SaaS Agreements: Everything you Need to Know

Software as a Service (SaaS) has become a phenomenally popular model in recent years - allowing businesses to evolve their digital operations with a suite of subscription-based tools. 

Unlike traditional software that can be purchased and installed on a machine - SaaS solutions rely on the cloud and have sky-rocketed in popularity thanks to their ease of use, cost-effectiveness, scalability, and superior maintenance infrastructure.

In fact, by the end of this year, the value of the global SaaS market is expected to reach US$317.55 billion.

Despite this, SaaS products can be an expensive investment, with the potential to make or break key components of a company's day-to-day. System failure, platform downtime, data integrity risks - when it comes to SaaS products, a lot can go wrong. 

As a result, it's crucial to clearly define the legal rights, responsibilities, and commitments of both the SaaS supplier and the customer. 

In this article, we reveal everything you need to know about SaaS agreements, from the perspectives of the SaaS supplier and the customer. We'll also be highlighting some of the key differences between UK and US agreements.

We'll be covering: 

• What is a software as a service agreement?
• What is the difference between SaaS and licensed software?
• Do I need a software as a service agreement?
• What are common obligations of a supplier in SaaS agreements? 
• What are common obligations of a customer in SaaS agreements?
• What should be included in a SaaS agreement?
• How does a SaaS agreement differ in the US versus the UK?
• Best practices for negotiating a SaaS agreement?
• Challenges of a software as a service agreement
• Need a technology lawyer for your SaaS agreement?

Let’s get into it. 

What is a software as a service agreement?

A Software as a Service (SaaS) agreement is a legal contract between a service provider and a customer. This agreement outlines the terms for accessing and using a SaaS product, ranging from a user's rights, data security obligations, support commitments of the provider, and more.

What is the difference between SaaS and licensed software?

Before we dive into the details of SaaS agreements - sometimes referred to as Subscription Agreements or simply “Terms and Conditions of Use” - let's address one of the most commonly asked questions: What's the difference between SaaS and licensed software? 

In legal terms the key difference is that, when you procure installed software, you are acquiring a license to use another party’s intellectual property rights, whereas a SaaS agreement is, in very simplistic terms, an agreement for the provision of a service.

In more practical terms, there are a few differences in the way installed software and SaaS are typically provided:

• delivery and usage rights: with licensed software you install and run a copy of the software on your own hardware, whereas SaaS is hosted by the provider and accessed via the internet
• fees: although there are no set rules on how to charge for installed software or SaaS, it’s more typical to charge a one-time fee for a perpetual or fixed term license, or periodic payments for a license that renews periodically. SaaS products, on the other hand, will almost always have subscription-based periodic pricing, usually linked to usage metrics (e.g. number of users, or levels of usage). 
• maintenance: SaaS products will be maintained remotely by the service provider, so customers don't need to worry about upgrading the platform, whereas users may need to download and install their own updates to installed software.

As a result, providing and procuring SaaS products needs a slightly different legal approach.

Do I need a software as a service agreement?

You might be wondering - do you actually need a SaaS agreement? Take it from experienced lawyers who've seen the good and the bad of the commercial world: absolutely. 

Whether you're a supplier or a customer, a SaaS agreement will put into writing the terms of use, define your rights, and protect you in the event of issues. Beyond the day-to-day workings of the software, a SaaS agreement will also set the tone for a transparent, mutually beneficial relationship. 

By clearly defining the protections of both parties, a SaaS agreement ensures a commercial relationship begins on the best foot - minimizing the risk of legal disputes further down the line.

Why suppliers need a SaaS agreement

For suppliers of SaaS platforms, a fit-for-purpose agreement is absolutely crucial. As a legal framework for the supplier-customer relationship, the scope of services, expectations, and supplier protections can be clearly defined and cemented.

Let's look at some of the biggest advantages of a SaaS agreement for suppliers. 

