GDPR and the Obligation to Notify Infringing Instructions

November 17, 2017

Those of us who have been grappling with how best to
approach GDPR compliance in outsourcing and other commercial contracts will be
all too familiar with Article 28 of the GDPR. 
Article 28.3 builds on the limited obligations that existed under the
existing regime but also includes some significant enhancements to the minimum
processor obligations to be addressed head-on in the contract.

Processor’s obligation to notify infringing instructions

One requirement of Article 28.3 in particular has provided
clients and counsel alike with a degree of angst since the final draft of the
GDPR was published in May 2016, and further back still for those of us who had
followed the negotiations and multiple redrafts of the GDPR prior to its final

The offending paragraph ‘floats’ at the end of Article
28.3’s list of contract requirements and reads:

‘With regard to point (h) of the first subparagraph, the
processor shall immediately inform the controller if, in its opinion, an
instruction infringes this Regulation or other Union or Member State data
protection provisions.’

We say ‘floats’ because the paragraph does not appear within
the Article 28.3 list and, from a formatting perspective, sits in line with
(but between) Article 28.3 and the following Article 28.4.

excerpt from Article 28

Either way, the obligation throws up a host of questions
that commercial and data protection professionals (especially those acting for
processors and sub-processors) will now need to consider each time they
negotiate an agreement under which personal data are to be processed and also
as they design and implement new service offerings.

For example:

1. What constitutes an instruction?

a. What level of involvement must a processor have in the
processing activities and the wider service provision to be deemed to have had
knowledge of the customer’s instructions?

b. For example, in a SaaS scenario, does the obligation apply
where the supplier’s systems enable certain types of processing but the
customer remains in control of configuring the system?

2. When, and to what extent, will processors be expected to
have or form an opinion?

a. To what extent will a processor be expected to interrogate
and assess the basis on which the data controller customer has the right to use
the personal data in question in the manner specified under the contract?  Will this now form a standard part of the supplier’s
initial contractual due diligence stage?

b. Will processors be expected to build and maintain an
internal compliance and legal capability to enable it to comply with this obligation
(or even outsource these capabilities to external counsel or consultancies)?

c. If so, will this result in processors who wish to be fully
compliant with Article 28 being forced to raise their prices; potentially
becoming uncompetitive when compared with their less compliant peers?

d. Even where such compliance teams are established or
enhanced, how will processor organisations ‘operationalise’ these teams so that
they are sufficiently integrated into the sales and delivery cycle that
infringements are identified and notified?

e. To what extent will ignorance of what is undoubtedly an
expansive and complex law be a defence?

3. To what extent can the data processor seek to limit or
exclude contractual liability for this obligation?

a. Will separate liability caps be required? Will suppliers
seek to carve out this obligation from indemnity provisions?

b. Will additional provisions be required to enable counterclaims
by a supplier?  For example will it
become custom and practice for suppliers to insist on specific representations
and warranties and, in the context of outsourcing arrangements, specific
‘customer dependencies’, that all instructions given by the customer are themselves
lawful and compliant with the GDPR?

4. Finally, to what extent is this obligation an insurable
business risk?

Is this a contractual obligation, statutory obligation or

In addition to the issues outlined above, the placement of
the obligation within Article 28.3 and the reference to sub-paragraph (h) is
also problematic.  From a plain reading
of Article 28.3, it is unclear whether the paragraph is intended to exist as a
stand-alone statutory obligation on the data processor or as an additional
contractual obligation to be included within the data processing contract, or
indeed both.

Given the placement of the paragraph and the fact that the
list of contractual obligations clearly ends at sub-paragraph (h) with a full
stop, it is arguable that the correct interpretation is that the paragraph was
intended as a stand-alone statutory obligation and not something that had to be
included in the contract (although from a controller’s perspective it would
clearly be desirable to do so in any event).

In other words, if the draftspersons had intended for the
clause to form part of sub-paragraph (h), why wouldn’t they have simply put it

Finally, it is also unclear what the qualification ‘With
regard to point (h)’ means in practice.  Sub-paragraph
(h) requires processors to make information necessary to demonstrate compliance
with the obligations set out in Article 28 and to allow for, and contribute to,
audits. It is not clear what the link is between information and audit
obligations on the one hand, and instructions of the controller on the other.
Does the reference to sub-paragraph (h) mean, for example, that the obligation
to notify the controller of infringing instructions relates only to information
requests and audits?

ICO’s draft guidance

To date, there has been little guidance on the above, with
businesses left to speculate as they prepare for 25 May 2018. 

However, the ICO issued draft guidance on contracts and
liabilities between controllers and processors for consultation on 13 September
2017.  The Draft Guidance sets out how
the ICO interprets the GDPR, and its ‘general recommended approach to
compliance and good practice’.

The Draft Guidance seems to have been prepared almost
entirely from the point of view of data controllers (perhaps a hangover from
the necessary approach under the existing controller-specific regime) and so
provides little additional guidance (at least in its draft form) from the
perspective of data processors.  This
lack of guidance extends to addressing how processors might go about complying
with the obligation to inform about infringing instructions whilst taking into
account some of the issues identified above. 

However, on the question of whether the obligation to inform
must be addressed in the contract and on whether it is somehow limited by
reference to sub-paragraph (h), the Draft Guidance does state clearly that:

‘Under Article 28.3(h), your contract must provide that…your
processor must tell you immediately if it thinks it has been given an
instruction which doesn’t comply with the GDPR, or related data protection law’.

So despite the questions of interpretation raised above, for
now at least, the ICO’s position on this point seems clear: the obligation to
inform is a contractual obligation and it is not limited to information and
audit requests of the type referred to in sub-paragraph (h).

Hopefully, additional clarification will be forthcoming as
the guidance is developed further by the ICO, or alternatively from the ICO’s
EU counterparts.

Given the UK’s involvement in negotiating the GDPR
throughout its draft iterations and the fact that the GDPR will effectively be
adopted into UK law through the Data Protection Bill, the ICO’s guidance is
undoubtedly persuasive and will likely remain so post Brexit.  The ICO has stated that its guidance will
need to evolve to take account of future guidelines issued by relevant European
authorities, as well as its experience of applying the law in practice from May
2018 and that it intends to keep the guidance under review and update it in
light of relevant developments and stakeholders’ feedback. 

In the meantime, controllers and processors alike will need
to consider how to address this obligation in their processing agreements.
Controllers will no doubt seek to include this obligation on a near word-for-word
basis. However, processors should consider carefully what additional
contractual and (just as importantly) procedural protections they need in order
to mitigate the potential impacts. For example, as a minimum, processors will
need to implement governance frameworks and clear reporting lines to assess
communications with their controllers and have a clear policy in place to guide
those individuals concerned on how to handle instructions from the controller
they deem to be infringing. 

Simon Lightman is counsel in the Global Sourcing &
Technology Transactions practice of Pillsbury Winthrop Shaw Pittman LLP, based in
the firm’s London office.

Steven Farmer is also counsel in the Global Sourcing &
Technology Transactions practice of Pillsbury Winthrop Shaw Pittman LLP, based in
the firm’s London office.

Read more analysis of the ICO draft guidance in this
article from Kuan Hon