IBM's revolutionary cloud services agreement still has some loopholes

IBM’s significant commitment to cloud computing has led its legal department to redesign the core contract under which it provides cloud services to enterprise customers. And in a very interesting development indeed, the new contract is only two pages long. We all know that good things can come in small packages. But a contract for critical computing services … in two pages? Seriously? ...
IBM's  revolutionary cloud services agreement still has some loopholes
George Takach, McCarthy Tétrault LLP

IBM’s significant commitment to cloud computing has led its legal department to redesign the core contract under which it provides cloud services to enterprise customers. And in a very interesting development indeed, the new contract is only two pages long.

We all know that good things can come in small packages. But a contract for critical computing services … in two pages? Seriously? And while that might work for IBM, how sensible a document is it for an IBM customer, like a business or a large public organization?

> IBM’s Big Bet on the Cloud
Before we look at Big Blue’s new cloud contract, it’s worth noting that IBM is making a huge bet on the cloud. Press reports indicate that, since 2007, IBM has made 17 acquisitions worth some $7 billion for cloud-related service providers. Revenue from the cloud, on an annual basis, is also now about $7 billion (and growing quickly it was only $4.4 billion in 2013).

To become a meaningful player in the cloud space,
IBM over the past few years has opened multiple cloud-oriented data centres, and its global footprint now includes Frankfurt, Mumbai, Beijing, Hong Kong, Melbourne, Dallas and Toronto (and many other centres).

> Redesigning IBM’s Agreement
At its best, a “software as a service” (SaaS) offering made available over the cloud means a straightforward application that is simple for a customer to subscribe to no fuss, no muss, just an easy-to-use system turned on and adding value, at a reasonable cost, in no time at all. This cloud mantra is what animated a group within IBM legal to brainstorm the simplification of the standard IBM legal agreement for enterprise cloud services, so that the traditional lengthy contract, with its lumbering transaction cycles, would cease to hold up the speedy cloud business model.

Press reports indicate that the
IBM legal team, with business and technical input, managed to simplify the cloud contract to a two-page length, cutting 18 pages out of the final product. This impressive result has garnered an award for IBM from the International Association for Contract & Commercial Management.

Press reports indicate the new short-form agreement is working well for
IBM. Apparently some 80 per cent of their cloud deals are now concluded with customers not requiring any change to the form of the agreement. Clearly, this was IBM’s objective to get customers signed up more quickly and reduce the contracting phase of the sales cycle.

> Some Kudos Warranted
There are indeed some praiseworthy aspects of the new IBM Cloud Services Agreement. Most impressive is the fact that the agreement eschews the dangerous practice of cross-referencing other documents through links. This approach, seen in the standard-form contracts of a number of technology suppliers, has been around for years, and it is loaded with problems.

The first is that in some cases there are so many links, and the materials on the linked sites change so often, that the parties are creating a contractual labyrinth, in which a judge (when the agreement comes before a court) would get lost, with the result that the entire contractual mess is found by the judge to be void for uncertainty.

There is a case precisely to this effect where a court in Ontario found the contractual quagmire so obtuse, that the court refused to enforce the contract’s limitation-of-liability clause. This case didn’t involve a contract with embedded hyperlinks, but it had the functional equivalent of multiple contractual documents
some found online and some in paper form. By finding against the services supplier that developed this contractual cat and mouse game, the message from the court to the service provider was easily inferred: a plague on your house for making your contract so inaccessible to the average customer. Therefore, bottom line, kudos to IBM for not including hyperlinks in its cloud agreement.

The other positive thing to say about the
IBM contract-slimming exercise is, good on IBM for trying. The length of just about all commercial contracts (whether related to IT or otherwise) has grown exponentially over the past 30 years, and only a small part of the increase in length has created any meaningful value. The marginal utility of many of the words that have been added is limited indeed. Sometimes less is more.

> When Too Little Is … Too Little
On the other hand, sometimes less is … just plain less and, frankly, insufficient for the job at hand. Here are a few of these “less is too little” features of the new IBM Cloud Services Agreement.

