A SaaS contract is a type of commercial agreement where a vendor sets out the terms and conditions for a client to use and access a software product.
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What Is A SaaS Contract
A SaaS contract is a type of agreement between a client and a vendor relating to the use and access of a software product.
“SaaS” is the acronym for “Software as a Service”.
In a SaaS contract, the client will generally obtain a license to use the vendor’s software product for a designated period of time (called the subscription term).
The client pays a pre-determined fee for the right to use the software.
For example, a company signs a SaaS contract to use a vendor’s software product at a cost of $100 per user for a one-year term.
Consider the SaaS contract to be the equivalent of a rental agreement.
When you pay someone rent to use their tools or equipment, you are essentially paying a software company rent to use their proprietary software product.
Key SaaS Contract Elements
A SaaS contract can greatly vary in complexity and scope.
A typical SaaS contract should include several key provisions such as the scope of the license, the subscription fees, the ownership of intellectual property, handling of the customer data, the service level agreement (or SLA), renewal terms, termination rights, warranties, and limitation of liabilities.
Enterprise SaaS agreements can get quite extensive and include many other provisions but the purpose of this article is to give you a general sense of what are the key terms of a SaaS agreement.
License Scope
Scope of license provides for the rights granted to the client under the contract (for example, a limited, worldwide, non-exclusive, non-transferable, and revocable license).
Subscription Fees
The subscription fees refer to the amount of money the client (or subscriber) must pay to use the software solution.
Just like a person pays rent to a landlord to use the landlord’s real estate property, the subscription fees refer to the rent the client pays to use the software solution.
Every SaaS contract can stipulate a different license pricing model.
You may have enterprise licensing, license per user, license based on revenue metrics, license based on usage metrics, and so on.
Intellectual Property Rights
SaaS agreements also provide that the software vendor remains the owner of the intellectual property rights associated with the software.
When the client needs to secure the IP rights on derivative works, extensions, or aspects, it’s important to properly negotiate that in the agreement.
Customer Data
What’s particular with SaaS contracts is that vendors typically tend to host the software in their own networks and environment.
As a result, clients are required to enter their business data into the vendor’s software solution.
In this context, clients demand that the vendor implement appropriate security and organizational measures to ensure that customers’ data is protected.
Service Level Agreement (SLA)
An important feature of a SaaS agreement is the service level agreement offered by the vendor.
The SLAs govern the timelines for resolving issues the customer may experience when using the application.
Should the client discover a defect or a particular issue, the SLAs dictate how the issue will be handled and resolved.
Renewal Terms
The renewal terms refer to the contractual provision where the parties agree whether or not the contract will be renewed and in what condition.
SaaS vendors prefer to have automatic renewals in such a way that there’s continuity of services.
The longer the client uses the software, the more profitable it will be for the SaaS vendor.
Clients, on the other hand, prefer to have better control of the renewal.
As such, they may require the contract to renew only upon their written confirmation at pre-determined rates.
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Termination Rights
A SaaS contract can include termination rights allowing either party to terminate based on certain contractually defined grounds.
One option that is favorable for clients is to have the right to terminate for convenience.
In other words, the client can terminate the contract at any time without incurring any liability of any kind.
On the other hand, SaaS vendors tend to prefer locking their clients into a more long-term contract allowing them to generate a higher profit.
The contract will generally define termination for cause grounds that the parties may invoke in the event of a failure of some kind.
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Warranties
For SaaS vendors, the warranties represent a very important element of their SaaS contract.
Clients have to find the right balance between the appropriate warranty on software product and the risks associated with the use of the product.
Very often, the standard warranty vendors will provide is that the software product does not infringe on a third party’s intellectual property rights.
Another warranty that is commonly negotiated is the vendor’s ability to deliver a software service consistent with the features and functionalities defined in the software documentation.
The warranties can be simple or get extensive depending on the complexity of the license agreement.
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Limitation of Liability
The limitation of liability is a commonly negotiated clause in a SaaS contract as it dictates how much potential liability the parties will assume under the contract.
The most common approach is for vendors to limit their liability as much as possible in such a way that they keep their liability exposure to a minimum.
On the other hand, clients expect vendors to remain liable for damages and losses client suffers as a result of the use of the software to the extent it’s defective or malfunctions.
Other Clauses
There are many other clauses that could be included in a software as a service agreement, such as:
- Defining authorized users
- License usage restrictions
- Creation of derivative works
- Professional service engagements
- Data security provisions
- Data protection provisions
- Indemnification clauses
- Confidentiality clauses
- Transitional services at the end of the contract
- Use of open source software
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Pros and Cons of Saas Contracts
In the business world today, particularly in the technology space, SaaS contracts are more and more used by vendors offering software products to the market.
There are several benefits for clients in entering into a SaaS agreement.
The first benefit is that the software solution can be used and accessed quite rapidly as the vendor has the system operational and working in its network.
Another benefit is that SaaS solutions can be accessed from anywhere, any time, and any place.
Also, the client does not need to have technical knowledge and understanding to manage the software solution in case something goes wrong.
On the other hand, SaaS agreements can expose clients to certain risks.
The first type of risk is that the client’s business data is recorded on the vendor’s network and servers.
This means that the client must rely on the vendor to have proper security measures to ensure that its data is kept safe and secure.
Another limitation is that the client is highly reliant on the vendor for the continuation of services.
If the vendor is unable to respect its service level agreements, maintain the software up and running at a high percentage rate, and provide proper maintenance and support services, the client will be at a disadvantage.
Another challenge for the client is being able to change the service provider at the end of the contract.
In some cases, the data obtained from the vendor may not be easily portable to a new software vendor making it highly impractical and expensive for clients to switch providers.
Large software companies that made it difficult for clients to change providers should also consider their antitrust law exposure.
SaaS Contract vs License Agreement
What is the difference between a SaaS contract and a license agreement?
Although many will use the terms SaaS agreement and license agreement interchangeably, there is a nuance you should know.
A SaaS contract is a type of contract where the customer obtains the license to use and access a cloud-based software and technology offered by a software vendor.
Generally, SaaS solutions are accessed online and they are hosted either by the vendor or privately by the client.
On the other hand, a license agreement is what we used to do traditionally where the software vendor delivers the actual software to the client who installs the application on its systems and infrastructure.
Takeaways
So there you have it folks!
What is a SaaS contract?
In a nutshell, a SaaS contract refers to a “software as a service” agreement where a software vendor grants a client the right to use its software product under certain conditions.
This type of business model is growing at a rapid pace in many industries, particularly in the technology space.
The software provider typically provides access to an online platform where the client can use the software solution based on different licensing models.
A SaaS agreement can be highly simple or it can get quite complex, particularly for large enterprise-type agreements.
If you are dealing with a SaaS contract or need legal advice in negotiating or drafting one, be sure to consult a qualified attorney in Quebec.
Good luck!
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