Data Privacy Newsletter – Navigating Data Privacy Challenges in Customer-Facing Contracts: A Guide for Service Providers : November 2024

Every customer engagement is governed by a contractual agreement that establishes the scope of work, roles and responsibilities, liabilities, and remedies in the event of a breach. Most customer engagements involve some form of personal data handling by a service provider on behalf of its customers. Such handling of personal data is governed by contractual agreements that are both comprehensive and compliant with data protection laws, commonly referred to as Data Processing Agreements (the “DPAs”).

This newsletter highlights some of the key challenges a service provider may encounter with customer-facing DPAs.

Key Challenges for Service Providers in Customer-Facing Contracts

1. Compliance with Law: A primary obligation in a DPA for both parties is to identify and adhere to all applicable data protection and privacy laws relevant to their operations. Given that data protection laws are evolving at a rapid pace, it is essential for service providers to stay informed about changing legal requirements to ensure ongoing compliance.
2. Global Templates: In most customer engagements, customers will seek to use their own DPAs to govern the processing arrangement. However, not all DPAs are tailored to reflect the specific services offered by the service provider. Customer contractual agreements and DPAs are generally global templates that directly reflect the customer’s requirements and business model, designed to apply to all jurisdictions simultaneously.
3. Information Security Compliances/ISO Certifications: A service provider may encounter challenges related to customer information security requirements that may not be applicable to their operations. Service providers must assess whether they can meet these demands without compromising their existing security protocols or incurring excessive costs.
4. Data Localisation & Restrictions for Cross-Border Data Transfer: Many customers impose specific data residency requirements that necessitate storing and processing data within certain jurisdictions, which may not align with the service provider’s operational capabilities. These localization mandates can complicate compliance efforts and limit the provider’s ability to offer flexible and efficient services. Additionally, navigating the legal complexities of international data transfers can result in potential regulatory risks and operational inefficiencies.
5. Authorisations for Engaging Subcontractors: Service providers often struggle with obtaining the necessary authorizations to engage subcontractors, which can lead to delays in project timelines and hinder operational efficiency. Furthermore, the need to ensure that subcontractors meet the same compliance and security standards as that of the primary service provider adds another layer of complexity, potentially impacting service quality and responsiveness.
6. Costs and Indemnities: Customers frequently impose extensive indemnification requirements that can expose service providers to significant financial risks in case of breaches or other legal claims. The ambiguity surrounding these indemnity clauses further complicates the situation, leaving service providers uncertain about their potential liabilities. Navigating these financial obligations while ensuring competitive pricing and maintaining high-quality service can prove to be a substantial challenge.

Remediations and Mitigation of the Challenges

1. DPA Provisions Not Aligned with the Service Offerings: In cases where the customer DPA is not tailored to reflect the specific services offered, a service provider should ideally use their own DPA crafted specifically for their services. Alternatively, the customer’s DPA can be customised to align with the services provided. However, using one’s own DPA template should always be the preferred option.
2. Defined Roles and Responsibilities: All contractual agreements must clearly specify each party’s role, whether as a data controller or a data processor. The customer, as data controller, holds primary decision-making authority over data processing activities. Service providers should ensure that they accept only those responsibilities that are operationally and practically feasible, to help minimize their liabilities.
3. Accurate Terms for Processing Activities: Service providers should ensure that DPAs clearly and accurately capture the scope and instructions for the data processing activities to be performed. Setting clear and detailed data processing terms in the contractual agreement will help establish realistic expectations and prevent potential disputes in the future.
4. Liability Considerations for Data Exposure: Liability is often a contentious area in customer contracts. Service providers should aim to limit their liability strictly to breaches of legal obligations rather than to violations of the customer’s terms and internal policies. Service providers should accept accountability only for aspects within their control, while the customer should bear responsibility for areas outside the service provider’s control.
5. Sub-contractors: Service providers often rely on third-party subcontractors to perform certain aspects of their service offerings. To ensure continuity and avoid delays due to last-minute approvals, the service provider should seek general approval from the customer for engaging subcontractors within the contractual agreement. This proactive approach helps support timely and uninterrupted service delivery in the long term.
6. Baseline privacy framework: As part organizational processes and procedures, every service provider must consider implementing a baseline data privacy framework to ensure that their practices align with legal requirements and industry best practices. A data privacy framework will provide internal stakeholders with appropriate guidance on handling matters related to personal data protection and the minimum requirements in customer contractual agreements or DPAs.

Building Robust Contracts to Lower Contractual Risk

For service providers, ensuring that customer-facing contracts (such as DPAs) are thorough is essential for reducing legal risks and maintaining customer trust. Clearly defining roles, responsibilities, and liabilities helps protect businesses from issues like data breaches, regulatory fines, and damage to their reputation. In an era of increasing regulatory scrutiny, actively strengthening contractual obligations shows a commitment to data privacy and ensures compliance with global laws.

By creating well-structured, future-ready DPAs and customer contracts, service providers can minimize risks, build trust with customers, and enhance their reputation as reliable, privacy-focused partners.