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Work Package WP 2 , Legal Track Due Date: M 16 ( 31 / 05 /201 6 ) Submission Date: 13 June 2016 // format revision 19/09/ Version: 1. 3 Status Final Editor(s): Gian Marco Rinaldi (Bird&Bird)
Reviewer(s) David Bicket (CIF) Daniel Field (ATOS)
The SLALOM Project is co-funded by the European Commission through the H Programme under Grant Agreement 644720
Before cloud computing contracts were identified as such, authors discussed the nature of contracts for the outsourcing of electronic systems which, to some respect, may be considered a precursor of cloud computing service contracts^4.
The outsourcing of electronic systems has been defined as the transfer to an external provider of all technologies and human resources, as well as the transfer of responsibility of management by the provider of the information technology services^5.
Typically, this type of contract includes a first step whereby the information technology resources are transferred (migration), and a second step in which the external provider is entrusted with the information technology services once the migration has been completed.
Most authors consider the above a supply of service contract, which under Italian law is regulated by Article 1677 of the Italian Civil Code (hereinafter, "ICC")^6. According to their interpretations, cloud computing service contracts should be classified as a service contract rather than as a lease agreement or supply contract^7.
Article 1677 of the ICC provides that: " If the subject matter of the contract is the continuous or periodic performance of services, the provisions of this chapter [i.e.: the chapter relating to "contract work", Article 1655 and following of the ICC] and those relating to standard "supply contracts" [i.e.: Article 1559 and following of the ICC] apply to the extent that they are compatible^8 ". In other words, under Italian contract law, service contracts are ruled in part according to the rules applicable to contract work contracts and in part to those applicable to supply of goods contracts.
Cloud computing has been defined as follows:
" Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and
(^4) Alessandro Musella, Il contratto di outsourcing del sistema informativo , Diritto dell'Informazione e
dell'Informatica, 1998, pag. 859; Federico Tosi, Il contratto di outsourcing informatico , 2001. (^5) Federico Tosi, Il contratto di outsourcing informatico , 2001, pag. 5 ; Willcocks L.P., Lacity M, Strategic sourcing
of information system , 1998, pag. 4. (^6) Rossello, I contratti dell'informatica nella nuova disciplina del software , 1997, 97; Cardarelli , La cooperazione
fra imprese nella gestione di risorse informatiche: aspetti giuridici del c.d. "outsourcing" , Dir. Informaz. e informatica, 1993, 94; Alessandro Musella, Il Contratto di Outsourcing del Sistema Informativo , Diritto dell'Informazione e dell'Informatica, 1998, pag. 859; Zincone, Il Contratto di Outsourcing: natura, caratteristiche, effetti , Rivista Dir. Autore 4/2002, pag. 379; Ricci, L'outsourcing e cloud computing , in Diritto dell'informatica, of Finocchiaro, pag. 669. This last author points out that because there may be major differences in how different outsourcing agreements are performed, it is necessary to assess on a case-by-case basis, as it is not always possible to consider them as a service contract. (^7) Even if other fulfilments, such us the lease or the supply of goods, may be included in the above contracts,
the "main" fulfilment must be considered as the most important fulfilment in the contract. Accordingly, in line with the "theory of absorption" (in Italian: " teoria dell'assorbimento "), which is considered the most reliable theory in relation to contracts that entail a range of fulfilments, these types of contracts (so called "mixed contracts") should be ruled in accordance with the provisions applicable to the main fulfilment. In the case of cloud computing, the most important fulfilment is the supply of a service. Consequently, the provisions of law applicable to the supply of services should apply. (^8) In this document, the translation of the Articles of the Italian Civil Code are from: " The Italian Civil Code and
Complementary Legislation ", translated by Mario Beltramo, Giovanni E. Longo, John H. Merryman, New revised and updated edition by Mario Beltramo, Oceana Publications, Inc., Dobbs Ferry, N.Y. Release 91-1, Issued March 1991.
services) that can be rapidly provisioned and released with minimal management effort or service provider interaction […] "^9.
