Given that Utility Computing is relatively new, there is ample room for dispute between suppliers eager to push the advantages of Utility Computing, and customers who may not be entirely sure what they are buying. Without necessarily being able to rely on empirical evidence of successful utility computing transactions over the years, many customers may find themselves simply holding their breath to see whether the model works as promised. The cold fact is that IT projects in general are often disappointing. There is no guarantee that a Utility Computing project will be different. And if a dispute arises, what are the options?

Dispute resolution

The first option is dispute resolution. When parties start a project together they do not usually want to focus on disputes. But especially in this “courtship stage” when everyone is still on good terms with each other, is it vital to establish a clear dispute resolution and escalation procedure. This will hopefully nip most disputes in the bud, rather than allowing them to fester leading to costly litigation or arbitration. There are a number of alternative dispute resolution techniques, including for instance mediation, that may also be appropriate after the parties have exhausted internal escalation procedures.

It may be appropriate to set out an arbitration procedure that will be used as a last resort, rather than providing for court litigation. Arbitration can be particularly useful where the disputes are likely to have a highly technical subject matter. In such case, arbitrators can be selected by the parties with appropriate expertise. Some jurisdictions such as the Netherlands and Belgium have centers for dispute resolution expressly designed for disputes arising in the ICT sphere. Not only the expertise of the fact-finders but also the procedures there are specifically tailored to facilitate dispute resolution in this unique sector.

This is an area in which parties might notice a significant difference in approaches and outcomes, depending upon whether the contract is under the law of a common law jurisdiction (such as the US or the UK) or a civil law jurisdiction (such as in Continental Europe). To name but one example, courts in common law jurisdictions are more apt to determine the outcome of a dispute by the wording what is actually contained in the contract. For that reason, common law jurisdiction contracts tend to be rather bulky, trying to cover every possible eventuality.

Courts in a civil law country, however, readily fall back on the local civil code to address whatever gaps or questions may be found in a contract. In addition, the concept of reasonableness and fairness will always play a role in these jurisdictions, to a far greater extent than in a common law jurisdiction.

Termination

In the event a dispute cannot be resolved, one of the parties is likely to want to walk away from the contract. When negotiating the contract, it will therefore be important to set out the events that will give rise to early termination, such as material breach, insolvency, failure to meet services levels over a protracted period of time, etc. It is also important to set out as far as possible, each party's rights and obligations on termination. It can be critical for the customer that there is an orderly transfer of the service either back to the customer or forward to a new service provider.

The Service Provider may look for some form of compensation on early termination to be set out in the contract. In most cases this would be a matter for negotiation as, under the governing law, a party might not have a right to compensation for termination, other than in the event of termination as a result of breach. This too is an area that can produce significantly different results, depending upon whether the governing law is that of a common law or civil law jurisdiction.

Are the parties returned to their respective positions before contract signing? And what would that mean to a service provider when “service” once delivered cannot be taken back? Does the provider recover lost profits? This is one area in which English words in a contract that would render one effect in a common law country might be translated to produce just the opposite results in a civil law country.

Transfers of assets back to the Client

In a Utility Computing arrangement, as in more conventional outsourcing models, it is important to ensure that, after the termination of the agreement, the customer is able to recoup its assets that the supplier used during the project. As the supplier may have assumed the risk for the functionality of these assets, he may have required ownership as well. If so, then it is often useful to provide that at the end of the term of the Agreement, the assets will be transferred back to the customer, often for either little consideration or at an agreed rate in the event of early termination.

Data privacy and employee disputes

Two other areas of potential problems that are strictly tied to local law are data privacy and employee problems. The outcome of these disputes can depend entirely upon what law governs the contract, or in which jurisdiction the claim is brought. Regarding data privacy, for instance, the EU has enacted strict rules governing the processing of personal data, which would almost always be an element of a Utility Computing contract. In this instance, court treatment of these problems would be more or less the same in the UK and in the rest of the EU, but could be quite different in the US or the rest of the world. For this reason, attention to this issue in the contract is vital.

The same problem exists regarding the rights of any employees who might be affected by the contract. In our last installment, we discussed some of the issues arising by law when the work of employees in the EU is transferred through a Utility Computing contract. Such issues may or may not be applicable in jurisdictions outside the EU. In the US, rules governing the rights of employees come from both federal and state statutes, requiring even more diligence in choosing the appropriate law for the contract.

Disputes arise in any project. Whether they are handled routinely or are allowed to blow up in the parties’ faces depends in large measure how well the parties planned ahead at the time of contracting.

Alan Steele-Nicholson is head of the IT-Telecom law department in the Rotterdam, the Netherlands, office of the global law firm Simmons & Simmons, and can be contacted on alan.steelenicholson@simmons-simmons.com. Peter Brudenall is Senior Lawyer in Simmons & Simmons’ London office, and can be contacted on peter.brudenall@simmons-simmons.com. Both are specialists in IT and telecom outsourcing law.