In Windows Azure a rack of computers is indeed identified as a fault domain. And the allocation of a fault domain is determined by Windows Azure at deployment time. A service owner can not control the allocation of a fault domain, however can programmatically find out which fault domain a service is running within.Windows Azure Compute service SLA guarantees the level of connectivity uptime for a deployed service only if two or more instances of each role of a service are deployed.
Windows Azure when possible will distribute instances evenly into multiple update domains with each update domain as a logical unit of a deployment. When upgrading a deployment, it is then carried out one update domain at a time. The steps are: stopping the instances running in the first update domain, upgrading the application, bringing the instances back online followed by repeating the steps in the next update domain. An update is completed when all update domains are processed. By stopping only the instances running within one update domain, Windows Azure ensures that an update takes place with the least possible impact to the running service. A service owner can optionally control how many update domains with an attribute.