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SaaS Agreements: What are they and How do they Work?


Amanda-HofmeyrWith new technologies and Apps around every corner, it is no surprise that the products and service offerings in which consumers and businesses are interested, often involve the accessing of software.  As individual consumers we need to accept Terms and Conditions pertaining to the use of online purchasing sites, or the creation of a Facebook account, for example.  Businesses, when subscribing to or licensing a software product, need to enter into an agreement with the relevant software provider.

Whilst traditional software licensing and services agreements have been around for a while – the buzzword on everyone’s lips now seems to be “SaaS” agreements – standing for ‘Software-as-a-Service’ agreements.   The key differential when it comes to SaaS software, is that it refers to cloud computing and services, where the software is owned, delivered and managed remotely by its provider/s – and delivered on a “one-to-many” model, to contracted customers on a pay-for-use basis or on a subscription basis.  This is different from the traditional model where companies licensed enterprise software from the software provider that then needed to be implemented “on premise” (usually the customer’s own controlled physical location), with accompanying hardware, infrastructure and support to set it up, and maintain it.  Put another way, SaaS software is fully maintained by its creator, leased to the customer and not hosted at the customer’s own physical premises.  This obviously has tax implications (which impact on budget decisions) as the lack of dedicated hardware (which is often needed with on-premise solutions) reduces if not eliminates any capital expenditure incurred by the customer – expenditure on SaaS software is usually put down to the monthly subscription fees, being operational expenditure.  Operating expenses are obviously fully tax-deductible in the year they are made, whereas capital expenditure is expensed using depreciation to spread the cost of the asset over a number of years.

Having made this distinction, however, it is important to note that the traditional nature of the legal agreement when it comes to SaaS software, is not hugely different.  One still requires a license to use the software (being the granting of a right to use and access the software in question, for the purpose for which it is intended), and there will be a number of services that are offered by the software owner / licensor, that are bundled together with the license, and need to be provided for.  Moreover, there will never be one standard model that fits all businesses – it will all depend on the particular software product being offered, and its “System Architecture”.  Rather than let the term “SaaS” dictate to one, it is best to ask exactly what the system architecture is, each time one considers a software product.   Is it a product that is hosted in the Cloud, by the likes of Google or Amazon?  Or is it hosted inside your own network, through a service provider, like Vodacom?  A third possibility that is increasingly arising is a hybrid hosting scenario, where a software application is hosted in the cloud, but certain database elements are hosted at the customer’s premise server (such as a document management system that is cloud-based and licensed to customers, but due to security concerns, the customer’s case files and data remain hosted on a customer premise server).  Also noteworthy is that cloud-based software products can be distributed either through a network of authorised distribution partners, or by the vendor directly to the customer.

The technology services that were traditionally optional “add-ons” to the software license in the context of on-premise software (such as maintenance and support services) are typically in the SaaS context bundled together with the actual software access, to allow for immediate and productive use of the software.  It is still, however, important to delineate the legal license of software from the provision of services – the supply of a product in law is something quite different from the supply of a service.  Implied warranties in law (and thus contractual exclusions that arise) are different when dealing with the supply of a product on the one hand, and the manner in which services are rendered, on the other hand – and this needs to be separately and clearly dealt with in the legal agreement.

As such, SaaS agreements will still need to detail maintenance and support services, which may be documented in a Service Level Agreement or SLA, covering issues such as what kind of “Uptime” is guaranteed and how bug fixes and other problems are resolved.  It is less common in the one-to-many model often applicable in the context of SaaS software, where “out the box” cloud based software products come standard to all – that customisation / development services are on offer, but this may still be available, depending on the product.  This will mean that the agreement needs to cover certain development services that will be rendered, the legal undertakings in relation to such development services and the Annexures which detail functional specifications (sometimes referred to as a “Statement of Works”) as well as testing and acceptance undertakings of any bespoke customisations undertaken for the customer.  This in and of itself is far from standard – sometimes a customer will configure software itself with limited input from the developer, other times the software needs bespoke customisation by the software provider in order to operate and deliver effectively.

Intellectual property in standard SaaS software code will always be owned by the creator – and licensed to the customer – but to the extent that there are any bespoke customisations that may give rise to the development of new software, the intellectual property therein will need to be covered by the agreement.   Agreements as to new IP arising in any bespoke customisations may vary, and can be negotiated, including in relation to payment therefor.  Similarly, fees and the payment thereof under SaaS agreements will be business determined – are all services charged for together with the license / subscription fee, or are services billed independently and ad hoc, on a usage basis?  Is payment upfront and annually, or on a monthly subscription basis, in arrears?

If the customer has end-users who will be accessing the software online, there will usually also be End User Terms and Conditions that will need to pop up when the users register to use the software for the first time.  As the software owning business, you will want an indemnity from the customer to cover breach by its end-users of those Terms and Conditions – as your contractual relationship is with the business customer, not each of its end-users individually.

Irrespective of the terminology used, an understanding of the system architecture of the particular software product in question is essential to determine what your agreement needs to cover – products are hosted differently, and may be licensed together with a unique bundle of service offerings.  Each agreement needs to be specifically drafted to provide for the particular product offering, and to cover the software-owning business properly from a legal perspective.

Amanda Hofmeyr

Amanda has a BA and LLB from UCT and an LLM from the University of Toronto. She was admitted as an attorney in 2003 while working at Sonnenberg Hofmann Galombik (now ENS), and rose to the level of senior associate in the commercial department by 2006. From 2007 to 2009 she worked as a senior legal advisor to MWEB, one of the Naspers Group companies. For the last eight years she has consulted to various clients, focusing on corporate commercial and tech-related work.

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