SaaS agreements: what they are and why they matter

Put simply, a SaaS agreement outlines the terms and conditions governing the use of cloud-based software applications. In this comprehensive guide, we'll cover the basics of SaaS agreements, demystify the cloud and delve into the essential components that make up a SaaS agreement. By the time you reach the conclusion of this blog, you will be equipped with the knowledge to confidently navigate and manage your own SaaS agreements.

What is a SaaS agreement?

A SaaS agreement is a contractual agreement between the SaaS provider and the customer, establishing the rights, obligations and restrictions related to the software service being provided via the cloud. It serves as a binding document that governs the relationship between the parties involved and ensures clarity and protection for both the SaaS provider and the customer.

A SaaS agreement typically covers various aspects relating to the software, including software access, data security, payment terms, intellectual property rights and service level agreements (SLAs). By clearly defining these terms, a SaaS agreement helps mitigate potential conflicts and ensures a smooth and mutually beneficial partnership.

What is the cloud?

“The cloud” is a network of remote servers that are connected to the internet. When it comes to a SaaS agreement, the cloud is where the software and data are stored and managed. Instead of installing the software directly on your own computer or servers, you access it through the internet, just like you would access a website. Before the cloud, the traditional software model would typically require you to use some form of physical hardware to download software onto your computer, such as a CD, USB or if you’re old enough to remember - a floppy disk!

With SaaS, the cloud allows you to use the software, without the need for complex installations or local infrastructure. It provides convenient access, flexibility and the ability to scale up or down based on your business needs, all while the cloud provider handles the software maintenance and server management for you.

Is a SaaS agreement the same as a software licence agreement?

No, they are not the same. Although both contracts govern the use of software, they are agreements based on software models that operate differently.

A SaaS agreement is a contract between the service provider and a customer to use and access a cloud-based software app or service. On the other hand, in a traditional software licensing agreement, the software is typically sold as a product, and the customer installs it on their own servers or devices. The customer acquires a perpetual licence (that lasts forever) to use the software and often pays an upfront fee for the licence. Maintenance and updates are usually separate and may require additional fees.

Remember when you could purchase Adobe Photoshop on a CD and download it on your PC? That's an example of a traditional software licence model. With this model, when using the software, you would agree to the software licence agreement which sets out Adobe's terms and conditions with the user. Users could buy a licence for a specific version of Photoshop, install it on their local computers and use it indefinitely without the need for a subscription.

On the other hand, a SaaS agreement provides access to software that is hosted on the service provider's infrastructure and delivered over the internet. Customers pay a recurring subscription fee for the use of the software, and the provider is responsible for maintenance, updates and infrastructure management. SaaS agreements are more flexible, allowing businesses to easily scale their software usage based on their needs.

For a more in-depth look into the differences between SaaS agreements and software licence agreements, check out this blog.

What’s a real-life example of SaaS?

Email and productivity tools: Services like Gmail, Outlook and Google Workspace all operate on a SaaS model. Users can access their email, calendars, documents, spreadsheets and other productivity tools through a web browser without needing to install any software locally.

Collaboration and communication platforms: Services such as Microsoft Teams, Zoom and Skype operate primarily on a SaaS model, meaning that users can access through a web browser or mobile application while the software owner hosts the software, handles updates, security and infrastructure management.

Customer relationship management (CRM) systems: Salesforce and HubSpot are popular CRM platforms that offer their services through a SaaS model. This means businesses can manage their customer data, track sales and automate marketing campaigns, all accessed through the cloud without the need for on-premises software installation.

How to draft a SaaS agreement

Having a SaaS agreement in place when software is being delivered and accessed through the internet is imperative. However, it can be hard for business owners to know where to start when it comes to drafting the terms of their SaaS agreements to protect themselves and their products. To help set you on the right path, we have listed below each of the key provisions that should be included within a SaaS agreement.

Key provisions of a SaaS agreement

While the specific clauses in a SaaS agreement may vary based on the nature of the software, industry and services provided, there are several key provisions that will be included in most SaaS agreements. Some of these terms include:

1. Rights to access and use the software

One of the most fundamental terms of a SaaS agreement is the granting of software access and usage rights to the customer. This section outlines the terms and conditions under which the customer is permitted to access and use the SaaS provider's software.

2. Parties' obligations

The SaaS agreement establishes the guidelines and requirements for using the software, outlining the responsibilities of each party involved to ensure a smooth and successful contract. For instance, the agreement may place an obligation on the customer to ensure that all users comply with its terms.

In addition to granting the customer the right to use the software, the SaaS agreement may also impose certain limitations or restrictions on its usage. These restrictions could include prohibitions on modifying the software or attempting to reverse engineer it. It is also common for the service provider to include audit provisions that allow them to verify the customer's usage of the service through periodic audits.

3. Payment terms and pricing

The payment terms and pricing section of a SaaS agreement specifies the fees, billing cycle and payment methods for the services provided. It may include details such as subscription fees, usage-based pricing models, any applicable taxes and invoicing procedures. When drafting a SaaS agreement, including clear and transparent payment terms helps prevent misunderstandings and disputes related to billing.

There are many different forms of pricing strategies when it comes to SaaS agreements. Our experts break down the 4 most popular pricing methods in this article.

