I wandered lonely into a cloud…

In traditional computing infrastructure, a computer’s operating system (eg Microsoft Windows), applications (eg Microsoft Office) and data are stored on an individual user’s computer. In the office environment data is usually stored on servers (often within the same building), which are then accessible by the rest of an organisation.

Cloud computing is a different approach to IT infrastructure. Information, software or other IT services are stored and accessed remotely via a supplier’s servers connected to the internet, rather than on individual computers or on private servers. This is not a new concept. Anyone who has a web-based e-mail account, such as Hotmail, has been able to use a simple form of cloud computing since 1997.

While cloud services have been available for some time, the growth and spend in this area has sharply accelerated in recent years. In 2009 Gartner estimated that the global market for cloud services had a value of around $46bn, with a predicted rise to around $150bn by 2013.1 However, a lack of clarity and consistent opinion as to the perceived risks of cloud services has been problematic for both providers and consumers. This has led to difficulties in contractually allocating legal and commercial risk, in an environment where a key driver towards the cloud for many organisations is the need to control costs.

This article will outline the most common types of cloud services and provides an overview of some of the prominent legal and contractual issues when using such services.


The most common types of internet-based IT services that are widely referred to as cloud computing are:

Software as a service (SaaS)

In SaaS, software applications are run on the provider’s system and accessed by a customer via the internet, usually through a web browser. This means that the software is not located on the user’s computer or within a business’s servers, but within the SaaS provider’s facilities.

SaaS is designed on a one-to-many model, meaning the software and its associated host hardware can be used to serve many customers simultaneously.

The advantages of SaaS are:

  • minimal configuration costs, as SaaS is designed to be run and accessed remotely;
  • reduction in ongoing maintenance and support costs, as economies of scale are achieved through the one-to-many model; and
  • the costs of keeping up-to-date are reduced. The supplier can roll out new versions and upgrades on a regular basis to all customers simultaneously.
Infrastructure as a service (IaaS)

IaaS provides a customer with remote access to certain pre-configured hardware that the customer is able to control and use as if it had access to the same physical hardware on-site. A common IaaS offering is a ‘virtual server’, which allows a customer to use the functionality of a traditional server remotely.

The term ‘virtual server’ is used because the customer is not accessing an individual instance of hardware. Rather it is using a set proportion of the shared resources of a powerful data centre. In this form of IaaS, the supplier is only responsible for the maintenance and running of the virtual server and its underlying hardware. The customer is responsible for running and maintaining the operating system and all software and applications running on the virtual server.2

The main advantages of IaaS are the reduction in infrastructure investment, maintenance, refresh and running costs for every element of IT infrastructure that is accessed remotely.

Platform as a service (PaaS)

PaaS is IaaS with the addition of an operating system being provided by the supplier. This allows a customer to run software on a supplier’s servers within the pre-configured virtual operating system. Under PaaS, the customer has limited control of the underlying operating system and hardware resources, and is only responsible for selecting and managing the software that is run on the virtual operating system.3 PaaS combines the advantages of SaaS and IaaS.

Everything as a service (EaaS or XaaS)

This is a hybrid term referring to a combination of SaaS, IaaS and PaaS.


Cloud services contracts share several similarities with traditional IT outsourcings, as both:

  • focus on the performance of the services being provided by the supplier;
  • aim to achieve efficiencies and reduce costs;
  • avoid or reduce how much the customer’s capital is ‘locked up’ in IT infrastructure;
  • involve the remote provision of services; and
  • are typically embodied in a contractual structure that contains a significant level of detail.

Due to these similarities, there is a corresponding overlap of the contractual and legal considerations. However, there are fundamental differences between the two, which means a standard IT outsourcing contract will not necessarily work for cloud service deals (see table below).

In light of these differences, approaching a cloud service deal as a traditional IT outsourcing deal will not be appropriate for all aspects of the contract.


Cloud computing arrangements raise a variety of legal and contractual issues. Many of these are not specific to cloud computing arrangements but apply more generally to many types of technology services agreements.

