Mastering SaaS buying with a SaaS contract template

Key takeaways:

 
• A SaaS contract typically includes a license or subscription agreement and a service agreement.
 
• A SaaS contract template is a tool that can help you know some important clauses to look for when reviewing contracts.
 
• Every SaaS contract will vary, and you should expect the clauses included to vary as well.
 
• Using a SaaS contract template can help buyers avoid making costly contractual mistakes.

If you’re responsible for software-as-a-service (SaaS) buying for your organization, a close relationship with contracts is a must. On the surface, SaaS contracts look like any other contract. But beneath the surface, SaaS agreements have important layers that are essential to understand, especially if you’re the one to sign and manage them.

I’ve spent years buying software and managing more than 1,000 contracts — you could say SaaS contracts and I are on a first-name basis. In this post, I break down the details of a SaaS contract template so the next time you have one to review, you’ll be ready to breeze right through with confidence.

SaaS contract vs. SaaS license vs. SaaS agreement

Before we jump into the specifics of a SaaS contract template, there are some common questions I want to answer. Is a SaaS contract the same thing as a SaaS license? And are those the same as a SaaS agreement?

The answers to these questions depend on the SaaS companies you’re working with. Generally, a SaaS agreement is a hybrid of a service and a license agreement. In this post, I use the terms “SaaS contract” and “SaaS agreement” interchangeably. I also use each term to include any license or subscription agreement along with any service level agreement (SLA).

Now let’s jump into the details of a SaaS contract template.

Sections in a SaaS contract template

No two SaaS companies will have the same contracts. You can expect contract formats, terms of service, subscriptions, and SLAs to differ. But there are some parts of a SaaS contract that are often standard, and I’ll cover those, step-by-step, here.

But first, here’s an expert tip: There is no part of a SaaS contract that you, as the customer, should think is non-negotiable. In reality, there may be sections of the contract the supplier cannot change for legal reasons, but it does not hurt to ask and require explanation. In most cases, suppliers are eager to find compromise.

A typical SaaS contract includes the following sections:

 
• Introduction
 
• Definitions
 
• SaaS services or grant of license
 
• Customer responsibilities
 
• Payment
 
• Term and termination
 
• Warranties
 
• Limitation of liability
 
• Indemnification
 
• Confidentiality
 
• Other general provisions
 
• Exhibits

Let’s take a look at each section individually.

Introduction

In the introduction of a SaaS contract, you’ll usually find a short statement that indicates which parties are involved in the agreement. As the customer, you will need to fill in sections needing customer input. It might look something like this:

This software as a service (SaaS) agreement is entered into between “Customer” located at “Customer address” and “Supplier” located at “Supplier address” and is effective on “Effective date.” “Supplier” and “Customer” agree that the following conditions of this agreement apply to the services provided under this agreement and supersede all other agreements.

Definitions

Words can have different meanings to different people, especially across industries. To avoid any misinterpretation, the supplier will include a “Definitions” section to define words commonly used in the agreement, especially headings.

For example:

 
• “Customer content or data” means all data and materials provided by “Customer” to “Supplier” for use as part of the SaaS subscription.
 
• “Third-party products” means any software or application provided by a third-party supplier that provides necessary functionality to the “Supplier’s” software.

Be cautious here, as it isn’t wise to assume every supplier will define words exactly the same.

SaaS services or grant of license

What exactly does this agreement grant you? What does the supplier consider acceptable use of the services? That is what the SaaS services section of the contract answers. This section may instead be called “provision of services,” “licensor services,” or "acceptable use policy.”

Example: “During the term of this agreement and subject to the terms of this agreement ‘Customer’ will receive a non-exclusive, non-transferable or assignable right to access and use the subscription for internal business operations.”

Make sure that the scope of the subscription covers everything your company needs to avoid breach of contract. 

Customer responsibilities

The supplier wants to be clear about responsible parties and what the expectations are of you, as the customer. The customer responsibilities clause in a SaaS contract describes those expectations. You may see things here like:

 
• Customer agrees to comply with local, state, and federal laws and regulations in connection with its use of the SaaS.
 
• Customer agrees to notify Supplier of any data protection issues or suspected breach.
 
• Customer agrees not to resell the product to any third parties.
 
• Customer agrees to be solely responsible for its administrators.

When reviewing this section, be sure the responsibilities are things your company can deliver. 

Payment

A payment clause does not usually address specific pricing but instead expresses how purchase orders, order forms, invoices, and payments will be handled. Some things you can expect to see under this section of a contract are:

 
• A description of how the supplier will deliver invoices
 
• Payment terms (e.g., 30 days upon receipt)
 
• A description of how extra expenses, like supplier-to-customer travel, will be billed
 
• Any applicable taxes and which party will be responsible for them

Term and termination

Every clause in a SaaS contract is important, but I want to especially emphasize the term and termination clause. Keeping up with contract terms, renewal terms, and termination clauses are some of the most challenging components of contract management — so much so that in our post on SaaS contract best practices, three out of 10 best practices involve how to better manage those things.

Auto-renewal is common in SaaS agreements. You’ll want to note this and request a change to the agreement if your company does not wish to auto-renew. Without a solid SaaS vendor management solution, auto-renewal can result in your company spending a lot of money on “shelfware.”