Some authors have underlined that, unlike electronic system outsourcing contracts, many cloud computing services do not entail specific services for specific adopters, but are typically standard services provided on a general basis to all adopters. Moreover, according to these authors, cloud computing contracts are very often not negotiated with the adopters.
Consequently, cloud computing contracts should not be equated to a services contract as regulated by Article 1677 of the ICC. According to these authors, the service contracts under Article 1677 of the ICC are characterized by their strictly personal nature (i.e.: " intuitus personae ") and therefore do not qualify as standard services.
In line with this interpretation^10 , cloud computing contracts should instead be considered as non- standard contracts (in Italian: " Contratti atipici "^11 ). As a consequence, they should not fall into the category of the standard model contracts provided by the ICC (or other laws) and the contract provisions should be entirely agreed by the parties since it is not possible to find applicable provisions in any standard model.
Other authors argue that cloud computing contracts should be considered as mixed contracts that share the features of both service contracts and license contracts^12.
According to this interpretation, the service aspect concerns the supply of information technology services, while the license aspect relates to the software provided by the provider (or third parties) on the cloud platform used by the adopter.
It could be argued that a license is not needed for software used by adopters through cloud platforms. If anything, a license would be needed by adopters to use the software installed on their own computers.
It is worth noting that, according to the majority of authors, a license contract is similar to a lease contract wherein the licensee has the right to use a good in its possession^13.
(^9) The NIST Definition of Cloud Computing, Recommendations of the National Institute of Standards and
Technology, by Peter Mell Timothy Grance. According to the definition: " This cloud model is composed of five essential characteristics, three service models, and four deployment models ". The five essential characteristics are On-demand self-service, Broad network access, Resource pooling, Rapid elasticity, Measured service. The three service models are Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS). The four deployment models are Private cloud; Community cloud, Public cloud, Hybrid cloud. (^10) Fabiano, I nuovi paradigmi della rete. Distributed computing, cloud computing e “computing paradigms”:
abstract sugli aspetti e i profili giuridici , http://www.diritto.it/docs/27973-i-nuovi-paradigmi-della-rete- distributed-computing-cloud-computing-e-computing-paradigms-abstract-sugli-aspetti-e-i-profili- giuridici?page=3. (^11) Non-standard contracts are allowed under Italian law: Article 1322 of the ICC provides that " The parties can
also make contracts that are not of the types that are particularly regulated, provided that they are directed to the realization of interests worthy of protection according to the legal order ". (^12) Mantelero, Il contratto per l’erogazione alle imprese di servizi di cloud computing , in Contratto e Impresa 4-
5/2012, pag. 1219; Limone, I Contratti di Cloud, at http://www.comparazionedirittocivile.it/prova/files/limone_cloud.pdf, pag. 4; Ricci, l'Outsourcing e cloud computing, in Diritto dell'informatica , of Finocchiaro, pag. 673. (^13) Sbisà, Profili generali dei contratti di utilizzazione dei computers , in I contratti di utilizzazione del computer,
by Alpa, Milan, 1984, p. 23; La Rosa, Lineamenti dei contratti di fornitura dei computers e dei servizi informatici ,
contracts, the purpose of the activity is the establishment of a service and the subsequent supply thereof for the benefit of the adopter through the use of technological means.
In view of the above, it could be argued that cloud computing agreements should be considered akin to service contracts governed under Article 1677 of the ICC.
1.2 Consequences of classifying cloud computing contracts as service contracts as per Article 1677 of the Italian Civil Code
If cloud computing contracts are classified as services contracts, the provisions set forth in the ICC for this latter type of contract would have to apply.
The parties should take into account that Article 1677 of the ICC will apply if the terms of contract do not set forth otherwise. If nothing is mentioned on this point and the contract does not expressly exclude the applicability of or partial derogations to the ICC provision, it could be argued that the ICC rules governing the standard models also apply to the relationship of the parties.