Legal issues
Data Protection Act (DPA) 1998

DPA 1998 governs the use of data that identifies individuals (known as ‘personal data’). Those who control the processing (ie storing, recording or transmitting) of personal data must comply with the eight data protection principles (the principles) contained in Schedule 1 of DPA 1998, as well as several other provisions.

It is likely that the utilisation of cloud services will involve the transfer and/or storage of personal data between the customer and the provider. Users of cloud services will need to ensure that their cloud arrangements comply with DPA 1998.4

The key relevant principles are:

First principle: personal data must be processed fairly and lawfully.

While many caveats exist, consent of the individual must usually be obtained to process personal data. Consent can generally only be given when an individual has been provided with sufficient information to make an informed decision.

Cloud computing issue: providers store and process data for many customers, simultaneously utilising an array of different hardware spread over several physical locations within the cloud provider’s data centre. It is arguable whether informed consent can actually be given by the individual due to the lack of certainty or understanding as to how and where the data is to be processed and stored.

Seventh principle: appropriate technical and organisational measures must be taken to prevent unauthorised or unlawful processing or accidental loss or destruction of personal data.

The principle enshrines the concept that the standard of protections for personal data will be implemented according to the type of information, the cost of implementing solutions and the potential damage that would be caused by its loss.

Cloud computing issue: personal data ‘in the cloud’ may be spread over many physical locations within a data centre. Compliance with this may be harder to practically achieve and enforce. Customers will need to consider what access, if any, the cloud provider will have to the data stored on their systems, whether the data should be encrypted, and what back up and data recovery procedures are in place. Customers may also find that they are unable to access a cloud supplier’s facility to audit security measures due to the supplier’s pre-existing contractual commitments to other customers.

Eighth principle: personal data must not be transferred to a country outside of the European Economic Area (EEA) unless that country ensures an adequate level of data protection.

If personal data is to be transferred outside of the EEA, that in itself is a potential breach of DPA 1998 without certain conditions being met. The European Commission has established a formal procedure for certifying countries that have adequate data protection rules in place. However, this list is limited.5

Cloud computing issue: cloud computing providers may be offering cloud services from a location outside of the EEA. Organisations based in the EEA need to ensure that any cloud services used will be provided from within the EEA or a certified country. If the provider is outside the EEA and not a certified country, the customer will need to determine whether compliance through another permitted means is possible, such as utilising the model contractual clauses issued by the Commission or determining whether the EU-US Safe Harbour regime applies.

Markets in Financial Instruments Directive (MiFID) and Senior Management Arrangements, Systems and Controls (SYSC) rules

In the UK, the Financial Services Authority (FSA)-regulated entities are likely to be bound by the provisions of MiFID (2004/39/EC). As part of the implementation of MiFID obligations in the UK, the FSA has issued the SYSC rules.6 SYSC rule 8 applies to regulated businesses that outsource an operational function that is ‘business critical’. In complying with this rule, regulated businesses must (among several other provisions) ensure that confidential information relating to customers is protected, and that the business, its auditors and the FSA can access the data and the premises related to outsourced activities.7

Cloud computing issue: these SYSC rules are not easily reconcilable with cloud computing arrangements. As mentioned above, access to the supplier’s data centre may not be viable and it may be impossible to tell exactly where all data is physically located at any one time. This inherent feature of cloud services means securing or demonstrating compliance with the above rules may be problematic and securing customised solutions that comply with the above may erode the cost savings that the utilisation of cloud services sought to achieve.

Contractual issues

The following issues offer an insight as to why traditional IT outsourcing provisions may not be suitable for cloud deals.

Service performance

IT outsourcing approach

In outsourcing deals customers often seek supplier performance warranties against specifications or requirements:

‘Supplier warrants… it shall: (i) perform the services using good industry practice and all due skill, care and diligence; and (ii) shall meet the customer’s requirements detailed at Schedule [X].’

Cloud computing issue: the nature of the one-to-many model means that cloud services are not usually adapted to the customer’s requirements outside limited parameters. This less flexible approach is reflected in the warranties that a cloud supplier is prepared to offer.

