How to terminate a cloud service contract


Terminating a contract is a legal minefield, especially if you believe your cloud service provider hasn’t been keeping to their side of the bargain.

What issues might you find when trying to end your agreement and how can you ensure you and your data is protected?

Any cloud service contract will comprise multiple parts, but the two you'll need to read carefully if you want to end your agreement are the Terms of Service (ToS) - which includes details such as the initial duration of the contract, the renewal period, payment schemes and termination guidelines - and the Service Level Agreement (SLA).

This part sets out the level of service the provider will offer and any compensation you'll be able to claim should standards fall from those stated. For example, Microsoft Azure guarantees at least 99 per cent availability in its SLA. Iff it drops below this and you can prove it, you may be able to claim compensation from the company.

This compensation is often stated as performance rebates - essentially refunds or credits - should the performance not be up to scratch. If claiming these are the only action the SLA states you can take if a provider’s service dips below what’s expected, you may be unable to terminate the contract or take action against the provider for failing to provide the agreed service or meeting service levels agreed.

It’s also important to note that SLAs vary between cloud providers and territories. For example, Microsoft’s terms in Europe are that any disagreements will be dealt with under the Luxembourg law, but in the US, the company’s disagreement policy follows US law.

This is especially important to check if your company has offices in a number of different countries. For example, if the agreement was set up with Microsoft US by your office there, but you’re based in the UK, it would follow the law set out in the contract and not your local laws.

Similarly, ToS policies vary between service providers. Amazon Web Services state in terms that if the ToS are breached, either party can terminate the contract, as long as 30 days’ notice is given to the other party. Other providers will allow you to terminate the agreement without notice at all.

Why you may want to terminate your contract

The reasons you may want to terminate your contract are broad, but the clause that is most likely to result in the termination of a contract is a material breach.

According to US Legal, a material breach is a “complete failure of performance under the contract which is significant enough to give the aggrieved party the right to sue for breach of contract.”

It may be that the service does not meet business needs despite the provider promising this, as was the case when Kentwool decided to terminate its contract and later sue Netsuite for failing to provide the services it promised.

Another reason you may want to terminate the agreement is it has more outages than the business can cope with or is set out in your SLA.

Alternatively, you may feel your data is at risk with your provider, especially if it is not hosted locally, or the provider said it would be hosted in the country when it fact they use datacentres outside of the nation. This is especially resonant in high-security industries where data has to be stored locally, such as the finance or public sectors.

The steps to take when service isn’t as expected

The first thing you should do when you believe you have reason for terminating your contract is to check the terms of contract to identify what your rights are and whether there is a termination clause specified.

John Turner, partner and head of dispute resolution at Fisher Meredith LLP says you should also assess whether there is a non-contentious and more cost-efficient route by which the contract can be brought to an end.

He says: “It is important for the right election to be made at the right time and treating a contract as repudiated in circumstances where there has been no repudiatory breach can be catastrophic.”

If you discover your contract doesn’t stipulate termination terms, or the supplier has not stuck to its service levels, you have the right to express your common law right to terminate the contract.

This may not result in legal proceedings though. The supplier may just agree to settle, accepting responsibility for breaching the contract and you can terminate the contract.

However, if you terminate the contract where there isn’t a termination clause, your provider may dispute this course of action and consider litigation against your company for unlawful termination.

Turner explains in this case, you can consider the contract repudiated on the part of the supplier, but it will need to be heard in a court to confirm this is the case, which means seeking legal advice and taking formal proceedings.

“There is no set definition of what constitutes a repudiatory breach and each situation will depend on the facts of the particular case, however, broadly, a repudiatory breach is a breach of a fundamental term underpinning the entirety of the contract. Similarly, there is no set process for terminating, or rescinding the contract on the basis of a common law breach,” he explains.

To decide whether the contract has been breached, the court will consider a number of aspects, such as how often the breach occurred and how long each breach lasted for in the case of outages. This doesn’t automatically mean it will be judged as a repudiatory breach though.

You then have the choice to accept the breach and pursue damages, or to affirm the breach, which means seeking performance of your supplier’s obligations.

However, Turner warns that if you accept the breach to claim damages and it turns out the breach wasn’t repudiatory, this could amount to repudiation of the contract itself.

“In that event, the innocent party becomes the wrongdoer and is potentially liable himself,” he says.

The supplier may, alternatively, decide to settle out of court. Turner says, “Some service contracts may contain a provision for arbitration or mediation requiring that any disputes arising out of the terms of the agreement must first be attempted to be settled by mediation. In the absence of any clause to this effect, the progress of the matter will depend upon the intention of the parties to the dispute.”

Transfer of data

When you have decided on action to terminate your contract, it’s important to ensure your biggest asset - your data - is secure and transferred without being lost.

In most cases, you may find the supplier puts the responsibility of transferring and protecting your data on you.

However, providers should implement a grace period after the contract is terminated to ensure you can access it when you need it. Amazon allows you to access your data for 30 days after terminating the agreement, while IBM’s policy means you should be able to access it until you let them know you’re happy for them to delete it, according to Broad Group.

Although there aren’t certain standards or obligations within the industry for data to be returned to the customer after contract termination, it is wise to ensure you have a copy of the data before legal proceedings take place, whether this is a back up or the supplier agrees to hand the data back to you in advance.

Clare Hopping
Freelance writer

Clare is the founder of Blue Cactus Digital, a digital marketing company that helps ethical and sustainability-focused businesses grow their customer base.

Prior to becoming a marketer, Clare was a journalist, working at a range of mobile device-focused outlets including Know Your Mobile before moving into freelance life.

As a freelance writer, she drew on her expertise in mobility to write features and guides for ITPro, as well as regularly writing news stories on a wide range of topics.