In the following paragraph 1.2.1, an overview of the Articles of the ICC that could apply to cloud computing contracts is provided^18.
1.2.1 Provision of services
As stated in paragraph 1.1 above, Article 1677 of the ICC provides that service contracts do not have their own specific standard model^19 but are to be ruled by the provisions applicable to standard contract work contracts (or "independent contracts") (Article 1655 of the ICC) and those applying to supply of goods contracts (Article 1559 of the ICC).
Article 1655 of the ICC provides that:
" The contract work is a contract by which a party undertakes to perform a piece of work or render services, organizing the necessary means and operating at his own risk, in return for compensation in money ".
Article 1559 of ICC states that:
" A supply contract is one by which a party binds himself to supply another with things continuously or periodically, in return for a price ".
It is important to note that cloud computing contracts do not entail a compensation in money in exchange for services especially mass cloud services, and thus, according to the above definition, cannot be equated to a service supply contract as regulated under Article 1677 of the ICC^20.
(^18) In the following paragraph 1.2 we refer solely to main provision included in the Italian Civil Code ruling
service contracts to the extent they may apply to cloud computing contracts. With reference to any other laws and regulation generally applicable to cloud computing contracts under Italian laws and regulations, see Deliverable 2.2. (^19) Many authors point out that in 1942, when the ICC was drafted, service contracts were not so important to
the economy at the time. As a result, lawmakers did not see the need to provide a specific standard model for this type of contract. Instead, it was decided that the rules governing both contract work contracts and supply contracts would be the points of reference. (^20) In this respect, we note that the proposal of European Directive COM(2015) 634 "on certain aspects
concerning contracts for the supply of digital content", Article 3, paragraph 1, sets out that: " This Directive shall apply to any contract where the supplier supplies digital content to the consumer or undertakes to do so
1.2.2 Quantity of services
Another Article of the ICC which could apply to cloud computing agreements is Article 1560:
" If the amount to be supplied is not established, it is deemed to correspond to the normal requirements of the customer as of the time of making the contract.
If the parties have established only a maximum and a minimum limit for the entire supply contract or for each instalment, the right to establish the quantity due, within those limits, vests in the customer.
If the quantity to be supplied is to be determined in relation to requirements and a minimum quantity was agreed upon, the customer is bound for the quantity corresponding to his requirements if this exceeds the agreed minimum ".
This provision could be considered as the first model clause of a service level agreement. Such a clause could apply in all cases in which the parties have not established a clear quantity or the parameters of the cloud services.
Also in light of this clause, it would be advisable for the parties (whose contracts are governed by Italian law) to always set out the service levels of the cloud services in order to avoid the application of Article 1560 of the ICC to their contractual relationship, which could lead to unexpected and uncertain consequences.
1.2.3 Duration - Termination
Article 1569 of the ICC provides that:
" If the duration of the supply is not established, each of the parties can withdraw from the contract by giving notice within the time agreed upon or established by usage or, in the absence thereof, within a reasonable time with regard to the nature of the supply ".
Generally speaking, this clause is applicable to cloud computing services. However, in most cases, the contracts models used on the market have a final term and are not open-ended. In any case, according to a possible interpretation, in the absence of this final term, the above provision on the withdrawal rights of the parties would apply.
It is worth noting that according to some authors, the application of Article 1569 cannot be admitted because it could be in conflict with the application of the Article 1671 of the ICC.
Article 1671 of the ICC on "Unilateral withdrawal from contract" (referring to contract work contracts) states that:
" The customer can withdraw from the contract even after the performance of the work or service has begun, provided that he compensates the contractor for the expenses sustained by him, for the work accomplished and for his lost profit ".
and, in exchange, a price is to be paid, or the consumer actively provides counter-performance other than money in the form of personal data or any other data "(our underlining). Accordingly, the proposal established that the counter-performance of the supply of digital content can also be the provision of personal or other data.