• Risk mitigation: It goes without saying... and yet, we're gonna say it: risk management is one of the core benefits of any commercial contract. From limiting a supplier's liability to shielding against future legal disputes, these documents go a long way towards creating smoother relationships today and for the road ahead. 
• Intellectual property protection (IP): A company's IP is one of its most valuable assets, which means that its protection should be a top concern. For SaaS suppliers, it's important to carefully ringfence the ownership of a platform, with the view of preventing unauthorized use, scraping, reconstruction or distribution. A well drafted SaaS agreement will help suppliers provide a valuable service to customers without undercutting their bottom line. 
• Financial protection: SaaS agreements most commonly work on a subscription model. While this provides SaaS companies with a steady stream of income - it also necessitates clear legal terms around payment. From defining timely payment schedules to fee penalties or service restrictions for late payments - suppliers would be wise to get details in writing.
• Customer obligations: providing a service via the internet is not without risk.  Occasionally, a customer’s use of the platform can cause issues for the whole platform. This can happen where, for example, a customer is processing an unexpectedly high volume of requests, or trying to integrate with other systems.  The SaaS agreement will identify the limits of use applicable to customers, so that the supplier does not need to deal with these types of issues. 
• Compliance obligations: SaaS suppliers are subject to a range of regulatory and compliance obligations that can vary from sector to sector. Keeping on top of these compliance obligations is key - and a well-written SaaS agreement will clearly document the commitments of the supplier. 
• Relationship-building: A particularly beneficial (but often not considered!) element of a SaaS agreement is its ability to fuel a healthy commercial relationship. By their very nature, SaaS products can result in a long and fruitful partnership between a supplier and customer - and maintaining the integrity of that is in the interests of everyone involved. 

Why customers need a SaaS agreement

SaaS agreements aren't just in the supplier's benefit - they also go to great lengths to protect the rights owed to customers. From service commitments to data obligations, a SaaS agreement will clearly set out what a customer is purchasing, the terms of their use, the commitments of the supplier to provide and maintain the service, and more.

As an often expensive piece of kit, getting supplier commitments in writing should be a priority for a customer. In the event of service downtime, a breach, or worse, customers will have greater ability to claim compensation, or limit the impact of a platform's failure on the business. 

What are common obligations of a supplier in SaaS agreements? 

In very simple terms, a supplier is obliged to provide a subscription service to the customer. Let's look at some of the most common obligations of a supplier. 

Service availability

Where a SaaS product is business critical, service commitments will be particularly important, with the supplier needing to define the availability, product uptime, and maintenance of the service. This can include a Service Level Agreement (or "SLA") that guarantees to the customer a certain level of service from the supplier. 

Support services

As an on-cloud service, SaaS platforms exist in a live ecosystem that's constantly updating and evolving. Customers will often expect day-to-day platform support that allows them to keep things ticking. These agreements will include details on the type of support provided and the responsiveness that can be expected.

Data security

The protection and integrity of data should be top-of-mind for suppliers. Data breaches are a costly risk, with IBM's 2024 Cost of Data Breach Report revealing that the global average cost of data breach was US$4.88 million, a 10% increase from the previous year. And, the risks are not just financial. Customer trust will quickly erode if the confidentiality of their data is not protected. A SaaS agreement will define the responsibilities of a supplier and a supplier's compliance with data protection regulations. 

Maintenance commitments

The upkeep, upgrades, and emergency maintenance commitments of a SaaS platform will need to be documented. Suppliers need to be clear on what a customer can expect, expected limitations, and more. 

Vendor breach consequences

While suppliers will do everything in their power to prevent it, a vendor breach can be an unfortunate reality. A SaaS agreement will need to document the consequences of a breach, whether that's termination rights for the customer, platform credits, or compensation.

What are common obligations of a customer in SaaS agreements? 

