Contractual Issues in Grid

The contractual issues that the various actors in Grid have to face are potentially enormous and endless, considering the spectrum of contracts and the variety of existing applicable national laws. Instead, here we focus on those contracts that, according to the practice so far developed within business law, are more popular and worthy of study, particularly on the international scale.

Contract law must be seen as a source of enablers for companies. The aim of this branch of law is not to limit the possibilities given to undertakings playing in the market, but to regulate their relations, with the ultimate objective of creating a market that is profitable for as many parties as possible. For this reason, every firm that is interested in working in a Grid environment should be aware of some fundamental facts.

First of all, it is impossible to get into a Grid business without establishing relations with other companies. It is clear that no undertaking can have by itself all the skills and resources necessary to implement and manage a complete Grid network. These relations have to be set through contracts, and the choice and the quality of the chosen agreement is of pivotal importance.

Secondly, the contract does not create any opportunity, nor set any objective, rather it is the vehicle through which these goals are realised. The first step to make regards the adoption of a strategy, and when the strategy is (at least) quite clear, it is then possible to ‘dress’ it with the best agreement. Every lawyer is condemned to be silent in front of managers’ requests, when the latter do not have any clear idea in mind.

Thirdly, the above considerations for contracts can apply also for liabilities. They exist as a way to regulate trade and business, and a well-structured policy is likely to prevent and avoid many responsibilities in which companies can fail.

Business Contracts for Grid Companies

Going outsourced: which scenarios for Grid companies? Outsourcing and Joint Ventures

The outsourcing agreement is the first, and more elementary, step of the integration between two companies. If we have to provide an easy, non technical, definition of outsourcing, we can say that “if a company outsources work or things, it pays workers from outside the company to do the work or supply the things”. Even if this contract is nowadays, especially by some part of the literature, overestimated, it is nevertheless of great importance and width. Considering that firms tend to be extremely specialized in one or few activities or productions, and that managers tend to concentrate the operative business of their firms on a very detailed activity, it is extremely likely that an undertaking needs to go ‘outside its premises’ to find the services or products it wants. Companies know that they can get a better quality than carrying on the same tasks in-house, and, of course, in many cases this is an obliged solution as it would be impossible to produce the good or service by themselves.

First of all, from the business point of view, we have to consider that it is not compulsory to make an outsourcing agreement if two undertakings want to collaborate. The options are many, and the spectrum goes from the outsourcing contract to a full integration made by a merger or an acquisition (M&A). In between, there are other possibilities, represented by a Joint Venture (JV) or other contractual alliances. What we want to make clear here is that the parties, when they want to start to work together, they have basically to decide which interests they are willing to defend, what is their goal, if they want to set up common objectives or not. Let us imagine, for instance, that a Service Provider simply wants to manage a business concerning the provision of Grid services to End Users, and to do that it needs a Grid provider. If the managers of the Service Provider just want to have a relationship supplier/client, without further commitment (on the basic assumption, of course, that they do not want or do not have the necessary resources or skills to set up and manage a Grid infrastructure), they will chose an outsourcing agreement.

The scenario can be different if the two parties involved have the aim to start a more profitable and stable relationship, maybe with the objective to start up joint activities and create a deeper link. In this case, it would be advisable to opt for a JV, and eventually this can also lead to the creation of a third company (equity JV), that will carry on the common activities. In this case one of the first problems to be solved is where to set the so-called newco, and major corporate and tax law issues arise. As a general remark, considering the confusion often existing in the business law literature, when we will talk about JV, we will consider the so-called equity JV, which exists “where each of the parties contributes capital to a jointly-owned business which is to be conducted as an identifiably separate business with some degree of independent management and in which the parties will share (directly or indirectly) in the profits or losses.” Coming back to the outsourcing agreement, we have to say that even if this kind of contract is the first step to a more complete integration between companies, this does not mean that it is a simple contract to make. First of all, we have to introduce the following basic distinction:

1. The outsourcing agreement does not imply the transfer of assets: in this case, we just have that a party agrees with another that the latter will carry on an activity or a service in the interest of the former, which will pay for that. For instance, it could be the case that the Grid provider makes an outsourcing agreement with a Software house in order to have the software he needs, and in this case we have a cash flow from the Grid provider to the developer of the Software and a ‘service flow’ in the other direction;
2. The outsourcing agreement does imply the transfer of assets: in this case the contract is more complex, as the outsourcing party confers also assets to the supplier, usually because the former was previously performing in-house the outsourced tasks. We can imagine the situation where a Grid provider, that had its own facilities and employees to write the software he needs, find more suitable to outsource this service to an external Software house, transferring also its infrastructures and personnel that were aimed to this scope. In this case, the outsourcing contract is also to be considered as a transfer of undertaking, and the parties has basically to respect the provisions, set by EC law and national laws, directed to protect the employees.

The core of the outsourcing agreement: the level of services

The central issue to be set in an outsourcing agreement, either with or without transfer of assets or employees, concerns the level to which the outsourced services must be provided by the supplier to the customer. As a matter of fact, we would suggest to write down these provisions within the outsourcing contract, and not (as often happens) in a separate and later agreement. The problem is less likely to arise in case of an outsourcing contract without transfer of assets, as in this case there is no need of a due diligence, so that the supplier does not have usually reasons to ask the customer to perform certain activities before the closing of the contract, or before the services agreement is signed. The parties should be extremely careful when setting the services agreement and this should be as much comprehensive as possible. The two key points to keep in mind while drafting such a contract are flexibility and completeness. The latter because a text that is as much as possible complete (even if, of course, it is impossible, and also unadvisable, to try to write down all imaginable provisions) is likely to prevent disputes and litigations; the former because a contract should be flexible enough to provide the parties with fast remedies, in case of lack of regulation for a specific case.

We would therefore advise to consider provisions like the following ones:

1. Definition of the core service to be provided by the supplier: in a Grid scenario, this depends on the relation that is taken into account. In a basic situation (relation End user or Service Provider/Grid Technology provider), the parties will define the technical specifications for the provision of the Grid service, according to their exigencies.
2. Ancillary services: other than the provision of the Grid service, it is advisable to take into account other services that can be necessary during the contractual relationship. For instance, what in case of technical problems? Is the technology provider obliged to offer its assistance? And for free, or under payment of a price? Which are the working hours of the assistance department of the supplier? All these issues should be regulated in the agreement, in order to avoid disputes and litigations. We would advise to write down also a generic provision, able to encompass all other (not expressly regulated) services, related to the core Grid supply, which the customer may need during the relationship.
3. Provision of future services: the customer’s exigencies will probably change with time, so that it is advisable to provide for the possibility of future amendments to the supply of Grid services.
4. Service level: this is a very sensitive part of the contract, as basically a breach of the Service Level Agreement (SLA) means a breach of the core of the outsourcing contract, and allows the customer to terminate the agreement and ask for compensation. The parties therefore should state when the service will be available (24/7, for instance), that it will not be interrupted without reason, and how it will be performed. In a Grid situation, the Technology provider should state, for instance, how many and which servers it will use for the provision of Grid supply, where they are located, which capacity they have. It would also be advisable to state, at least in the customer’s interest, that the supplier is committed to guarantee the supply of Grid capacities, even in case of technical failures of the servers. A separate problem, to be discussed by the parties and regulated by the agreement, concerns the fact that the provision of Grid services necessitates an underlying network, managed by a telecommunications operator. The need of a dedicated leased line should be investigated by the parties, and eventually it would be possible to make an agreement between Technology provider, user of the Grid services and telecommunications operators.
5. Measurement of the service level: it is also necessary to set how the service level will be measured, with which frequency, and who will be in charge of that. Major discussions can, in fact, happen between the supplier and the customer as to whether the service level had been respected or not. This can be a serious obstacle to manage, and therefore the contract should also set a way to solve the disputes in a fast and (possibly) friendly manner, before talking about termination of the agreement and compensation. 

Useful Templates

Below, you can find some templates

• Template: Outsourcing Agreement.
• Template: Application Service Provider (ASP) Agreement.
• Template: Joint Venture Agreement.

About

This material is taken from the document "Legal Report on Contractual and Liability Questions" produced by the BEinGRID project.