1.2.5 Materials to perform the services
Article 1658 of the ICC provides that:
" The materials necessary to perform the work shall be furnished by the contractor, unless otherwise agreed by the parties or provided by usage ".
This article may also apply to service contracts. With reference to cloud computing services, it could be argued that according to this provision, the provider is responsible for providing all the hardware and software necessary for the work, scope, or purposes set forth in the agreement with the adopter, such as applications or software provided by the parties.
In light of this provision, it is important that cloud computing contracts be very clear in specifying the responsibilities of the provider and those of the adopter in relation to the resources to be used to supply the services. The contract must specify, for instance, if the adopter must separately purchase a third-party license to be installed on the provider’s platform or if this is up to the provider.
1.2.6 Variations
Articles 1659, 1660, 1661 of the ICC concern variations with respect to plans. The application of these Articles to service contracts (and therefore to cloud computing contracts) has been debated.
Article 1659 of the ICC (Variations agreed upon with respect to plans) provides that:
"The contractor cannot vary from the stipulated manner in which the work is to be done, unless such variations have been authorized by the customer.
Evidence of such authorization must be in writing.
Even when variations have been authorized, the contractor is not entitled to any compensation for such variations or additions if the price of the entire work has been determined in a lump sum, unless otherwise agreed ."
This Article is unlikely applicable to standard cloud services, which are provided on a non-specific basis to all adopters and contain standard terms and conditions.
, Differently, the provision could apply to cloud computing services specifically designed for the adopter. However, it should be noted that the provider must ask the customer to authorize any changes in the services and that any consequent fee change must be agreed by the parties, otherwise the fee will not be due.
Those who argue that the last paragraph of Article 1659 of the ICC does not apply instead deem applicable the third paragraph of Article 1562 of the ICC, which states that: " In periodic supply contracts, the price is paid according to the customary terms "^25.
Article 1660 of the ICC (Necessary variations in plans) provides that:
(^25) Bocchini, La somministrazione di servizi , 1999, pag. 197 deems that this Article is applicable to service supply
contracts; Cottino, Del Contratto estimatorio. Della somministrazione , in Commentario del codice civile by Scialoja-Branca, 1970, pag. 219 opposes the application of Article 1660 of the ICC to service supply contracts.
"If, in order to carry out the work according to the standards of the trade, it is necessary to make variations in the plans, and the parties fail to agree in that respect, it is the duty of the court to establish what variations are to be made and the related variations in the price.
If the amount of the variations exceeds one-sixth of the total price agreed upon, the contractor can withdraw from the contract and can, according to the circumstances, receive a just indemnity.
If the variations are of considerable importance, the customer can withdraw from the contract and is bound to pay a just indemnity ".
The question of whether this provision also applies to service contracts or only to work contracts has led to differing opinions^26.
If we acknowledge that Article 1660 applies to service contracts, it could also apply to all cases in which cloud computing services are specifically designed for an adopter and in which in order to achieve the service levels, the purpose or the objectives agreed in the contract the services need to be changed.
With reference to cloud computing agreements and due to the uncertainty deriving from the application of the above provision, it is advisable to exhaustively regulate all issues concerning variations in the services.
Article 1661 of the ICC ("Variations ordered by customer") provides that:
" The customer can make variations in the plan, provided that they do not involve an amount in excess of one-sixth of the total price agreed upon. The contractor is entitled to compensation for the additional work performed by him even if the price for the work has been determined in a lump sum.
The provision of the preceding paragraph is not applicable when the variations, even though contained within the above limits, involve considerable changes in the nature of the work or in the amount of any category of work provided for in the contract for the performance of the entire work "
According to some authors, Article 1661 of the ICC is not applicable to service contracts, which, they argue, should be governed under Article 1560 of the ICC concerning supply contracts (see paragraph 1.2.1).
We agree with those authors who point out that the two Articles concern different aspects and that the application of one provision does not rule out the application of the other^27.