Typically, cloud suppliers will only offer limited warranties of performance, confined to providing the cloud services in accordance with ‘good industry practice’ or ‘skill’ and ‘care’. However, in such an immature marketplace, it is not known what such standards mean.

Service levels

IT outsourcing approach

Outsourcing service levels attempt to give customers confidence that the service they have outsourced will be performed to an acceptable level. Often this will include a metric targeting the level that the customer expects the service to be available.

Cloud computing issue: where service provision is entirely over the internet, any ‘end-to-end’ service level will need to cover availability of the internet. The past three years have seen numerous high-profile examples of internet availability being affected by factors no supplier of cloud service would take responsibility for, eg political unrest, denial or service attacks and accidental cutting of submarine telecommunication cables.8

To date, few cloud service providers have been offering service levels that take responsibility for internet performance, leaving customers to bear this risk. Recently, however, there are examples of large providers accepting this risk and offering 99.9% uptime service level agreements to customers.9


IT outsourcing approach

A requirement that a customer can audit the service provider is often required as simple good practice. In regulated sectors, such as financial services or public sector procurement, this may be a stronger requirement.10

Cloud computing issue: suppliers will find it difficult, if not impossible, to identify the exact location of individual services and data for an individual customer, and will not usually allow access to service provision locations due to the obligations owed to other customers.

Termination or exit

IT outsourcing approach

An outsourcing contract will usually contain terms obliging the supplier to return the customer’s information and materials to enable the services to be brought back ‘in-house’ or transition to a replacement supplier.

Cloud computing issue: there are no cloud industry data standards for transitioning between suppliers. Cloud customers should be wary of being de facto locked-in to continuing to use a supplier by not being able to easily transition services to a new supplier. Customers should therefore look to establish an exit plan pre-contract, which will include the details of how, when and in what form the customer’s data will be returned.


Businesses need the efficiencies and cost savings that cloud computing can bring, regardless of the operational and legal risks that can be identified. This places a strain on the agreements that allocate the risks and rewards of cloud computing between customers and suppliers. What is clear is that, while the technology might be undergoing evolutionary development, the approach to the contracts that govern them might need to be revised in a more revolutionary way to adapt to the new delivery method.

By Andrew Joint, partner, and Edwin Baker, solicitor, commercial technology team, Kemp Little LLP.

E-mail: andrew.joint@kemplittle.com; edwin.baker@kemplittle.com.


  1. See http://www.gartner.com/DisplayDocument?id=914826. Amazon’s Elastic Compute Cloud (Amazon EC2) is an example of this form of IaaS.
  2. Microsoft’s Windows Azure is an example of platform as a service.
  3. In April 2010 the European Commission noted that cloud computing raised ‘challenges to data protection’, and that ‘risks to privacy and the protection of personal data’ due to this activity are increasing. See http://ec.europa.eu/justice/news/consulting_public/0006/com_2010_609_en.pdf.
  4. For example, Israel, Switzerland, Argentina, Guernsey, the Isle of Man, Jersey and Canada.
  5. See http://fsahandbook.info/FSA/html/handbook/SYSC.
  6. See Senior Management Arrangements, Systems and Controls (SYSC) rule 8.1.8(10) and 8.1.8(9).
  7. See www.bbc.co.uk/news/technology-12306041;www.bbc.co.uk/news/technology-11980125; http://news.bbc.co.uk/1/hi/technology/7228315.stm.
  8. See www.informationweek.com/news/infrastructure/management/showArticle.jhtml?articleID=229100165&cid=RSSfeed_IWK_All.
  9. See SYSC Rule 8.1.8 and http://fsahandbook.info/FSA/html/handbook/SYSC/8/1; plus Office of Government Commerce ‘Model Terms and Conditions of Contracts for Services’ athttp://dev.inhouselawyer.co.uk/www.ogc.gov.uk/Model_terms_and_conditions_for_goods_and_services.asp.