Borrowed from Miller Thomson LLP

The cloud computing trend developed to accommodate the increase in processing and storage capacity that many organizations require to handle the enormous repositories of information connected with their business activities.

Companies are also looking for means of rapidly accessing applications from a variety of locations and using a variety of access devices, such as office computers, laptops and PDAs.

Miller Thomson Analysis

Contract Issues

The cloud contracting trend requires the adoption of new business models to allow corporate and individual customers to obtain access to IT products and services. The “traditional” licensing model contemplates that a software company will grant a customer the right to install and use the program on the customer’s own computer located on its own premises (perhaps for a perpetual term).

By contrast, in the cloud computing paradigm, the provider grants the customer the right to obtain access to certain limited functionalities (perhaps through a web-based interface) of programs installed on the provider’s computer at a remote location. Such limited right of access and use may be granted only for a limited time period.

This different business model has implications for a variety of contract terms to address matters such as payments, warranty terms, termination, liability and protection of confidential and personal information.

Protection of Privacy

There have been concerns as to whether personal information about Canadians stored outside Canada may be accessed by lawenforcement bodies, particularly under anti-terrorism legislation such as the USA PATRIOT Act.

If a corporate or public sector customer uses a cloud computing service for purposes such as managing its e-mail system, it is quite possible that e-mails sent or received by individuals within the organization will be stored in the U.S. or another country.

In theory at least, such e-mail could be accessed by law enforcement bodies in that country, possibly without the knowledge of the persons affected. Faculty and student members of a Canadian university recently expressed concern about this possibility in circumstances where the university was using a cloud computing service offered by a U.S. service provider.

Enforcement of Intellectual Property Rights

The cloud computing trend also gives rise to concerns about whether rights holder will be in a position to enforce their intellectual property rights when computing resources are used for the unauthorized distribution of video, music or other content, and the location of the infringing activity may be difficult to determine.

Jurisdiction

Finally, there is the broader issue of which courts will have jurisdiction to deal with any wrongful activity such as the posting of defamatory content on storage devices located in one jurisdiction, where the customers or any affected third parties may be located in other jurisdictions.

Conclusions

The cloud computing trend is likely to lead to new business models and contract arrangements between IT providers and their customers. Whereas corporate customers may obtain significant benefits from this movement, they must also understand and be prepared for the full implications and potential risks of the new arrangements for their stakeholders.