Part two. Drafting a contract

F. Payment terms

Pay-as-you-go

Price is an essential contractual term, and failure to include the price or a mechanism for determining the price in the contract may render the contract unenforceable.

The on-demand self-service characteristic of cloud computing services is usually reflected in the pay-as-you-go billing system. It is common for the contract to specify the price per unit for the agreed volume of supply of the cloud computing services (e.g., for a specified number of users, number of uses or time used). Price scales or other price adjustments, including volume discounts, may be designed as incentives or penalties for either of the parties. Free trials are common. It is also common not to charge for some services. Although there could be many variations for price calculation, a clear and transparent price clause, understood by both parties, may avoid conflict and litigation.

Licensing fees

The parties may wish to clarify in the contract whether the payment for the cloud computing services encompasses licensing fees for any licences the provider may grant to the customer as part of the services. SaaS, in particular, often involves the use by the customer of software licensed by the provider.

The licensing fees may be calculated on a per-seat or per instance basis and fees may vary depending on the category of users (e.g., professional users, as opposed to non-professional users, may fall in one of the most expensive categories). Different payment structures may have different implications. For example, a customer's licence costs may increase exponentially if software is charged on a per instance basis each time a new machine is connected, even though the customer is using the same number of machine instances for the same duration.

The contract may identify the total number of potential users of software covered by the licence arrangement, the number of users in each category (e.g., employees, independent contractors and suppliers) and the rights to be granted to each category of users. The contract may also identify access and use rights that will be included in the scope of the licence and cases of access and use by the customer and its end users that may lead to an expanded scope of the license and consequently to increased licensing fees.

Additional costs

The price may cover also one-off costs (e.g., configuration and migration to the cloud (read more)). There could also be additional services offered by the provider against separate payment (e.g., support after business hours charged per time or provided for a fixed price).

Cloud computing services may fall within the category of taxable services or goods in some jurisdictions. The parties may wish to address in the contract the impact of taxes on payment terms.

Other payment terms

Payment terms may cover invoicing modalities (e.g., e-invoicing) and the form and content of the invoice, which may be important for tax compliance. Tax authorities of some jurisdictions may not accept electronic invoices (although this is becoming rare in an increasingly paperless environment) or may require a special format, including that any tax applicable to the cloud computing services may need to be stated separately.

The parties may wish to include, among other payment terms, payment due date, currency, the applicable exchange rate, manner of payment, sanctions in case of late payment and procedures for resolving disputes over payment claims.