Software as a Service contract – What you need to know

October 4, 2018 by

Software as a Service (SaaS) contract

A Software as Service contracts, or SaaS contract, is a contract for the supply of standardised software packages. SaaS contracts are essentially service agreements for the provision and hosting of software.

SaaS contracts allow businesses to outsource software resources in an inexpensive and scalable way. The mass-market nature of SaaS means that the software is uniform and standardised, leaving little room for customisation.

Problems with SaaS agreements typically involve the reliability of service (uptime), IT security, data ownership, the extent of warranties and indemnities, hidden fees, intellectual property (IP), and service provider lock-in.

Most of these problems can be minimised with good planning and tightly defined service levels.

Key points to address when negotiating a SaaS contract

Intellectual property

At the core of a SaaS contract is copyright and contract law. Copyright is the main vehicle for the protection of computer software.

A SaaS contract authorises the subscriber to do something with the software that would otherwise be a copyright infringement.SaaS contract In a SaaS contract, the right to use the software is typically subscription based.

Users do not acquire ownership in the underlying software. They simply obtain the right to use the software service. The licence granted under the SaaS details what the user can and cannot do with the software.

The software licence will typically limit the purpose for which the software can be used (e.g. for internal business purposes). Sometimes the use of a licence is also restricted to a specific territory. SaaS users need to ensure that the licence grant meets their business requirements.

Payment clause

In exchange for the right to use the software, the purchaser agrees to pay the agreed subscription fee. That fee can be calculated periodically (monthly or annually) or on a per user basis (say 100 employees within the business).

This pay as you go model makes the SaaS model so attractive because it removes the need for high upfront investments into IT infrastructure and the associated capital expenses of procuring in-house hardware and software. Users simply pay in instalments for the latest software.

Subscribers need to pay attention as to how they are being charged under the SaaS contract. The right to use the specific software must be clear and the metrics for calculating the subscription fees should be equally clear. For instance, are set-up, training, integration, and support charges included in the subscription fee? If not, how and when are additional fees being charged?

Termination rights

SaaS contracts are typically entered into for a specific period of time (minimum subscription period). The SaaS contract will also need to state whether the contract will renew automatically on the same terms (sometimes service providers reserve the right to unilaterally change the SaaS terms).

If there is no renewal clause, then the contract will simply expire which may not be what the parties want.

Subscribers are well advised to screen the contract for any early termination fees. In addition, it is important to understand what will happen to any data once the contract has been terminated.

Service levels (up time commitment)

The service levels specify the network and server uptime that the SaaS service provider is aiming for (rarely are uptime guarantees given). These are typically contained in the Service Level Agreement (SLA) attached to the SaaS contract.

Subscribers should be aware of the huge differences in the service levels offered in the market. For instance, 99% uptime may sound like a lot. However, when calculated over a year it shows that the permissible downtime can be substantial (Downtime is the time that a network or server is not working or unavailable).

Here is a breakdown of the uptime promises per annum and what this means in hours, minutes, and seconds for the average annual downtime:

Uptime Average Annual Downtime
99%87 hours and 40 minutes
99.9%8 hours and 46 minutes
99.99%52 minutes and 36 seconds
99.999%5 minutes and 16 seconds
99.9999%31.6 seconds

SLAs define when the software service will be available and when temporary interruptions are permitted. It is important to understand the provider’s liability if there are unexpected interruptions in service.

SLAs are typically broken down into 4 priority levels that are incident based.

Priority LevelPriority Level Definition
1 – Critical
  • High business impact, i.e. critical business processes or functions are inoperable
  • High-level financial exposure through revenue loss
2 – High
  • ·Medium-level business impact, i.e. major business processes or functions are inoperable or largely inoperable
  • Partial impact to end-customer service delivery
  • Low-level financial impact with limited exposure or likelihood of penalties or customer churn
3 – Moderate
  • Low business impact, i.e. major business processes or functions are partially impacted, minor business processes are inoperable or impacted
  • No financial exposure through penalties or customer churn
4 – Low
  • Very low business impact, i.e. major business processes or functions can be performed and minor business processes are impacted
  • No financial exposure through penalties or customer churn

In summary, a SaaS contract needs to set out all the terms of the business relationship between the parties. These include as a minimum:

  • a description of the software and associated service provided;
  • service levels and incident priorities;
  • price and payment;
  • intellectual property and scope of software licence;
  • data ownership;
  • IT security;
  • warranties, liabilities, indemnities and insurance;
  • assignment;
  • term and termination;
  • dispute resolution;
  • applicable law and jurisdiction; and
  • “boiler plate” provisions.

If you need help with the drafting or review of a SaaS contract, please feel free to get in touch with one of our technology lawyers. + 61 4 324 85 612 or email to info@lawdownunder.com