If nothing has been agreed by the parties on this point in the cloud computing agreement, Article 1661 of the ICC could have important consequences as it could be argued that, by means of this provision, the adopter can change the services both in the service design phase and in the service supply phase.
It is therefore advisable that the parties regulate if and to what extent the adopter can change the services.
(^26) Cottino, Del Contratto estimatorio. Della somministrazione , in Commentario del codice civile by Scialoja-
Branca, 1970, pag. 219 argues that Article 1660 of the ICC is not applicable to service contracts. Bocchini, La somministrazione di servizi , 1999, pag. 197 deems that Article 1660 of the ICC is applicable also to service contracts such as services subject to technology development which need to be constantly updated. (^27) Federico Tosi, Il Contratto di Outsourcing di Sistema Informatico , 2001, pag. 68.
1.2.9 Suspension of the supply
Article 1565 of the ICC provides that:
" If the customer has failed to perform and the default is of slight importance, the supplier cannot suspend his performance of the contract without giving reasonable advance notice ".
If the parties have not clearly set out that the provider has the right to suspend the contract , the above provision could also apply to cloud computing services.
1.2.10 Price increase or reduction due to external events
Article 1664 of the ICC sets out that:
" If as a result of unforeseeable circumstances, there have occurred such increase or reductions in the cost of the materials or of labor as to cause an increase or reduction by more than one-tenth of the total price agreed upon, the contractor or the customer can request that the price be revised. The revision can only be granted for that part of the differences which exceeds one-tenth ."
It is unclear if service supply contracts should be governed by this provision or by Article 1467 of the ICC which is a general provision on "Excessive Onerousness"^30 applying to all standard contracts.
However, we cannot exclude that in force of Article 1664, the provider could ask a review of the fees in light of any additional costs (exceeding one-tenth of the total fees) it must bear in relation to hardware or software and as a result of circumstances not foreseeable at the time the agreement was entered into.
On the other hand, the adopter could also claim that because of a reduction in software or hardware costs , the provider must reduce the price to be paid by adopter.
Because of the uncertainty of the application of above provision, it is advisable that the parties in their agreement provide that the price will be revised in light of any unforeseeable events or that it will remain unchanged regardless.
1.2.11 Warranty for defects
Article 1667^31 and 1668^32 of the ICC concerns defects and non-conformity. Generally speaking, it is safe to say that they can be applied to service contracts such as cloud computing contracts.
(^30) Article 1467 of the ICC provides that: " In contracts for continuous or periodic performance or for deferred
performance, if extraordinary and unforeseeable events make the performance of one of the parties excessively onerous, the party who owes such performances can demand dissolution of the contract, with the effects set forth in Article 1458 of the ICC. Dissolution cannot be demanded if the supervening onerousness is part of the normal risk of the contract. A party against whom dissolution is demanded can avoid it by offering to modify equitably the conditions of the contract ”. (^31) Article 1667 of the ICC: " Non conformity or defects in work. The contractor is bound to warrant the customer
against non-conformity or defects in the work. The warranty does not apply if the customer has accepted the work and the changes or defects were known to him or were detectible, provided that such defect were not passed over in silence by the contractor in bad faith. The customer shall, under penalty of forfeiture, notify the contractor of the non-conformity or defects within sixty days from the discovery thereof. The notice is not necessary if the contractor acknowledged such non- conformity or defects or concealed them.
However, some authors have pointed out that cloud computing contracts normally include provisions on the quality and quantity of the services as well as on the consequences arising if the services do not comply with the contract requirements. In other words, it is very common for cloud computing contracts to already include the requirements, characteristics and metrics of the service.
Provisions on quality and quantity of services or default in correctly providing the services should generally replace the application of the above warranty for defects.
If the contract does not contain any provisions on how the services are to be provided or their characteristics, the adopter could claim that the above warranty is applicable despite the unlikelihood of applying it to cloud computing services.
