measures, confidentiality, data breach notification procedures, limitations on data use, and requirements for data deletion/return.
- Your (Client's) Instructions: The TSP must process data only on your documented instructions.
Data Location: Crucial for compliance. Where will your data be stored and processed? If outside Canada, understand the implications for privacy and data sovereignty, especially concerning foreign government access (e.g., the US PATRIOT Act for data stored in the US).
Security Standards: Require the TSP to adhere to specific industry security standards (e.g., ISO 27001, SOC 2, NIST frameworks).
Audit Rights: Reserve the right to audit the TSP's security practices and data handling procedures.
Data Breach Notification: Clear obligations for the TSP to notify you immediately upon detection of any data breach or security incident, including details and assistance with your own regulatory notification obligations.

C. Intellectual Property (IP) Ownership:

Ownership of New IP: Crucially, your contract must state that any IP created by the TSP for you during the course of the engagement is owned by you (the client). This typically involves a "work for hire" clause and a comprehensive assignment of all IP rights.
Background IP: If the TSP uses their pre-existing tools, software, or methodologies (their "background IP") to deliver the services, ensure you get a perpetual, irrevocable, worldwide, royalty-free license to use that background IP solely for the purpose of using the deliverables/services provided.
Third-Party IP: Ensure the TSP indemnifies you against any claims of infringement by third-party IP used in their services or deliverables. You need to know if they are using open-source software and what licenses apply.

D. Limitation of Liability and Indemnification:

Limitation of Liability: Negotiate reasonable caps on the TSP's liability. However, ensure that liability for certain critical breaches (e.g., gross negligence, wilful misconduct, data breaches, IP infringement) is either unlimited or subject to a much higher cap.
Indemnification: The TSP should indemnify you against claims arising from their negligence, breach of contract, data breaches, or IP infringement. You may also need to indemnify them for claims arising from your misuse of the services or breach of your obligations.

E. Representations and Warranties:

TSP Warranties: The TSP should warrant that: (i) they have the necessary expertise and resources; (ii) their services will be performed professionally and competently; (iii) the deliverables will meet the specifications; (iv) their services/deliverables will not infringe on any third-party IP; and (v) they comply with all applicable laws and regulations (including privacy).
Your Warranties: You may need to warrant that you have the authority to enter the agreement and will provide necessary information.

F. Due Diligence on the TSP:

Before signing any agreement, conduct thorough due diligence:

Financial Stability: Are they financially stable? You don't want a TSP to go out of business mid-project.
Reputation and References: Check their references, reviews, and industry standing.
Technical Capabilities: Assess their technical expertise, methodology, and infrastructure.
Security Posture: Evaluate their security policies, certifications (e.g., ISO 27001, SOC 2), and incident response plan.
Insurance Coverage: Confirm they have adequate professional liability (E&O) and cyber liability insurance.
Subcontractors: Understand if and how they use subcontractors and ensure their contracts with subcontractors mirror the key protections you have with the primary TSP.

G. Exit Strategy and Transition Plan:

This is often overlooked but is extremely important to avoid vendor lock-in and ensure business continuity.

Data Portability: Ensure clear provisions for the secure return or transfer of all your data in a usable format upon termination or expiry.
Transition Services: The TSP should be obligated to provide reasonable transition assistance (e.g., knowledge transfer, documentation, support during handover) for a specified period after termination.
Costs of Exit: Define who bears the cost of the exit process. No Interference: Clauses preventing the TSP from interfering with your ability to transition to a new provider.

H. Confidentiality:

A robust Non-Disclosure Agreement (NDA) or a strong confidentiality clause within the main agreement is essential to protect your proprietary and confidential business information shared with the TSP. This should also extend to any TSP personnel or subcontractors.

I. Compliance with Laws and Regulations:

Ensure the contract requires the TSP to comply with all applicable laws and regulations relevant to their services, including but not limited to privacy laws, industry-specific regulations, and accessibility standards.

J. Change Management:

Define a clear process for how changes to the scope of work, timelines, or pricing will be managed. This typically involves written change orders signed by both parties.

At Neufeld Legal, we understand how computer algoritms and technological processes intersect with the law and commercial aspects of the Internet, and working with corporate business officers, tech entrepreneurs and IT departments as they strive to realize upon the financial potential of the Net, AI and other computer-based technologies. For more information as to how our law firm can apply our knowledge of the law, technology and the Internet to your business pursuits, contact us via email at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

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