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Computing Blog - Flow-downs - Liability Arrangements: Cloud or Otherwise

Posted 21st April 2011 by Jagvinder Kang, Director

As I wrote this legal blog, I was sitting in sunny Bangalore at a technology legal conference - and a question was raised by an Indian IT vendor regarding the issue of flow-downs - it made me think that it would be a topic worthy of a blog.

Flow-downs are of course the contractual arrangements which an IT supplier will be looking to 'flow-down' from its contract with its customer to its subcontractor. Sometimes these flow-downs are expressed as mandatory flow-downs, namely, those which a customer will expressly state in a contract are required to be flowed-down to its subcontractor, for the customer to ensure that there is a 'chain of protection' for the customer.

However, flow-downs are not limited in scope to these. As there can be other flow-downs, which although not expressed to be required to be reflected in a subcontract, would still need to be reflected in such an arrangement, in order to prevent the supplier being in breach of its arrangements with its customer - eg intellectual property right assignment provisions, security obligations or accreditation requirements.

The question which was raised by a delegate at the seminar at which we were presenting though, was in the context of flow-down of liability in cloud computing arrangements. The vendor was looking to back-to -back its liability in full to its subcontractor, but was having difficulty in doing so.

The issue of flow-downs is obviously not unique to cloud arrangements. The same issue arises in any technology subcontracting arrangement. The reality though, is that a subcontractor is rarely likely to mirror the liability provisions which are in the prime customer contract, unless the subcontracting arrangement is akin to taking the bulk of the service obligations under the prime contract.

Parties therefore need to be realistic to this situation, and understand that risk and reward go hand in hand. If a subcontractor is not taking on the lion's share of profit, why should it be exposed to the lion's share of liability ?

Businesses therefore need to be alive to the fact that an intact contractual flow-down chain is not something which is realistically possible, and pursuing such an arrangement is a waste of time, resource and nothing more than a relationship straining position.

Parties need to identify the key flow-down requirements, but when it comes to liability issues -internal business continuity, disaster recovery, insurance and other internal risk management, are the measures which are required - rather than attempting to use a contract to completely outsource one's risk.