Part two. Drafting a contract

K. Remedies for breach of the contract

Types of remedies

The parties are free to select remedies within the limits of applicable law. Remedies may include in-kind remedies aimed at providing the aggrieved party with the same or equivalent benefit expected from contract performance (e.g., replacement of the defective hardware), monetary remedies (e.g., service credits) and termination of the contract. The contract could differentiate between types of breaches and specify corresponding remedies.

Suspension or termination of services

Suspension or termination of the provision of the cloud computing services is a usual remedy of the provider for the customer's breach of a contract or violation of AUP by the customer's end users. The contract may include safeguards against broad suspension or termination rights. For example, the right of the provider to suspend or terminate the provision of the cloud computing services to the customer may be limited to cases of fundamental breach of the contract by the customer, significant threats to the security or integrity of the provider's system and cases stated in the applicable law. The provider's right to suspend or terminate may also be restricted only to those services that are affected by the breach, where such a possibility exists.

Service credits

An often-used mechanism to compensate the customer for non-performance by the provider is the system of service credits. Those credits take the form of a reduced fee for the services to be provided under the contract in the following measured period. A sliding scale may apply (i.e., a percentage of reduction may depend on the extent to which the provider's performance under the contract falls short of the performance parameters identified in SLA or other parts of the contract). An overall cap for service credits may also apply. Providers may limit the circumstances in which service credits are given to those, for example, where failures arise from matters under the provider's control or where credits are claimed within a certain period of time. Some providers may also be willing to offer a refund of fees already paid or an enhanced service package in the following measured period (e.g., free information technology consultancy). If a range of options exists, providers' standard terms may stipulate that any remedy for provider non-performance will be at the choice of the provider.

Fixing service credits as the sole and exclusive remedy against the provider's non-performance of its contractual commitments may limit the customer's rights to other remedies, including suing for damages or terminating the contract. In addition, service credits in the form of fee reduction or an enhanced service package in the following measured period may be useless if the contract is terminated. Excessive service credits may be unenforceable if they have been considered as an unreasonable approximation of harm at the outset of the contract. Other measures, such as penalties (where admissible) or liquidated damages, may provide more appropriate incentives for ensuring contractual compliance.

Formalities to be followed in case of the breach of the contract

The contract may set forth procedures to be followed in cases of breach. For example, the contract could require a party to notify the other party when any terms of the contract are deemed to be violated and to provide a chance to remedy such asserted violation. Time limits for claiming remedies may also be set.