Example:

Term: The initial term of this agreement shall begin on “Effective date” and shall continue until terminated by Customer or Supplier as defined under Termination.

Renewal: This agreement shall auto-renew at the end of each term unless terminated no less than thirty (30) days in advance of the end of the term.

Termination: Customer or Supplier may terminate this agreement, without cause, after giving the other party no less than thirty (30) days of written notice.

Warranties

When it comes to SaaS, warranties are often slim. This clause usually addresses any performance promises made by the SaaS supplier. For example, the supplier may warrant that it will provide the services promised in the agreement in a manner consistent with industry standards. You might also see statements in this clause relating to supplier-provided data backup.

This contract clause, among several others to follow, is often written in all capital letters so it is conspicuous. In other words, the supplier wants to make sure you see it.

Be sure to include your company security team when you review SaaS contracts, and use a SaaS security checklist to make sure all security needs are met.

A warranty section may read like this:

“SUPPLIER WARRANTS THAT IT WILL PERFORM THE SAAS SERVICES OUTLINED IN THIS AGREEMENT IN A PROFESSIONAL MANNER CONSISTENT WITH GENERAL INDUSTRY STANDARDS …”

“DISCLAIMER: THE SUPPLIER DOES NOT WARRANT THAT ACCESS AND USE OF THE SAAS PRODUCT WILL BE UNINTERRUPTED OR ERROR-FREE.”

As the customer, make sure the warranty protects your company. If the product requires paid implementation and customization, you want to make sure the warranty provides some sort of refund if the system performance is not what was promised. 

Limitation of liability

Though these sections can be in any order, the last few sections of the SaaS contract template address legal matters and how they’ll be handled.

A friendly reminder: Your company legal counsel should be involved in the review of any agreement signed on behalf of the company and can provide valuable legal advice.

An example of something you can expect to see under the limitation of liability clause is:

“NEITHER CUSTOMER NOR SUPPLIER SHALL BE LIABLE FOR INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES INCURRED BY CUSTOMER OR SUPPLIER OR ANY THIRD PARTY, REGARDLESS OF THE CLAIM.”

Indemnification

Similarly legal in nature, the indemnity clause defines any indemnification rights on the part of the supplier and the customer. In other words, if a claim is made against either party that relates to the agreement and that asserts that the other party is at fault, the at-fault party agrees to defend the claiming party and cover legal fees. 

With the help of your legal counsel or law firm, look for provisions that may not be in the best interest of your company. The agreement already considers your supplier’s protection, so your goal is to ensure the indemnification clause is fair to both parties. 

Confidentiality

Confidentiality is a big deal in the world of software as a service. Solutions often contain sensitive customer data, but sometimes even the SaaS agreement and associated documents include confidential or proprietary information, intellectual property rights, or trade secrets. This section of the contract defines what confidentiality means to the supplier and then goes on to address how confidential information should be treated. 

For example, the supplier may specify that if the customer receives a request for confidential information and the customer is legally obligated to disclose, the customer (the disclosing party) must notify the supplier in advance of any disclosure. 

When I worked in technology procurement for a state institution, I had to consider the state’s laws when signing any contract. Because Kentucky was subject to open records laws, I made sure to include a revision stating so in every contract I signed. Your organization may have similar superseding laws that apply to any part of a contract.

Other general provisions

Depending on the company, the industry, and the software product, there could be any number of other general provisions in a SaaS agreement. These are some clauses you might see:

 
• Applicable law (or governing law)
 
• Force majeure
 
• Dispute resolution 
 
• Signatures
 
• Waiver

Exhibits

Now you’ve made it through what is sometimes called the “terms of service” section of a SaaS agreement. What you’ll typically find after that are the exhibits to the agreement, which are additional documents the supplier intends to include as part of the overall agreement. This will vary but might include things like the pricing schedule and service level agreement.

Exhibit A: SaaS pricing schedule

The price schedule will begin with an introduction, much like you already saw at the beginning of this SaaS contract template. After the introduction, the supplier will provide a breakdown of the subscription term, which may or may not be the same as the agreement term. Next, they’ll provide an itemized list of pricing, or “schedule value,” that defines what the customer is responsible for paying.

Finally, you’ll be asked to complete some customer information so the supplier knows how and where to deliver invoices. In some agreements, the customer information section may be under the payment clause instead.

Exhibit B: Service level agreement

The SLA is where you’ll find specifications of how support and maintenance will be handled by both the customer and the supplier. An example of this is a table, filled out by the supplier, that includes problem versus response expectations. These are things your company, especially the stakeholder teams, need to know before the agreement is signed.

Problem

Response

SaaS system is down or is creating errors that are impacting customer’s business

Supplier support services will respond within one business hour.

Enhancement requests or other noncritical issues

Supplier support services will respond within 48 business hours.

Other common areas addressed in an SLA:

 
• Guaranteed uptime percentage or maximum downtime
 
• Support services
 
• Support access
 
• Scheduled maintenance services
 
• Professional services available 

Why is a SaaS contract template so important?

As SaaS buying professionals, we manage large SaaS stacks with a seemingly endless stream of requests from end users for new software applications. Simply put, sometimes we need a little help. Using a SaaS contract template to keep track of key clauses to look for and what they mean is a way to streamline and speed up your processes. It’s also a great way to help protect your company from costly contractual mistakes.