A breakdown of key clauses commonly found in SaaS contracts

Published on: March 15, 2022

The software as a service (SaaS) subscription business model continues to grow in popularity, but many companies still struggle to understand what they’re signing onto when they subscribe. A SaaS contract, specifically a cloud service agreement, is not the same as a licensing agreement and doesn’t adhere to a standardized format across organizations, making this type of document particularly difficult to decipher.

Nevertheless, learning the basics of a SaaS contract will position your company to score a better deal as you’ll be able to meaningfully negotiate the nitty-gritty. This blog will help you develop a general understanding of SaaS contracts by answering some commonly asked questions and clarifying key clauses.

Interested in a specific aspect of SaaS contracts? Click on the topic below to skip ahead.  

  1. Scope of permitted use
  2. Limitation of liability
  3. Data ownership and security
  4. Customer service and support
  5. Subscription plan, model, and pricing
  6. Term, termination, and renewal
  7. Service Level Agreement (SLA)

What is a SaaS contract?

SaaS is a software distribution model where users access cloud-hosted applications through the internet in exchange for a recurring fee. Typically, the software provider offers different features and degrees of functionality through a few pricing tiers. To support this subscription model, vendors need specific contracts.

A SaaS contract is an agreement between the application developers and users that defines how the application is to be accessed and used. Many providers have a ‘terms of service’ or ‘terms and conditions’ page that fulfils the role of a simplified SaaS contract.

How is a SaaS contract different from a perpetual licensing agreement?

Under a perpetual licensing agreement, a company will deliver and physically install software and relevant hardware. Customers are granted rights to copy and use the software, which also serves to protect the vendor’s copyrights, patents, and intellectual property rights.

A SaaS contract permits users to access the software through the cloud and customers can only use the software in line with the terms of their subscription. In brief, a perpetual license agreement leads to a singular payment and full ownership of the software whereas a SaaS contract permits use of the software as long as the customer pays for the service.

Differences between SaaS contracts and licensing agreements

Why do companies need a SaaS contract?

SaaS contracts document the exact software access clients receive for the term of their subscription. They are essential for cloud application providers to minimize the risk of lawsuits and penalties. Terms, limits, and liability waivers establish the relationship between the vendor and users so that both parties know exactly what is expected. SaaS contracts can protect vendors’ interests by limiting liability in a data breach or prohibiting specific user activities, like sharing the software with other people or using it to commit illegal actions. It’s not uncommon for providers to have unique SaaS contracts tailored to each of their individual, small business, and enterprise-grade tiers.

What is included in a typical SaaS contract?

SaaS contracts need to strike a balance between the provider’s responsibilities and the users’ expectations to properly establish legal accountability by both parties. Without proper foresight, the process of creating, managing, negotiating, and maintaining an organization’s contracts can be a headache-inducing legal quagmire. However, a firm understanding of the layout and key clauses in a typical SaaS contract will help prepare your team to tackle the challenge.

A typical SaaS contract includes the following sections:

1. Introduction

2. Definitions

3. SaaS services

4. Customer responsibilities

5. Payment

6. Term and termination

7. Warranties

8. Limitations of liability

9. Indemnification

10. Confidentiality

11. Other general provisions

12. Exhibits

 

What are the key clauses in SaaS contracts?

A SaaS contract may look easy to manage in theory, but it can become a painful process in practice, especially if you do it manually. Each contract may contain distinct terms and specific clauses dependent on relevant information like your company’s industry or the products and services you offer. Nevertheless, you can set your organization up for success by learning about the following key clauses found in virtually every cloud service agreement.

Jump to a specific clause by clicking below: 

  1. Scope of permitted use
  2. Limitation of liability
  3. Data ownership and security
  4. Customer service and support
  5. Subscription plan, model, and pricing
  6. Term, termination, and renewal
  7. Service Level Agreement (SLA)

 

1. Scope of Permitted Use

One of the most important aspects to understand about SaaS contracts is that any licensing is for the services—not the software. As such, most SaaS contracts don’t include end-user licence agreements (EULA). To make this clear to all parties, you’ll often see “scope of permitted use” or “scope of licensed access and use” clauses in place of a “scope of licence” clause.

The scope of permitted use defines and limits the rights transferred to the subscribers. SaaS contract permitted use provisions usually include most or all the following:

  • The SaaS services. The specific service applications that the customer may use should be clearly identified and it should be stated that customers do not have a right to a physical copy of the software.
  • The defined extent of permitted access or use. The agreement must establish the metric used to measure extent of use (such as number of users or amount of data), define what a user is, and establish penalties for abuse. For example, the agreement may permit use of services by  the entire subscriber organization (enterprise-wide authorization), a stated number of unnamed users or concurrent users, and/or specifically identified users.
  • Non-exclusivity. This allows more than one customer to use the SaaS services in a multi-tenant software service distribution model—customers share the software application through a single database, but each tenant’s data is isolated and invisible to other tenants.
  • The authorized facilities, technologies, and means for accessing and using the services
  • The territory of permitted access and use. There is often room for negotiation with this provision in B2B deals as worldwide permission could be more expensive than a contract limited to North America and Europe.
  • The term (duration) 
  • Transfer and assignment. SaaS contracts typically either prohibit or impose restrictions and conditions on transferring subscriber rights.
  • Purpose, use, market, or field of use restrictions. For example, subscribers are limited to using to application for a specific industry.

 

SaaS contracts often also include a “prohibited uses” clause in the SaaS services section or a separate acceptable use policy, outlining actions that would cause the user to forfeit their access. Behaviours typically included in this clause include using the software to conduct illegal activities, spam or harass other customers, and install viruses. It is the responsibility of the subscriber to ensure that the scope is sufficient to support the intended current and future use of the SaaS service.

