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Many businesses now rely on cloud-based software in their day-to-day operations.  However, recent news articles of hacking and data leaks shed a light on the vulnerability of software systems. Software developers should ensure they have well-drafted agreements in place. These will not only protect your legal responsibility but also cover matters such as the distribution and subscription licensing of the software. This article will explain what a software as a service (SaaS) agreement is and what clauses it should contain.

What is a Software as a Service (SaaS) Agreement?

SaaS agreement is a document that sets out the provision and delivery of software services to customers through the internet. As the software is licensed on a subscription basis and centrally hosted, it is often distributed on-demand in the cloud.

The agreement is a serious undertaking which requires careful consideration. However, once properly in place, it eliminates the future hassle associated with more conventional software licensing models. This is on account of the fact that the agreement can simply be renewed when the subscription period expires.

Broadly, a SaaS agreement includes clauses regarding the following areas:

Services and Functionalities

Before drafting this clause, you should question what functionality the software offers or the type of service that it renders to the business under the agreement. You should outline this in exact detail to prevent a dispute arising about what was promised.

If you require customised services that may be outside the scope of the agreement, you should also draw up a separate customisation agreement. This additional agreement sets out the:

  • tailored services;
  • delivery timeframe; and
  • costs that may be attached to these.

Access to the Software

The means of access and authorised parties that are permitted to use the software should also be included in the agreement.

For instance, whether users need to create an account to use the software, the platforms it is accessible from and if they have to apply to use the software. If intending to implement geo-blocking, listing out the banned locations where the software cannot be used should also be included.

User Obligations and Prohibited Use

This section should contain the obligations that the end user has to abide by and the expectations around the use of the software. These responsibilities include the safe storage of personal information by users, that they will give notification if the security is breached and that it falls on them to update the product where necessary. This should be accompanied by a statement to the effect that all information provided by the user is true and accurate.

If there are prohibited uses for the product, these terms should also be made clear here, and these may include clauses around tampering, damaging, reselling and misusing the software.

Payment Clause

This part of a SaaS agreement should outline the methods of payment accepted for the subscription, and that payment must be made in full for continued use of the software. If the payment fails for whatever reason, there should be within the agreement, notification methods in place to rectify the issue. Provision should also be made in the case of multiple user accounts to ensure that re-subscription is not necessary for all those users licensed to access the software.

Data Collection and Personal Information

Although broadly falling under a Privacy Policy, something which should be drawn up separately if need be, regard to sensitive and confidential information also needs to be given in the body of a SaaS agreement. This can be an incorporated across from the Privacy Policy and should contain provisions as to the secure storage of personal information and whether it will be passed onto third parties for marketing purposes.

Intellectual Property Rights

Licensing is the central component of intellectual property rights in a SaaS agreement. This is because the end user must be issued with a license that specifies how content is to be used during their software subscription period. This license should be revocable in the event a customer decides to cancel their subscription or upon its expiry.

If a user wishes to modify the software, this too must be addressed in the agreement, with additional alterations being subject to the requirement of a further agreement.

Lastly, a provision allowing for the collection and backing up of data by the software provider to ensure delivery of the service should also be provided for. Users should also be aware it is their responsibility to protect the intellectual property rights and data associated with any content created through the software.

Termination of a SaaS Agreement

This clause should extensively cover off the criteria under which the SaaS agreement can be terminated. It should include provisions for termination for a number situations, including:

  • if terms in the SaaS agreement, and any associated legal document, such as your website’s privacy policy or terms of use, are breached;
  • there are ground to believe the user is or has tampered with the software;
  • the provider-customer relationship has deteriorated;
  • if the user files for bankruptcy; or
  • in unforeseen or uncontrollable circumstances where the required software cannot be provided to the user.

The handling and withholding of user information during and post-termination, must also be clearly outlined.

Updates to Software

Software will inevitably need to be updated, and when this happens, notice must be issued to the user. Note the type of notice you intend to give as the software provider and the timeframe in which it will be issued. Also ensure that users are aware they are subject to the same SaaS agreement with each software update download and they are agreeing to use the latest version, given this allows for full functionality.


Another critical inclusion in a SaaS agreement are all the support options and feedback mechanisms available to customers. To this end, the contact details and troubleshooting methods offered by the service provider should be recorded here.

Dispute Resolution

If there is a dispute arising from the SaaS agreement, a set process with procedural mechanisms, should be laid out in the document itself as a way to attempt to bring about its resolution.

Firstly, it should recommend negotiation between the parties as the first course of action. If this is unsuccessful, the agreement will then provide for other methods of alternative dispute resolution such as mediation, whereby an impartial third party recommends a non-binding outcome,

As a last resort, the agreement will allow for litigation, far less desirable owing to its cost intensive and resource-heavy nature.

Limitation of Liability and Disclaimers

This section should seek to disclaim commercial risks such as those associated with operating system incompatibility and third party hosting. The fact that the product will perform as advertised does not act as a guarantee it will fully satisfy all customer requirements, is an important consideration to take into account and specify.

To further reduce the potential liability, it is advisable to set out the responsibilities you are subject to under the consumer law as well as any guarantees customers are entitled to claim in order to help prevent disputes.

In addition to this, customers liabilities and indemnities against you as the software provider should be stated. This could be for failing to provide accurate information, breaching the terms and conditions of the agreement and other instances of customer misuse of the software. Another prudent clause to incorporate is a customer’s obligation to pay costs incurred from disputes and that the SaaS terms continue beyond the termination of the agreement.

Any type of insurance a business has should also be referenced in the SaaS agreement.

Key Takeaways

A SaaS agreement is designed to be a comprehensive document and as such, software providers should pay careful attention to the multiple aspects of the agreement that set out liability and obligations. Failing to include or properly define a crucial clause can have serious legal implications on a business’ risk, reputation and commercial relationships. If you’re looking for a specialist IT lawyer to assist in thoroughly drafting a SaaS, get in touch with LegalVision on 1300 544 755 or fill in the form on this page.


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