Call Lipp Law: (703) 896-7704
Call Lipp Law: (703) 896-7704
Software-as-a-Service (SaaS) is a means of providing technical services remotely via the internet. It allows people to access software online without having to install it locally on their computers. SaaS products have become essential to how many businesses operate and cover everything from customer relationship management and payroll to accounting, project management, data storage, cybersecurity, and internal communications.
The service agreement that a SaaS company provides may govern your relationship with a provider for several years and determine what happens if the software does not perform as expected, prices increase, company data is compromised, or the business wants to switch providers.
SaaS agreements often have room for negotiation, and savvy business owners will read their agreements through and determine whether there are terms that should be addressed before signing. Here are some of the key provisions businesses should consider carefully before signing a significant SaaS agreement.
The initial subscription price is often only part of a company’s financial commitment. Before signing, businesses should understand how the vendor calculates pricing and may change pricing over the life of the business relationship.
Questions to consider include:
These issues become particularly important when a company is making a substantial investment in implementing the SaaS solution. Once employees are trained and company data and processes are integrated into a platform, changing providers may become difficult and expensive.
Businesses should know exactly how long they are committing to the SaaS solution.
Many SaaS agreements automatically renew unless the customer gives notice within a specified period before the contract expires. For example, an agreement might require notice of non-renewal 60 or 90 days before the end of the current term. Missing that deadline could result in another lengthy contractual commitment that the business doesn’t want.
Before signing, review:
The longer the proposed commitment, the more important it is to understand how the business can exit the relationship. Exit is often one of the most important terms in a SaaS agreement, so understanding how yours works and what you can do to strengthen the exit provision for your company is of paramount importance.
A business should also ask a simple question before entering into a long-term software relationship:
What happens if this doesn’t work?
The vendor’s standard contract may provide few opportunities for the customer to terminate early.
Depending on the transaction, businesses may want to consider termination rights if:
Some businesses may also seek a right to terminate for convenience – that is, at will and without any given reason – although whether this is commercially realistic will depend on the particular transaction.
The agreement should also clearly explain the financial consequences of early termination, if any.
If your company depends on the software to operate, what happens when the system goes down?
A separate Service Level Agreement, or SLA, may establish standards for matters such as:
Businesses should look beyond an impressive uptime percentage and examine the details. How is uptime calculated? What periods are excluded? What remedy does the customer receive if the provider repeatedly misses its service commitment?
Note that a service credit, which is often offered as a remedy for violation of an SLA, may have limited value to a business that cannot operate because a critical system is unavailable.
One of the most important parts of a SaaS agreement may be the provisions governing your company’s data.
Businesses should understand:
The appropriate protections will depend in part on the type and sensitivity of the data involved.
A platform containing confidential business information, employee records, customer data, financial information, or other sensitive material may require considerably more scrutiny than software that handles little or no sensitive information.
If a vendor obtains sensitive information, businesses should understand the provider’s contractual security obligations.
Depending on the nature of the service, the agreement may need to address issues such as:
Businesses should also review any separate data processing, privacy, or security addendum incorporated into the agreement. Those additional documents can contain significant contractual obligations and should not be overlooked simply because they are separate from the primary SaaS agreement.
Software providers often attempt to limit the warranties they provide, if they provide any at all. Warranties are promises regarding the performance of the SaaS product and provider at issue.
Depending on the transaction, warranties might address whether:
The agreement should also explain what remedies are available if warranties are breached, such as the ability to terminate the agreement immediately for cause.
Intellectual property provisions can become particularly important when a SaaS relationship involves customization, integrations, development work, or materials created specifically for the customer.
The contract should distinguish between:
Businesses should understand what they own, what they merely have permission to use, and what rights they may lose when the contract ends.
Indemnification provisions allocate responsibility for certain claims and losses between the parties.
For example, a business purchasing software may want protection if a third party claims that the vendor’s software infringes its intellectual property rights.
A vendor, meanwhile, may seek indemnification from the customer for claims involving the customer’s data or use of the software.
These provisions can involve substantial financial exposure and should be evaluated in the context of the risks each party actually controls.
A limitation-of-liability clause may be one of the most financially significant provisions in a SaaS agreement.
These clauses frequently place a cap on the amount one party can recover from the other.
For example, the vendor may propose limiting its total liability to the subscription fees paid during the previous 12 months.
Whether that limitation is reasonable depends on the particular transaction and potential risks.
Businesses should also examine whether certain types of claims are excluded from the liability cap, such as confidentiality breaches, data security incidents, indemnification obligations, intellectual property claims, or intentional misconduct.
The liability provision should be considered together with the agreement’s indemnification, insurance, warranty, and data-security provisions.
Businesses frequently focus on getting their data into a new platform without thinking about how they will eventually get it out.
Before signing a SaaS agreement, consider what happens when the relationship ends.
These questions can become extremely important when a company needs to transition quickly to another provider.
Finally, consider where and how disputes will be resolved.
A SaaS provider headquartered in another state may propose that its state’s law govern the agreement and require all disputes to be resolved there.
The contract may also require arbitration rather than litigation or impose specific procedures before either party can pursue a claim.
These provisions are easy to overlook when a deal is going well, but can become very important if a significant dispute later develops.
Oftentimes, the answer is yes.
This said, the amount of negotiating leverage a business has depends on factors such as the size of the transaction, the provider, the length of the commitment, the nature of the services, and the business relationship between the parties.
An experienced attorney can help a business identify the terms that create the most meaningful risk, distinguish important issues from lower-priority ones, and propose revisions that make sense for the particular transaction.
Lipp Law assists businesses with reviewing, drafting, redlining, and negotiating software and technology agreements.
If your company has received a SaaS agreement, software license, Master Services Agreement, Statement of Work, or other technology contract, our attorneys can review the proposed agreement, identify significant legal and business risks, recommend revisions, and negotiate contract terms on your company’s behalf.
Ideally, that review occurs before the agreement is signed—when your business still has the greatest opportunity to address unfavorable terms.
Have a software or technology agreement you would like reviewed? Contact Lipp Law to discuss how we can help.
This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Contract terms and legal requirements vary depending on the transaction, parties, jurisdiction, and applicable law.
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