When a SaaS provider deals with a customer's non-SaaS contract, careful review is essential. Focus on licensing, IP, data, SLAs, updates, customer obligations, and general contract terms. By addressing these issues, SaaS providers can mitigate risks.
It happens all the time. You are a SaaS subscription service provider, and a new customer insists on using their own contract template, but it is not designed for a SaaS transaction. Maybe their form or “paper” is suitable for a sale of goods, a consulting arrangement, custom development work (work for hire), or downloadable software – anything but a SaaS subscription deal. After (politely) pointing out the mismatch, if the customer doubles down, and if you still wish to move forward, it is important that you review the proposed contract with the help of legal counsel to ensure it does not expose you to a level of risk falling outside the normal scope of the relationship.
Below is a checklist of the issues most likely to be missing from a non-SaaS specific agreement that will require careful review:
- License Grant. Contracts drafted for a sale of goods or consulting arrangement will likely include no mention of licensing or scope limitations (e.g., maximum number of seats or users, etc.). And if licensing is mentioned, the specific terms may not be suited to a SaaS subscription model. For example, in contracts for downloadable software, you will see references to “downloads” (as opposed to access) and there may be “perpetual grants” (vs. a specific subscription period).
- License Restrictions. Similarly, you are unlikely to find licensing restrictions in a contract drafted for goods or consulting. In a SaaS deal, service providers rely on certain basic restrictions (e.g., prohibiting resale, reverse engineering, or use to build or improve competitive products or services, etc.) in order to protect their IP from infringement.
- Intellectual Property. A SaaS provider’s technology is typically its most valuable asset, so retaining and protecting ownership is critical. In a typical SaaS contract, IP-specific provisions will only grant customers a term license to access the provider’s technology. In contrast, customers in consulting arrangements are commonly given ownership of a service provider’s deliverables as “works for hire.” This distinction is significant – misplaced work for hire language can inadvertently grant a customer ownership rights in your proprietary services.
- Data. SaaS providers prefer favorable data processing terms. However, at a minimum, establishing your right to use a customer’s aggregated or anonymized data will be critical to your ability to provide SaaS services. Depending on the nature of your business, securing the right to use certain customer data to train your AI tools and models may also be important.
- Service Level Agreements (SLAs). When a customer’s template is used, service specifications may disproportionately favor the customer. For example, SaaS providers can be “hamstrung” by language that overpromises on their customer service availability or guarantees a virus-free service. A service provider’s SLA will usually include such standard caveats as internet downtime, things outside your control, customer error, and downtime for routine maintenance.
- Right to Update. Again, contracts intended for the sale of goods or for professional services will likely not address a SaaS provider’s right to update its products or services. Given the real-time nature of SaaS, however, service providers rely on this provision to enable their ability to constantly update and iterate their services without notice to or consent of the customer.
- Generally Available Service. SaaS contracts typically include language that clarifies the fact that the provider is offering the same “generally available service” to all of its customers, eliminating any expectation of customization.
- Additional Obligations of Customer. In a transaction for goods or professional services, most obligations (the “reps and warranties”) are one-sided, falling on the shoulders of the provider only. However, SaaS relationships typically impose on customers certain responsibilities owed to the SaaS provider, including agreeing not to violate the scope of the its license or its IP rights, and obtaining consent to share data..
- Deletions and Changes. There may be other terms in the customer’s template that are irrelevant or wrong in the context of a SaaS subscription arrangement, and the SaaS provider may wish to delete them entirely or replace them. For instance, a provision that allows the customer to “test before accepting” the service is incongruous with the real-time nature of SaaS service delivery. Likewise, maintenance and warranty provisions in a SaaS deal will look very different than those in a goods or consulting contract.
- Other Changes NOT Unique to SaaS. As with any contract, careful review of all provisions, whether or not they would differ based on the nature of the deal, is highly recommended, especially when the contract form is provided by the opposing party. Contract terms addressing key issues like confidentiality, indemnity, limitations on liability, etc. can skew heavily in favor of the drafting party.
In summary, although not ideal, it is certainly possible for a SaaS service provider to work with a customer’s contract template, as long as you carefully review its provisions and request any edits that may help to mitigate your risk. And to help set expectations, you might first try sending your own form to the customer – in lieu of a heavy redline – along with a note explaining why (they sent the wrong contract type). If they still insist on using their own paper, this initial effort will at least minimize the shock and potential slow down that excessive redlines are known to cause.
If you would like assistance with a SaaS agreement or other commercial contract, please contact Client Success at clientsuccess@outsidegc.com.