4. Intellectual property rights

Intellectual property rights (IPR) provisions in a SaaS agreement address ownership and licensing of intellectual property related to the software. It clarifies that the SaaS provider retains ownership of the software and any associated intellectual property rights. The customer is typically granted a limited, non-exclusive licence to use the software for the duration of the SaaS agreement.

5. Data ownership

An important component of the SaaS agreement is the provision that clarifies who owns the data that is entered into the service – typically this will be categorised as the customer’s data. For a deeper dive into data ownership and security terms in a SaaS agreement, check out this blog.

6. Service level agreements

Service level agreements define the level of service and support to be provided by the SaaS provider. The SLA will typically outline the minimum performance standards for the SaaS, such as uptime guarantees, response times for support requests and any remedies or penalties in case of service disruptions or failures.

The SaaS agreement may include the SLA within its terms or as an attachment. Alternatively, some service providers may prefer to set any SLAs out on their website. For an example of this, check out Microsoft's website.

SLAs provide assurance to the customer regarding the reliability and performance of the software service. If you want to know more, this checklist created by our lawyers provides a more in-depth insight into SLAs in SaaS agreements.

6. Warranties

The warranty clause in a SaaS agreement will outline any warranties and/or guarantees provided by the service provider regarding the performance, functionality and quality of the software being delivered. These clauses specify the extent to which the service provider will ensure that the software meets certain standards or performs in accordance with the SLA. Warranties can assure the customer that the software will perform as intended and gives a form of legal recourse in the event the software does not meet expectations.

It's important to note that many SaaS providers may be hesitant to provide warranties in their SaaS agreements due to the complexity and variability of their software across different customer environments. Limited control over external factors and frequent updates can also make it challenging to offer long-term guarantees in relation to their software.

If you will be drafting your SaaS agreement, you may wish to include a clause that expressly states you will not be giving any warranties, guarantees or representations in respect of the software. By avoiding explicit warranties that are outside of their control, service providers can mitigate potential liability, maintain pricing flexibility, and adapt to the competitive SaaS market.

For more information about warranties, check out these non-legal jargon answers to FAQs about warranties and indemnities.

7. Term and termination

The SaaS agreement typically has a fixed term, and it may have provisions for automatic renewal unless one of the parties provides notice to terminate. The termination clause outlines the conditions under which either party can end the contract before its intended completion. It includes important details such as notice periods and specific events that may lead to termination, such as a breach of contract or the occurrence of predetermined triggering events. This section is crucial in safeguarding the interests of both parties and facilitating a seamless transition in the event of an early termination.

8. Limitations of liability

The limitation of liability clause in a SaaS agreement determines the level of responsibility the SaaS provider holds for any damages or losses suffered by the customer related to the agreement. It outlines various aspects such as disclaimers of specific types of damages, exclusions of liability for indirect or consequential damages, and limitations on the overall liability of the SaaS provider. These provisions serve to mitigate risks and safeguard both parties from exposing themselves to excessive liability.

In cases where the SaaS agreement is drafted by the software provider, it is common for them to include an "as is" provision. This means that the software is provided to the user in its current state, without any guarantees or warranties regarding its functionality, performance, or suitability for a specific purpose. For more information about providing software on an "as is" basis, take a look at these FAQs.

9. Governing law and jurisdiction

The governing law and jurisdiction clause determine the laws that will govern the SaaS agreement. These terms also specify the jurisdiction or venue where any disputes arising from the agreement will be resolved. This provision helps establish legal certainty and provides a framework for resolving potential conflicts.

For a more in-depth understanding of the essential clauses to include in your SaaS agreements, check out this checklist.

What are the consequences of not having a SaaS agreement?

The consequences of not having a SaaS agreement in place can be extremely detrimental for both customers receiving SaaS and also service providers.

• For a Service Provider: Operating without a SaaS agreement exposes your business to various risks and uncertainties. Without a well-drafted SaaS agreement, you may encounter difficulties in managing customer expectations, resulting in disputes over the software, payment terms or intellectual property ownership. Moreover, without explicit terms and limitations, you may face unlimited liability arising from service failures, data breaches or other unforeseen events. Having a comprehensive SaaS agreement not only helps establish a clear understanding of responsibilities but also provides legal protection and minimises potential legal disputes with customers.

• For a Customer: Not having a SaaS agreement in place can lead to several harmful consequences for your business. Firstly, without a clear agreement, there may be ambiguity regarding the rights and responsibilities of both parties. This may leave room for misunderstandings and subsequently lead to unmet expectations when it comes to the performance of the service provider and its software. Additionally, without contractual terms in place, you may face challenges in enforcing service levels, data privacy or intellectual property rights. In the absence of an agreement, you may also lack protection against potential breaches or failures by the service provider, making it difficult to seek legal recourse or hold them accountable for any losses that you suffer as a result.

Conclusion

A well-drafted SaaS agreement is essential for establishing a clear and mutually beneficial relationship between the SaaS provider and the customer. By addressing key provisions such as software access, data security, payment terms, and intellectual property rights, a SaaS agreement provides a solid legal foundation for the partnership. Following best practices in drafting a SaaS agreement can help mitigate risks, promote transparency, and foster a successful and long-lasting business relationship.

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