The legal obligations of a SaaS agreement don't all rest with a supplier. Customers have an important set of commitments to abide by, including: 

• Timely payment of fees.
• Abiding by permitted uses of the platform.
• Compliance with supplier policies (such as credential access to the platform). 
• Adherence to supplier's intellectual property protection rights. 

What should be included in a SaaS agreement?

We've touched on common supplier and customer obligations - so what should a well-drafted SaaS agreement include? 

Below we tackle key elements of a standard SaaS agreement. It's worth noting here, this is not an exhaustive list, and your SaaS agreement should closely reflect your company's needs. This is a legal document that can safeguard supplier and customer alike - so ensure it's fit-for-purpose. 

SaaS subscription details

Before diving into the finer details, you'll need to set out the specific SaaS subscription the customer is signing on for, including its duration, fees, and more. 

Data ownership and privacy

SaaS products process and, depending on the platform, store, vast quantities of data. Your SaaS agreement will need to detail data privacy obligations, the commitments of the supplier to comply with regulations, and the measures in place to protect the integrity of data. 

Supplier's obligations

The SaaS agreement will need to clearly set out the obligations of the supplier, and the legal consequences of breaching these commitments.

Customer's obligations

Similarly, your SaaS agreement will need to establish customer commitments, and the penalties in place if breached. 

Charges and payment

Your SaaS agreement will need to detail payment schedules, fees, applicable taxes, the consequences for late payment, and more. 

Rights and responsibilities 

Your agreement will need to demonstrate in clear terms the rights, responsibilities, and restrictions of this arrangement, from preventing distribution, to limiting certain uses of the software. 

Confidentiality

In many instances, the use of a SaaS product may necessitate a series of confidentiality clauses. Your SaaS agreement can set out confidentiality obligations and the consequences of a breach. 

Liability

You'll want to ensure your SaaS agreement is clear on liability, and the limitations both for supplier and customer. While a dispute is the last thing you want, it's an unfortunate reality of commercial arrangements. 

Renewal and termination clauses 

Your SaaS agreement will need to specify the circumstances under which an arrangement can be terminated, the notice required, and the process that needs to be followed once termination has begun. This includes scenarios like a breach of service terms, or non payment. 

Similarly, your agreement will want to address renewals and the terms both parties need to commit to in the continuation of the relationship. 

Disputes

Prepare for the worst - but hope for the best! By tackling disputes in your SaaS agreement, you can mitigate future disputes, while clearly communicating what will happen in the event of a conflict. This helps both parties clearly understand the risks, while expediting the dispute process should it kick into effect. 

Intellectual property ownership

SaaS products quickly become a mesh of supplier and customer intellectual property. Your agreement will need to define the protections owed to each party, the consequences of infringement, and more. 

Service Level Agreement (SLA)

As we touched on briefly, your SaaS agreement may include a SLA, which sets out the service standards the supplier commits to. This might include product availability, support response times, regulatory of maintenance, and more. 

How does a SaaS agreement differ in the US versus the UK?

While the above provides an insight into common elements of SaaS agreements, it's worth noting differing legal requirements in the US versus the UK. 

• The UK and US are governed by different legal frameworks and, in the US, these can vary from state to state. You'll need to ensure your agreement considers, and abides by, local regulations both  where your SaaS platform is operating and where your users are located. 
• With SaaS products, there is often a particular focus on data protection and privacy obligations. Privacy and data protection regulation in the UK (and EU) is very different from the US - which has a patchwork of rules covering different states, different types of personal data (e.g. health and financial data), and different types of individuals (e.g. children).  Failure to abide by the correct set of rules can expose your business to high levels of risk. 
• Consumer protection laws will also differ between regions and, if your SaaS product is B2C, you'll need to ensure your agreement considers these differences. In the UK, you'll need to consider things like the Consumer Rights Act, while in the US, you'll need to ensure you're abiding by the Federal Trade Commission’s standards.
• The same extends to intellectual property rights. The governance of these rights, and the avenues for their protection will vary between regions. Suppliers and customers will want to ensure their agreement offers them the right amount of protection, whichever jurisdiction they are located in. 

