Exclusivity in Cloud Engagements

More and more cloud providers are seeking exclusivity in their customer contracts.  That is, to obtain the best pricing, cloud providers are asking their customers to contractually commit to an exclusive engagement in which the customer may not seek similar services from another provider.  The challenge of these types of arrangements is that if the contract does not provide excellent service levels and other protections, the customer could find itself bound to an agreement with a poorly performing provider which it cannot terminate or seek supplemental services from an alternate provider.

There are three primary areas to consider in entering into an exclusive arrangement:

1.  Is the vendor offering strong service levels?  To commit to an exclusive agreement, the customer must have confidence the cloud services will be available when needed and achieve all other performance requirements.  Those service levels must be very clearly defined, not be qualified with dozens of vague exceptions, include realistic credits to ensure the vendor has sufficient incentive to achieve required performance levels, and include termination rights for continuing or substantial failures.

2.  Are there appropriate exceptions to exclusivity?  There are situations that may arise in which the cloud vendor cannot perform as required under the agreement, but would not be in breach.  For example, the vendor may be subject to a force majeure event or other circumstance that temporarily relieves the vendor of its performance obligations (e.g., a period in which the vendor is operating under its business continuity and disaster recovery procedures).  The problem is that the customer may still need to conduct its business during the pendency of the event.  In such cases, the customer should be relieved of its exclusivity obligations to the extent necessary to obtain temporary services from an alternate vendor.  Depending on the type of services at issue, if the event continues for more than a few days, the customer should have the right to terminate and permanently transition to an alternate vendor.

3.  Does the agreement permit transition in anticipation of a termination?  Every cloud agreement will have a defined duration or term (e.g., an initial term of two years, with certain renewal terms).  As that term comes to an end, the customer may want to explore a relationship with an alternate vendor.  To ensure a smooth transition, the customer will likely need the right to enter into an agreement with the alternate vendor well before the existing agreement expires.  The exclusivity provision must be drafted to include the right for the customer to enter into an agreement with an alternate vendor in anticipation of expiration.

Exclusive engagements can provide the customer with potentially substantial pricing advantages.  The key to controlling risk is to ensure those advantages are not outweighed by the overall risk of the contract.