The application of Article 1672 of the ICC concerning "Impossibility of performance of the work"^33 is a subject of much discussion among academics According to some authors^34 this provision is not applicable because it is not possible to have a "partial delivery of service".
With reference to cloud computing, the effective application of Article 1672 of the ICC seems quite unlikely seeing that the services are supplied on an on-going basis: in cloud computing it is not possible to clearly distinguish a "moment of the delivery" of the service or identify a partial delivery as in a contract work.
1.2.12 Provisions of the ICC not applicable to service contracts and/or cloud computing services
The ICC provides three clauses in relation to supply contracts concerning "Right of first refusal" (Article 1566), "Exclusive dealing clause in favour of supplier" (Article 1567) and "Exclusive dealing clause in favour of the customer" (Article 1568). Although, according to some authors, these Articles may also apply to service contracts, the rules included therein do not seem to apply to cloud computing services^35.
Articles 1665 of the ICC on “Testing of and payment for work” and 1666 on “Testing and payment of individual parts” are not applicable to service contracts nor to cloud computing services as a work per se is not supplied.
Article 1673 of the ICC on "Destruction or deterioration of the property" also does not apply to cloud computing services as the services are not themselves subject to destruction or deterioration.
The action against the contractor shall be prescribed [2934] in two years from the date of delivery of the work. A customer who is sued for payment can always enforce the warranty, provided that notice of the non- conformity or defects was given within sixty days from discovery thereof and within two years from delivery”. (^32) Article 1668 of the ICC: " Contents of warranty against defects in work. The customer can demand that the
non-conformity or defects be eliminated at the expense of the contractor or that the price be reduced proportionately, without affecting compensation for damages in case of fault of the contractor. However, if the non-conformity or defects in the work are such to render the work completely inadequate for its purpose, the customer can demand the dissolution of the contract ". (^33) Article 1672 of the ICC: " Impossibility of performance of work. If the contract is terminated because
performance of the work has become impossible due to causes which cannot be imputed to either party, the customer must pay for that part of the work which has already been completed, to the extent that the work is useful to him, in proportion to the price agreed upon for the whole work ". (^34) Federico Tosi , Il contratto di outsourcing di sistema informatico , Giuffré, pag. 67; Bocchini, La
somministrazione di servizi , 1991, pag. 203. (^35) Federico Tosi , Il contratto di outsourcing di sistema informatico , Giuffré, pag. 64.
AS far as we are aware of, there are no judgments with regard to the classification of cloud computing contracts yet. Accordingly, it can be assumed that German courts will continue to apply the ASP-judgment and qualify cloud services as services under a lease agreement.
Whereas the pure provision of software, platform or infrastructure for use classifies as a lease agreement, cloud computing contracts that comprise additional services will often qualify as “mixed type contracts”. In such contracts, each of the different services owed under the respective contract must be qualified separately. For example, the adaptation of the software to specific requirements of the respective customer might qualify as a works contract, whereas maintenance or training services might qualify as services agreements.
2.2 Consequences of classifying cloud computing contracts as lease agreements as per Section 535 et seq. of the German Civil Code (BGB)
If cloud computing contracts classify as lease agreements, the provisions set forth in the BGB for this type of contract apply.
The following paragraphs provide an overview of the Sections of the BGB that can apply to cloud computing contracts.
2.2.1 Provision of services
Under a lease agreement, the lessor owes the availability of the leased property for the entire term of the lease.
Section 535 BGB provides that:
"( 1) A lease agreement imposes on the lessor a duty to grant the lessee use of the leased property for the lease period. The lessor must provide the leased property to the lessee in a condition suitable for use under the contract and maintain it in this condition for the lease period. He must bear all charges to which the leased property is subject.
(2) The lessee is obliged to pay the lessor the agreed rent ".