Best practices for negotiating a SaaS agreement?

SaaS platforms can be an invaluable addition to a business, triggering potential new revenue-streams, streamlined operations, accelerated project management faculties, and more. However, that means they often come with high risks and high costs. 

For those either entering into, or supplying a SaaS agreement - how should you go about negotiating an agreement? 

Focus on a mutually beneficial approach

SaaS agreements can trigger a long and rewarding commercial relationship. As a result, it's in everyone's interests to start on the best foot. Taking an aggressive or unreasonable approach to SaaS agreements can risk a strained arrangement - or worse, the collapse of one entirely. 

Before entering into a negotiation think carefully about your "non negotiables", while making allowances for the areas you are willing to compromise on. 

Have your primary goal in mind

There's a lot to wade through when it comes to SaaS arrangements, but the core goal of a negotiation process will differ from customer to customer. Negotiations can be expedited when you have a clear understanding of your objective, and the outcome ultimately desired from the negotiation. 

Hone in on must-haves

On that point, it's important you don't enter into an agreement that fails to meet your needs. Enter negotiations with a clear understanding of absolute imperatives, such as service level agreements or termination clauses. 

Consider the exit 

With termination in mind, think carefully about what you want an "exit" to look like. Pay attention to things like, what warrants a termination? What happens to data? What remains the intellectual property of each organisation? Avoiding a sour end is in everyone's interest - but it needs to be considered from the very beginning. 

Prioritise flexibility

Flexibility in terms of service can be beneficial to both supplier and customer - however, it's important that everyone is on the same page. Perhaps, the customer needs flexibility around payment schedule, or, perhaps, the supplier needs flexibility around maintenance expectations. Whatever the circumstance, ensure you get it agreed in writing. 

Bring in technology law experts

SaaS arrangements can have a huge impact on a business, from boosted profits, to revenue-hitting fines. As a result, you need to ensure it provides protections for every conceivable reality. While templates are available, utilising them is one of the more risky things you can do within a business. 

By enlisting the help of technology law experts, you can draft a fit-for-purpose sales agreement that cements your protections. Better yet, technology lawyers can alert you to opportunities and risks you might otherwise have missed in the negotiation process. 

Challenges of a software as a service agreement

For all their importance, you'll want to be mindful of the key pitfalls that can come with SaaS agreements: 

• Data protection and compliance: Different regions will be subject to different laws. As a result, you need to make sure that data (and especially, personal data), its use, storage, and security, abides by the jurisdictions the supplier and customer will be operating in. Pay careful attention to how data is stored and transferred, and the legal repercussions of data that crosses regulatory borders. 
• Service disruptions or failures: Service issues can be a common occurrence in SaaS products, whether that's due to server issues or software bugs. However, without sufficient clauses in place, customers can be left powerless to earn compensation or support for a platform's downtime. Similarly, if suppliers don't clearly define their obligations - and the limitation of their liability - downtime can become a costly issue. 
• Supplier lock-in: Sometimes, a SaaS product just doesn't work out. However, customers would be wise to pay close attention to SaaS agreements, specific to data migration, contract duration, and termination circumstances. Failure to do so could leave customers locked into a platform and payment plan that's no longer desired.
• Hidden costs: While SaaS platforms are usually more cost-effective than on-premise solutions, customers will want to be clear on the prevention of hidden costs. Similarly, when suppliers update or evolve a platform - customers will want to be armed with an agreement that clearly defines the notice for price increases and cost caps where applicable.

Need a technology lawyer for your SaaS agreement?

Biztech Lawyers is a technology-focused law firm, with multi-jurisdictional experience in creating airtight SaaS agreements. With clients in the US, UK, and AU, our lawyers approach SaaS agreements from every angle and every corner of the globe. 

Need support in drafting or negotiating a SaaS agreement? Discover how we can support you.

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