Negotiating and drafting Software as a Service Agreements with customers

Introduction

While Ireland is well known for being the European headquarters of some of the world's largest tech companies, the country has also seen a sharp increase in home-grown technological ingenuity. There is an ever-expanding spectrum of IT services and products hitting the market off the Irish conveyer belt – whether it is a startup rolling out its aspirational revolutionary technology or a reseller having identified gaps in the European market for tried and tested products. Ordinary consumers often never hear of these technologies because, in most cases, they are not meant for the ordinary consumer. They are instead designed and deployed as business-to-business products and services. They often involve licensing – rather than outright selling - cutting-edge technologies in exchange for a subscription fee. That would seem like a solid business model for the technology's owner since, in addition to generating a steady, predictable cash flow, it also offers the opportunity to greatly expand the customer base beyond borders. After all, it is much easier and cheaper to deploy software overseas than it is to ship hardware. But there are pitfalls along the way and it is important to identify and avoid them at the outset instead of trying to deal with them later on, when often it is too late. The best way of doing that as the owner or director of a technology company is to ensure you have in place a reliable, detailed contract in place which best protects the interests of your company and the integrity of the software.

We are often instructed to advise clients of technology and software companies on negotiating and drafting Software-as-a-Service (SaaS) agreements. While every such agreement is unique, we distilled a few important considerations for software owners in the process of negotiating SaaS contracts with potential customers.

Things to consider when negotiating and drafting SaaS agreements

1. Understand the purpose and structure of SaaS agreements

It is important to appreciate the point of the contract. It defines everything about your relationship with a particular customer: the product you are selling, how much your company will be paid for it, how long the relationship will last, what happens in the case of a fault, non-payment or other dispute. And the list goes on. Since the duration or "term" of such agreements often spans a number of years, it is important to include as much detail as possible because a lot can change in that time. Relationships can break down. Software can become obsolete. Regulatory changes can lead to drastic price increases. The parties need to know where they stand if that happens. You also need to be aware of industry-specific rules and risks which apply to your software and which should be included in the agreement – your lawyer will provide the necessary legal advice but, at the end of the day, you are the expert in your field and will be in a better position to foresee technical issues and pitfalls.

2. Every SaaS agreement is unique

No SaaS agreement is the same and there is no one-size-fits-all document. The contract must be specific not only to the product your company is licensing but also to the customer in question. A customer may require specific features (often for an increased licence fee) which need to be described in the contract and their specifications set out in detail. The worst thing a company can do is to use a pro forma template contract or indeed attempt to draft it without any legal assistance. Once your first SaaS agreement is drafted, this can be used as the basis for all future such contracts with other customers. In other words, the contract only needs to e drafted once, albeit that there may need to be future modifications in line with changing standards and customer requirements.

3. Know what you are selling

It is important to specify exactly what your company is selling. There is obviously the base software being licenced to the customer. But there are numerous things to take into account. How many of the customer's personnel will be permitted to use the software? Will your company provide support services? Will your company provide hardware on which the software is installed (in which case there will also be a hardware-as-a-service or HAAS contract) or will it be installed on the customer's own devices? Does your company require its own licences to distribute the software/hardware and, if it does, is the SaaS contract consistent with those licences? Are you providing a warranty? Will there be a trial period or other special offer? Those are just some of the product-specific questions which the SaaS agreement needs to address. They are normally set out in a separate Service Level Agreement (SLA) which forms part of the overall contract.

4. Negotiating and compromising with larger customers

While the software service provider is normally expected to produce the SaaS contract, it is not uncommon, especially with larger customers, for the customer to have its own contract and to insist that the provider sign its version. This often results in intense negotiations because each party has a contract which is heavily one-sided in its favour and not likely to be acceptable to the other. Reaching a middle ground can be challenging. The most common areas of dispute tend to involve liability clauses and indemnity clauses. With international customers, the jurisdiction and governing law clauses will often be a sticking point. It is important to have a strategy in place, to know what you are prepared to give and what is simply unacceptable. You should negotiate in good faith but not necessarily assume the other party is doing the same. In most cases, however, both parties are eager to find a workable compromise.

5. Protect what's most important

Without doubt the most important thing you are giving is the licence itself and the intellectual property rights associated with that. The SaaS contract must make it abundantly clear that all you are giving is a limited licence, that it must not be interfered with, transferred or otherwise infringed. It is also probable that the contract requires you to provide confidential information. This too must be protected. In the case of personal data, there are a number of data protection regimes in different jurisdictions and it is important that the SaaS contract identifies the appropriate regime and ensure compliance with it. This is normally done in a separate data protection document. It is not correct to assume that the rules protecting personal data do not apply to your company just because you are dealing with another business rather than an individual consumer.

Conclusion

An SaaS agreement is an investment in your business and the software it has worked hard to develop or procure. If drafted properly, it should only need to be drafted once. Therefore, it is critical to seek appropriate legal advice as part of your business strategy. As with most contracts, the hope is that you will not need to rely on intricate details but, if you ever do, they can be critical to your company's success or failure. This is especially the case in software licences which are notoriously technical and detailed in nature. From a lawyer's perspective, they are time-consuming to draft and we find that, although the spine of the document remains the same, changes do need to be made with every new customer signed up to the software. The document therefore evolves over time and, as with the software itself, it is important to implement updates when appropriate.

Author: Mahmud Samad BL
Publication date: 20th November 2023

CORPORATELEGAL