If the cloud-provider does not specify the availability of its service, it owes an availability of the services for the entire term of contract without limitation or qualification (i.e. 100% 24/7). Accordingly, cloud computing contracts regularly contain Service Level Agreements (“SLAs”) that further qualify the scope of service, defining permitted down-times as well as of the overall level of availability at less than 100%. Such SLAs should specify at least (i) the part of the service, (ii) the time period, and (iii) the interface the availability refers to, and provide for agreed down times during maintenance.
If a provision on service quality limits the service that the provider initially owes under the contract, such provision must be reasonable and is subject to review under Section 307 et seq. BGB. If, however, the SLA is already part of the service description itself, the German law on standard terms and conditions does not apply.
In case the actual performance does not comply with the agreed performance (including potential disruptions of the service), thus impairing the customer’s use of the cloud service, the performance is defective in quality.
Section 536 para. 1 BGB provides that:
" If the leased property at the time of surrender to the lessee has a defect which removes its suitability for the contractually agreed use, or if such a defect arises during the lease period, then the lessee is exempted for the period when suitability is removed from paying the rent. For the time when suitability is reduced, the lessee need only pay a reasonably reduced rent. A trivial reduction of suitability is not taken into account ".
A legal defect exists if the customer’s use of the cloud service is impaired because of third party rights (Section 536 para. 3 BGB), e.g. in case of a third party’s cease-and-desist claim based on an infringement of its rights by the cloud service provider.
2.2.2 Duration - Termination
If the parties have not specified a contract term, the lease agreement is entered into for an indefinite period.
A lease agreement with a specified term cannot be terminated for convenience.
Section 542 BGB provides that:
"(1) If the lease period is indefinite, then each of the parties may give notice of termination in accordance with the statutory provisions.
(2) A lease entered into for a definite period of time ends at the end of that period unless it
In case of cloud services that classify as a works agreement (such as individual adaptation of the software, see item 2.1 above), the customer can terminate the agreement at any time, but has to pay the contractor a compensation specified by law.
Section 649 BGB provides that:
"The customer may terminate the contract at any time up to completion of the work. If the customer terminates the contract, then the contractor is entitled to demand the agreed remuneration; however, he must allow set-off of the expenses he saves as a result of cancelling the contract or acquires or wilfully fails to acquire from other use of his performance. It is presumed that the contractor is accordingly entitled to five percent of the remuneration accounted for by the part of the work not yet provided."
In any case, the parties may at any time terminate the agreement for good cause. The law defines good cause in a very general manner, providing that good cause means if the terminating party, taking into account all the circumstances of the specific case and weighing the interests of both parties, cannot reasonably be expected to continue the contractual relationship until the agreed end or until the expiry of a notice period.
2.2.3 Warranty and Liability
Under cloud computing contracts that qualify as a lease or works agreement, the service provider is obliged to remedy defects independent of whether these are based on its fault or not. In case the cloud-provider fails to do so, the customer may reduce the remuneration or revoke (works contract) respectively terminate (lease agreement) the contract.
remuneration in case of a defect. Also, a customer’s confirmation that the service is not defective when entering into the contract would be unenforceable. Hence, a provision stating that the cloud- services are offered “as is” is not enforceable under German law of standard terms and conditions.
2.2.3.2 Liability
Under German law, the injuring party is liable for all damages that the injured party can demonstrate and prove, and that have been caused by a wilful or negligent breach of a contractual or statutory duty.
Section 280 para. 1 BGB provides that:
"If the obligor breaches a duty arising from the obligation, the obligee may demand damages for the damage caused thereby. This does not apply if the obligor is not responsible for the breach of duty".
Under statutory law, damages include lost profits.
Section 252 BGB provides that:
"The damage to be compensated also comprises lost profits. Profits are considered lost if they could have been expected with probability in the normal course of events or in the special circumstances, particularly under the measures and precautions taken".
