As commercial law attorneys, much of our work involves advising technology companies on structuring, negotiating, and drafting software agreements. One of the most transformative developments in the software industry has been the rise of Software-as-a-Service (SaaS)—often referred to as cloud-based software delivery.
SaaS has disrupted traditional software licensing models and continues to reshape how businesses build, sell, and consume technology. Applications such as Slack, Trello, Salesforce, Stripe, and Dropbox exemplify how software is now delivered as an ongoing service rather than a once-off product.
This article provides a practical overview of the SaaS model and highlights key legal issues founders and businesses should understand when negotiating SaaS agreements.
What Is Software-as-a-Service (SaaS)?
Software-as-a-Service is a software delivery model in which a provider hosts an application and makes it available to customers over the internet. Instead of installing software locally, customers access the software remotely through a web interface or API.
The contract governing this relationship is referred to as a SaaS agreement. Unlike traditional software licence agreements, a SaaS agreement does not grant the customer a licence to install and run software locally. Instead, it grants a subscription-based right to access and use a hosted service.
Key Commercial Benefits of the SaaS Model
1. Lower Setup and Infrastructure Costs
SaaS eliminates the need for customers to purchase and maintain expensive hardware or software infrastructure. Hosting, updates, security, and system maintenance are managed by the SaaS provider.
2. Flexible Pricing Models
Customers typically pay on a subscription or usage-based model (e.g., per user, per transaction, or per storage unit), allowing costs to scale with business growth.
3. Scalability
SaaS platforms can scale rapidly, allowing businesses to increase storage, functionality, or user access without deploying new hardware or software installations.
4. Automatic Updates and Maintenance
Providers deliver updates, patches, and new features automatically, reducing the burden on customers and ensuring continuous improvement of the platform.
5. Accessibility and Mobility
Users can access SaaS applications from any internet-enabled device, supporting distributed teams and remote operations.
Traditional Software Licensing vs SaaS
Traditional Software Licence Model
Under a software licence agreement, the customer typically purchases software and receives a licence to install and use it locally. The licensor retains ownership of all intellectual property, and the licence is a limited right of use.
SaaS Model
In a SaaS model, the customer does not download or install the software. Instead, the provider hosts the software and delivers functionality as a service. The agreement governs access rights, service delivery, data processing, and ongoing obligations between the parties.
Key Legal Issues in SaaS Agreements
A well-drafted SaaS agreement should comprehensively address the rights, obligations, and risks of both parties. Core provisions typically include:
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Scope of services
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User access and usage restrictions
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Subscription fees and payment terms
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Data protection and privacy compliance
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Intellectual property ownership
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Service levels and support
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Termination and suspension rights
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Disclaimers and warranties
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Limitation of liability and indemnities
Below are some of the most critical provisions.
1. Limitation of Liability
Liability provisions are among the most commercially sensitive clauses in any SaaS agreement.
Consider scenarios such as:
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A cyber-attack or data breach exposing customer data
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Service outages causing business interruption
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Loss or corruption of customer data
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Regulatory penalties arising from non-compliance
A limitation of liability clause determines what damages can be claimed, what is excluded, and the financial cap on liability. Without carefully negotiated limitations, SaaS providers can be exposed to disproportionate and potentially business-ending risk.
2. Service Levels (SLA)
SaaS customers often expect guaranteed uptime and performance standards. Service Level Agreements (SLAs) typically specify:
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Minimum uptime commitments (e.g., 99.5% or 99.9%)
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Maintenance windows
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Response and resolution times for support requests
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Service credits or remedies for downtime
Providers must carefully balance commercial competitiveness with realistic operational capability.
3. Maintenance and Support Obligations
SaaS agreements should clearly define:
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Support channels (email, phone, ticketing systems)
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Support hours and response times
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Bug fixes and patching obligations
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Upgrade and feature deployment policies
Ambiguity in support obligations can lead to disputes and reputational risk.
4. Upselling, Upgrades, and Future Orders
SaaS businesses often rely on expansion revenue. Agreements should include mechanisms allowing:
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Additional user licences
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Feature upgrades
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Additional storage or usage tiers
By ensuring future orders are governed by the existing agreement, providers avoid the need for repeated contract execution.
Conclusion
A SaaS agreement is a foundational commercial and risk-management document for any technology business. Poorly drafted or incomplete agreements can expose founders and companies to significant legal, financial, and reputational risks.
Careful legal structuring of SaaS terms—including liability allocation, data protection obligations, service commitments, and IP ownership—is essential for scalable and investable technology businesses.
Need Assistance with SaaS or Software Agreements?
O’Reilly Law advises technology companies, founders, and investors on SaaS agreements, software development contracts, licensing structures, data protection compliance, and technology transactions.
If you require assistance in drafting, reviewing, or negotiating SaaS or software-related agreements, contact our team for specialist legal support.