The process of drafting a Software as a Service (SaaS) agreement and preparing it for execution can be quite complex. For an agreement to become legally binding, and to ensure a company is covered on all fronts, there are several elements that need to be included.
It is important to understand the basics of contract development and the specific clauses and terminology every SaaS agreement must have. Read on for a breakdown of what Software as a Service is, an SaaS agreement checklist, SaaS limitations, and more.
Software as a Service is a business model in which software access is supplied on a subscription basis. With SaaS, users won’t need to install any software onto their computer, they can simply access what they need through an internet browser. With only a simple login required for entry, the user(s) will be able to access their account(s) across different devices as needed.
Some examples of SaaS include but are not limited to:
Users can access any of these services by simply opening their web browser, creating an account, and signing in with their chosen username and password. Once an account is created, these services can be logged into from any device that has an internet connection.
A SaaS agreement legally authorizes a consumer to access and utilize a particular software. The contract will specify which level of access a user has chosen, the subscription cost and frequency, and the terms they need to adhere to regarding their usage of the service — all of which will also be highlighted on the SaaS agreement checklist, below.
Additionally, an SaaS agreement is designed to protect the interests of the company offering the service. The agreement highlights not only what a user can do but also what they cannot do. SaaS agreements typically also include liability clauses; such clauses usually address the implications of a data breach or intellectual property violations.
Before beginning to check items off the SaaS agreement checklist, it is important to understand the core elements of a contract. These are what make an agreement legally binding and enforceable by law.
There are six components every contract must include, regardless of its intricacies.
Offer phase: The initiating party proposes an agreement outlining the responsibilities of all parties involved and the desired outcome of said agreement.
Acceptance phase: The offeree decides whether they wish to agree to the terms by conduct, with conditions, or via option agreement.
Awareness: Both parties must know they are entering into a legal agreement and agree to its terms for it to be enforceable under the law.
Consideration: In legal terms, consideration is a good, service, promise, or anything that holds value. Something of value (not necessarily monetary) must be exchanged for a contract to be legally enforceable.
Capacity: All parties must certify that they fully understand the terms, responsibilities, and consequences outlined in the contract for the agreement to be enforceable by law.
Legality: The contract must adhere to the laws of the jurisdiction in which it was executed.
SaaS agreements will differ depending on the industry and service type. Nonetheless, there are a few key clauses every contract should have. This SaaS agreement checklist highlights eight essential clauses; this list is not exhaustive.
Access rights/users: This clause states how many users are covered under the contract and the consequences if the user limit is surpassed.
Data ownership: This clause clarifies who holds ownership of any data inputted into the SaaS system.
Data security: This clause highlights the responsibilities of all parties involved regarding the protection of user data within the system (ex: encryption).
License scope: This clause outlines a user’s rights and limitations (ex: duration of use).
Liability: This clause states the amount of liability an SaaS company is willing (and unwilling) to take on, along with the compensation limits for any damages paid out to a claimant.
Warranties: This clause outlines the guarantees a company makes about the quality and performance of their service, and what a user can claim in terms of damages if those guarantees are not met.
Pricing and subscription plans: This clause includes the level of subscription chosen, the payment amount, and the payment frequency.
Subscription term, termination, renewal: This clause clarifies how long the subscription lasts, how to cancel or amend it, how to renew it for another term, and early termination penalties (if applicable).
The clauses displayed in this SaaS agreement checklist are designed to ensure a SaaS company is covered on all fronts; allowing them to maintain full ownership of their software while providing users with valuable services.
Software companies need SaaS agreements in place when they opt to license their software for commercial use as opposed to selling it outright. When companies license software, they need to outline the terms of use, limitations, and liability limits. If an agreement is not put in place, the company risks losing money or being sued by its users.
Considering the SaaS agreement checklist and all other necessary elements of contract creation, an agreement can be developed and executed.
The following steps will outline how to draft a SaaS agreement from start to finish.
SaaS terms are typically month-to-month or fixed. Monthly subscriptions are paid every calendar month on a set date; the service being terminated if a user fails to pay on any given bill date.
Fixed subscription billing, yearly for example, requires an upfront payment. This lump sum would cover an entire year’s worth of access to the platform and its services. At the end of the fixed term, the user would need to pay for another year or the service would terminate.
Customers need to know what they will be receiving in return for their investment. Companies can have a dedicated landing page on their website outlining the services they offer, detailing the services in the SaaS agreement, or both.
This information must be clearly communicated so users understand what it is they are signing up for, paying for, or subscribing to for a set period of time. Without this clause in the agreement, companies legally put themselves at risk.
Another important section to include in an SaaS agreement is a description of routine maintenance. Customers will also need to know how to troubleshoot glitches or bugs that may arise as they utilize the platform.
Will there be set maintenance periods throughout the year? If so, what time frame will maintenance be executed in? In other words — how long can customers expect their service access to be disrupted? Outside of routine maintenance, it also needs to be clear how users can receive support.
SaaS agreements must also detail how consumer data will be used. This could mean where and how it will be stored, for how long, if it will be shared elsewhere, and who maintains ownership of the data once it is entered into the platform.
Agreements can also include an explanation as to how data is backed up, the process for retrieving it if it is lost, and how the company plans to secure consumer data and protect sensitive information from being accessed by hackers.
It is a good idea for companies developing these types of agreements to speak with a privacy attorney. They can provide clarification regarding what information the organization is and isn’t allowed to gather and keep stored on the platform, and ensure the SaaS agreement is compliant.
The company always maintains full ownership of the IP that enables the SaaS platform to function. To ensure this, there will need to be a clause in the contract stating that they own all rights to said software.
This section should also detail what the user’s rights and limitations are when utilizing the service, who has ownership of any work they upload onto the platform, as well as the consequences for going against the agreement.
It is important to make sure any SaaS agreement contains a clause that limits the provider’s liability. This means clarifying how much responsibility a company is willing to assume regarding damages, the maximum they are willing to pay out if a claim is filed, and the like.
An organization should also highlight the specific types of damages they are willing to cover, or risk potentially being held liable for any and all issues raised by claimants.
A governing law clause is meant to highlight which law will be applied if a customer should file a claim against the company. To avoid the potential hassle of cross-country lawsuits, an SaaS agreement should be governed by the laws in the country the SaaS company operates in.
As with anything, there are both positives and negatives to Software as a Service (SaaS) agreements. For starters, these contracts cannot shield companies from all potential liability. In some instances, they could still be held liable for damages, regardless of what the agreement states.
For example, users may still be able to sue for data breaches that put their sensitive information at risk. Situations like this can be evaluated on a case-by-case basis, as liability clauses may not be enforceable in every jurisdiction.
Once a company checks the items off of their SaaS agreement checklist, and a contract is developed, LexCheck can step in and help expedite the deal process. With us, companies get their contracts reviewed (and signed) faster — saving customers both time and money.
Sources:
What Is Software as a Service (SaaS)? | Investopedia
Acceptance by Conduct Contract Law | Up Counsel
What You Need to Know About Commercial Use | Hubspot
Privacy Attorney: What Is It? and How to Become One? | ZipRecruiter
Recurring Billing: Definition, Types, and Examples | Investopedia