The parties cannot limit liability for wilful misconduct. In addition, in cloud computing contracts that qualify as standard terms and conditions, any limitation of liability is subject to the strict limitations of Section 307 et seq. BGB. In particular, the cloud-provider may not exclude its liability for damages resulting from its breach of a material contractual obligation (“Kardinalpflicht”). Material contractual obligations are contractual duties the fulfilment of which is essential for the proper execution of the contract, the breach of which endangers the purpose of the contract and on the fulfilment of which the customer regularly relies. The cloud-provider may only limit its liability for a breach of such material obligation up to the amount of damages as “typically foreseeable” at the time of entering into the contract. In case of cloud computing contracts, German courts have neither specified the term “material contractual obligation” nor the amount of damages “typically foreseeable” in a cloud computing contract. Based on the nature of the service, at least providing suitable levels of data security and the availability of data are likely to qualify as such “material contractual obligations” of the cloud-provider.
Pursuant to Section 309 no. 7 BGB, the cloud-provider may not exclude or limit its liability for gross negligence or for any kind of intentionally or negligently caused personal injuries.
As a consequence of the above limitations, clauses that generally exclude liability for indirect damages or lost profits are not enforceable under German law.
3.1 Classification of cloud computing contracts
Under English law^36 , cloud computing contracts are classified as contracts for the supply of services.
The relationship between the supplier and customers tends to fall into two categories depending on whether the supplier is providing a paid service or a free one. This distinction is not always clear as some free services impose non-monetary obligations, such as targeted advertising, whereas others may offer a free trial period which is conditional on the customer providing payment details, which then converts into a paid contract at the end of the "free" trial period.
Nevertheless, there is a distinction between the terms and conditions found in cloud computing contracts for a paid service and those for a free/low-cost service. In a paid service contract, the terms and conditions will often stipulate the duration of the contract, its renewal period, and payment structure, and how either party may terminate the contract. Some of these contracts, such as Amazon's web services terms and conditions, will state that the contract will last indefinitely until terminated.^37 In service contracts for a free/low-cost service, however, there is no periodic payment structure and, therefore, there is often no fixed term. Nevertheless, the contracts will often include ways in which the supplier can bring the relationship to an end so that it does not have to host customer data indefinitely. An example of such a provision can be seen in Dropbox's terms and conditions, whereby Dropbox reserves the right to close accounts which have not been accessed for 90 days.^38
Consumer contracts
Cloud computing contracts may include both a mix of services and digital content. Digital content is defined as "data which are produced and supplied in digital form" (section 5 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (SI 2013/3134) (" CCRs ") and section 2 of the Consumer Rights Act 2015 (" CRA ")). The CRA Explanatory Note includes digital content which is supplied under contract from a trader to a consumer and which is largely or wholly stored and processed remotely, such as software supplied via cloud computing.
The CRA states that where the contract is for a mix of services and digital content, the service element of the contract attracts service rights and remedies whilst the digital content elements attract the digital content rights and remedies. However, the CCRs require that a contract is categorised as either a sales contract, services contract or an online digital content contract; it does not cater for mixed contracts. Classification is important as it impacts the following matters: (i) which contracts are in scope, (ii) the pre-contract information required, (iii) the confirmation requirements, (iv) the calculation of the cancellation period, and (v) the rules on supplying the product during the cancellation period.
It can be difficult to differentiate contracts for online digital content and services. Recital 19 to the Consumer Rights Directive (2011/83/EU) provides the following definition of digital content: "Digital content means data which are produced and supplied in digital form, such as computer programs, applications, games, music, videos or texts, irrespective of whether they are accessed through downloading or streaming, from a tangible medium or through any other means ".
(^36) UK law consists of the law of England and Wales, the law of Scotland and the law of Northern Ireland. This
note sets out the English law position. Scots law can have significant variations from English law. Northern Irish law is closer to the law of England and Wales. (^37) Service description is found at http://aws.amazon.com/ and terms and conditions are found at
http://aws.amazon.com/terms/. (^38) Service description is found at https://www.dropbox.com/features and terms and conditions are found at
http://www.dropbox.com/terms.