 

2. Limitation of liability

A “limitation of liability” clause outlines under what circumstances the SaaS provider is liable to pay damages to the customer(s) and the maximum amount of damages owed. Most SaaS contracts include limitation provisions to protect the vendor from the impact of events beyond the developers’ control. Power outages and bandwidth overloads are common occurrences that can make it impossible for an application to function correctly. The specifics of these clauses often differ between SaaS vendors to capture risks associated with their unique solutions, but SaaS contract limitation provisions usually include most or all the following:

  • Exclusion of indirect, consequential, or special damages
  • A contractual damage cap. Often, indemnity obligations will be exempt from the cap and providers may include a higher cap for their data breach liability.

3. Data ownership and security

Cloud-based applications host an enormous amount of provider- and user-generated data, so SaaS contracts must have clauses to establish who owns the data uploaded to the platform and each party’s data security responsibilities.

SaaS vendors that handle personally identifiable information (PII) or protected health information (PHI), particularly those operating within the healthcare or finance industries, must ensure that their data ownership and security clauses are watertight. While data ownership clauses state who owns data uploaded to the service, data security provisions usually include most or all the following:

  • Data protection procedures. This includes responsibilities for vendors related to encryption, processing, storage, and security of data.
  • Customer compliance on data protection. This includes responsibilities for subscribers related to encryption, processing, storage, and security of data.
  • Security breach protocols. What happens to data and vendor responsibilities in the event of cybersecurity leaks, attacks or other forms of security breach.
  • Return of data. What happens to data in the event of termination of service or bankruptcy.

 

Additionally, SaaS vendors must create a Privacy Policy compliant with privacy laws in the regions where their software is used. For example, SaaS vendors operating in the EU must write a policy that complies with GDPR. Privacy Policies typically cover:

  • What types of personal information (e.g., PII or PHI) is collected from users.
  • How personal information is used and protected.
  • What rights users have related to their own information.
  • If cookies are used, which ones and why.

 

4. Customer service and support

Customer service and support clauses state how the SaaS vendor will offer support for their services and any additional guarantees related to expected service. Customer service and support provisions usually include most or all the following:

  • Support requirements. Commonly these are fulfilled with a 24/7 help desk, a dedicated customer success manager, priority phone support, omnichannel support, email support, or live chat support.
  • Response time. This is measuring the time it takes for customer service to respond to a reported technical issue.
  • Additional guarantees related to expected service 

 

5. Subscription plan, model, and pricing

These clauses document the exact subscription plan, model, and pricing the customer has chosen. This is another section that is frequently negotiated during B2B deals. Vendors can work with customers to optimize their SaaS plan, lowering customer acquisition costs (CAC) and increasing customer lifetime value (LTV) through higher prices and better retention rates. Subscription plan, model, and pricing provisions usually include most or all the following:

  • The type of subscription pricing model. This is commonly a description of one of the top eight SaaS pricing models in use today.
  • The tier of the subscription 
  • The payment schedule. Recurring billing typically occurs on a monthly or annual basis.
  • The amount the client is expected to pay each billing cycle
  • How the services will be delivered to the client 

 

Top 8 SaaS pricing models

6. Term, termination, and renewal

Term, termination, and renewal are three clauses that establish the term of the agreement and the processes to terminate or renew the account. Many SaaS vendors have evergreen renewals in place that require the subscriber to terminate their contract before a specified date, or else the agreement will automatically renew. These clauses are generally presented as:

  • Term of agreement. A recorded period from an effective date that the contract is in effect.
  • Effect of termination. An acknowledgement of the right of the subscriber to terminate their account at their discretion and what will happen to their accounts upon termination.
  • Term of renewal. A statement that the contract will auto-renew unless the subscriber or the provider terminates their account and a description of the process of auto-renewal, including the auto-renewal period.

 

7. Service Level Agreement (SLA)

A Service Level Agreement (SLA) can be a stand-alone document or a section of a comprehensive SaaS contract, either way it’s a critical component of any cloud service agreement. An SLA designates minimum performance standards, usually with a focus on service availability. A comprehensive SLA may raise customer expectations, but it can also be a selling point. Quick response times and high availability are valuable metrics for potential subscribers. SaaS SLAs usually include most or all the following:

  • Performance metrics and key performance indicators (KPIs). These can include first call resolution rates, acceptable error rates, or maximum number of monthly security issues.
  • Response time and support availability requirements 
  • Penalties. If the performance standards in the SLA are not met by the provider, the customer can be compensated usually by having a percentage deducted from the bill or providing free features or services for a set period.
  • Exclusions. The vendor is exempt from compensating the customer if the performance standards are not met due to things beyond the provider’s control or when the fault is with the customer.
  • Guaranteed uptime percentage. Companies like Microsoft guarantee 99.9% uptime but often deliver 99.99%.
  • Privacy and security
  • Pricing and billing structure 

 

Introducing Subscription Billing Suite

Accurately managing and maintaining SaaS contracts is nearly impossible without automating at least some parts of the process. Modern companies need readily available insights into KPIs and subscription plan details. A comprehensive subscription management solution, like Subscription Billing Suite, can not only handle recurring billing, invoicing, and recognition, but also supports flexible pricing structures, real-time reporting, and regulatory compliance. It’s available as an embedded extension in Microsoft Dynamics 365 Finance and Operations, Business Central, and Dynamics GP.

Complete guide to subscription management 2

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