While
IBM refrains from using hyperlinks to cross-reference other contractual artifacts, the company does use a companion piece to the agreement, called an “order document.” Presumably a lot of the detail of what the customer is getting, in terms of the nitty gritty description of the services, will be in the order document. And who knows how many pages long the order document will run. So to say the new IBM cloud-related paperwork is only two pages long is not quite accurate.

One very important aspect of any cloud service provider’s offering is the “uptime guarantee.” This is the commitment by the supplier as to the percentage of the scheduled operating time that the service will be up and running. The standard nowadays is “five nines”
that is, the system will be up and running 99.999 per cent of the time, and if it fails to achieve this standard, the supplier will give the customer a partial refund for the month in which the outage occurred. This is now a very standard contract mechanism in the IT world.

So it is disappointing that what
IBM provides instead is that its cloud services are “designed to be available 24/7 subject to maintenance.” Sadly, this undertaking is well nigh meaningless. Who cares what the service was “designed” to do; what matters is only what it actually achieves.

Equally, “subject to maintenance” is a huge loophole that sticks out like a sore thumb. Typically, the supplier has a small maintenance window (a couple of hours early on a Sunday morning when no one needs the system anyway). Some applications don’t even allow this amount of downtime. Think e-banking, where the customer facing website simply has to be available all the time, period.

Now, to be fair, IBM indicates that service level commitments could be in the order document. But even this is troubling, because IBM says service level commitments are only available “if applicable.” Which then begs the question, when would some form of service level for a cloud offering not be applicable?

That’s right, never. Simply by definition, if you’re using a cloud service, or any type of SaaS offering, you need a service level commitment. It’s as yin and yang as pancakes and maple syrup. Or, in the US, apple pie and ice cream. So, if IBM really wants to reduce contract negotiating time, it should unilaterally offer some sensible service levels, coupled with a meaningful financial credit if it fails to meet a service level in any particular month. Now that would be a real breakthrough in efficiency-enhancing contract documents.

> Two Steps Forward, One Back
Consider also the limitation-of-liability clause in the IBM Cloud Services Agreement. Again, the conclusion is “I have some good news, and some bad news.”

Given all the things that can go wrong in the provision of computer services, it’s not surprising that clauses purporting to limit the liability of the supplier are scrutinized carefully by the customer. Traditionally, for example, suppliers of IT services set the limit that a customer could claim by way of damages (for poor performance or some other breach of the contract by the supplier) at an amount equal to three months of fees paid by the customer under the agreement.

Very often during negotiations, especially if the customer has some negotiating leverage, this cap amount would get bumped up to nine or 12 months of fees, sometimes even higher. So, congrats to
IBM for putting a cap of 12 months of fees into the standard-form cloud agreement.

This is the good news. The bad news is that the agreement doesn’t deal with the scenario where the damage arises in the first 12 months of the contract (for example on the 60th day of the term). In that case, the amount of the cap should not be the fees paid during the previous 12 months (because in effect that would only be two months of fees), but rather the cap should be the average amount of monthly fees paid or payable over the first twelve months of the contract, multiplied by 12. Most suppliers of
IT services give this add-on to the limit-of-liability clause in negotiated IT agreements; it’s the sort of thing that would be refreshing to see in the standard-form IBM Cloud Services Agreement.

> An Invitation
If IBM is really serious about creating a streamlined but even-handed contract for enterprise cloud services, then here’s a thought. I invite IBM to retain me to help them improve their two-page IBM Cloud Services Agreement, so that we craft something balanced that will be a lot closer to what is required by most customers, but still sensible for IBM.

It’s unlikely even this form will be signed without some amendment by certain customers on a deal-by-deal basis (especially to address concerns specific to their industry, such as in the financial-services sector), but it sure would move us closer to the joint objective of concluding cloud deals in a shorter period of time.

Your move,
IBM.

George Takach is a senior partner at McCarthy Tétrault LLP and the author of Computer Law.

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George S. Takach