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Key Clauses To Understand and Evaluate in SaaS Contracts

Take a look at the key clauses & terms that SaaS vendors and SaaS customers should pay attention to in SaaS contracts by calling SaaS Attorney Andrew S. Bosin for a free consultation.


By getting SaaS legal advice from Andrew, you will learn how to lower SaaS contract costs and decrease time in negotiations.


Pricing


As a SaaS customer you need to fully understand the pricing of the subscription to use a vendor’s SaaS application. You need to optimize your spend and get the most features and services you can to fit within your budget.


If you’re an early stage startup it's not a bad idea to do monthly subscription plans with a SaaS vendor. This way you can budget your monies accordingly.


In the subscription-based pricing model, customers pay on a regular basis for continued use of a service or product. This means the strategies for setting subscription prices are very different from pricing traditional products. Ongoing customer payments and tiered product packages mean SaaS vendors need to put more thought into their pricing structure.


Term


A SaaS vendor is going to want your company to lock into a one or two year agreement. This is fine as long as the subscription is monthly and you can terminate the agreement in any given month of the term and not be liable to pay the remainder of that year’s monthly subscription fees.


Limitation of Liability


A SaaS vendor is going to want to limit its liability to paying almost nothing in damages to the customer with the exception of its confidentiality and indemnification obligations.


A customer should demand that language be put in the vendor agreement that the vendor be held liable for damages for a sum certain amount in the event the customer’s data is lost, stolen, hacked or compromised in any way.


Why The SaaS Vendor Should Not Assume Liability For Its Third Party Cloud Managed Services Provider?


When Andrew negotiates a SaaS agreement for a vendor and the opposing party is an enterprise company typically the contract is re-written by the enterprise customer and it comes back barely resembling its original self.


Enterprise customers because of the monetary amounts of the contracts will bully smaller SaaS vendors into assuming a significant amount of liability when it comes to data security, data breaches, cyber hacks and privacy.


Sometimes the language is such that no SaaS vendor in the world, even ones that employ the best security measures, could adhere to the standards, steps and protocols some enterprise companies want smaller vendors to implement in protecting data and confidential information.


It is always assumed by Andrew when negotiating a SaaS agreement against an enterprise customer that the customer will demand that Andrew’s client assume responsibility and liability for the third party cloud managed services provider that hosts, serves and maintains the vendor’s SaaS product or application.


We’re talking about companies like AWS, Google, and Azure. So enterprise customers will craft language that demands that Andrew’s SaaS vendor clients assume liability in the event there is a breach or a data hack.


In negotiating a SaaS agreement with an enterprise customer you should never agree to be liable for the conduct and actions of any 3rd party vendors. You can only control what you can control and you should only assume liability for your own company’s actions.


You should also never agree to pay “consequential damages.” Consequential damages are damages that can be predicted or anticipated as a result of a breach of contract. Most would probably agree that if a customer’s data is lost or destroyed or stolen in a data breach and it caused the customer to suffer damages that this is foreseeable damage flowing from the data breach. For some SaaS vendors these types of damages could well exceed the monies paid by the Customer for the SaaS Services offered by the vendor in the Agreement and could likely cause the SaaS vendor to go out of business.


You should also never agree to accept liability for consequential damages. All it takes is one data hack and a customer suffering catastrophic losses for the SaaS vendor to go belly up.


A SaaS Agreement Should Contain Language About SaaS Application Availability And The Vendor Offering An Uptime Commitment


If you’re a SaaS vendor it is not unreasonable for a customer to have an expectation that the SaaS application will work properly and be up and running and available for a significant period of the time the agreement with the vendor is in effect.


And, if you want to attract enterprise customers it is critical that you guarantee that the SaaS Application be available to use at least 99.5% of the time all day every day of the year. The part of the SaaS agreement that this guarantee is made by the vendor is called the Service Level Agreement or SLA.


What is a Warranty of Subscription Service Functionality?


A Warranty of Subscription Service Functionality says that the application will function according to specs and any documentation the vendor provides to the customer. It’s not a bad idea if you’re the vendor that you offer this warranty to a customer. You need to remember that the customer is looking for a web based solution that solves for a particular problem and if your application fails to perform according to the specifications contained in any documentation you the vendor provides to the customer then you have a serious problem.


Indemnification


Indemnification is a legal term that deals with the SaaS vendor essentially paying customer’s damages in the event that a third party, not a party to the customer/vendor agreement sues the customer in what is known as a third party claim. Typically, this is a claim that the SaaS application infringes on that third party’s intellectual property right.


On the flip side, because the customer is uploading so much content and data in the vendor’s SaaS application, the vendor should get an indemnification from customer with the customer holding the vendor harmless and paying the vendor’s damages in the event that vendor gets sued because the customer’s data or content infringes on a third party’s intellectual property right.


This is just a brief overview of some legal issues to be aware of and not an exhaustive list when negotiating a SaaS enterprise agreement.


This blog post is for informational purposes only and not offered as legal advice.


If you would like to speak to a SaaS Lawyer about negotiating a SaaS enterprise agreement please contact Andrew S. Bosin at 201-446-9643.


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