Key Takeaways:

  • SaaS contracts define the rights, responsibilities, and liabilities between a software provider and the customer, often addressing data security, uptime, and damages.
  • Data breach liability provisions should clarify security standards, vendor obligations, and scope of financial responsibility, including direct and consequential damages.
  • Consequential damage clauses often limit vendor liability, with exceptions for gross negligence or intentional misconduct. Cyber-liability insurance can help mitigate risk.
  • Uptime commitments (e.g., 99.5% availability) are typically included in service-level agreements, with clear exceptions for maintenance and force majeure events.
  • Additional key clauses in SaaS contracts may include termination rights, intellectual property ownership, data portability, privacy compliance, payment terms, and change management processes.

SaaS contracts are legal agreements between two or more parties, including a software as a service provider and a customer.

Financial Liability for a Data Breach

A prospective SaaS customer might be worried by the idea of giving total control of important company data to a SaaS provider located off-site. Nowadays we constantly hear about new and massive data security breaches, often resulting from mistakes, espionage, cybercriminals, and other causes.

A vendor of a SaaS platform should be expected to handle certain tasks to reduce the data breach risk. Some of these tasks include:

  • Third-party reviews
  • Appropriate training of personnel
  • Use of adequate security technology
  • Firewalls

A vendor should also take steps to ensure that all security measures are certified.

Some industry experts have argued that since a SaaS provider is required to implement fully functional and robust security infrastructure to reduce the risk of data breaches and remain competitive, these types of vendors are actually more equipped to handle the protection and safeguarding of customer data. With this knowledge and experience in the area of security, the vendor is probably more equipped to handle secure data than the customer is equipped to handle their own data.

However, customers will typically still hold SaaS vendors liable and responsible for any breach, intrusion, unintended disclosure, damage, and data loss. In SaaS contracts, the vendor must accept liability for potentially massive consequences resulting from data breaches, intrusion, and loss. In a contract, consequential damages include any financial damages that could be foreseen and arise as the result of a breach. Those damages could exceed the cost of the SaaS substantially. Some of these examples might include the cost associated with notifying anyone affected by the breach and the cost of any business lost by the customer.

Data Ownership and Portability

In SaaS contracts, it is critical to clarify who owns the data stored or processed on the platform. Generally, customers retain ownership of their data, while the vendor has limited rights to use it for providing services or improving performance. The agreement should:

  • Explicitly state customer data ownership rights.
  • Define how and when the customer can export or retrieve their data, especially upon contract termination.
  • Specify acceptable formats for data delivery (e.g., CSV, API export).
  • Include timelines and support obligations for facilitating data migration.

Clear data portability provisions prevent vendor lock-in and ensure business continuity if the customer transitions to another provider.

Consequential Damage Liability

Most SaaS vendors are not liable for consequential damages. Doing so could result in a vendor having to go out of business after a single breach or loss of data. It isn't reasonable for a SaaS customer to expect a vendor to accept consequential damages, especially since these same customers often don't accept consequential damages in their own contracts with their customers. By choosing to accept the liability for full consequential damages, a SaaS vendor could be bankrupted after one breach.

Instead of trying to get a vendor to accept full consequential damages, it is better for a customer to look at options for liability related to direct damages from a loss of data. In a SaaS contract, this will typically be up to a limit agreed upon by both parties, such as the overall contract value or its multiple. The amount the SaaS vendor is expected to be paid over the life of the contract could also be a factor in the limit.

Additionally, a SaaS vendor should be responsible for at least some consequential damages when a data breach happens because of intentional misconduct or gross negligence on the part of the vendor. Cyber-liability insurance may be a good option for both the vendor and the customer. This type of insurance protects against data loss risks when one or both parties aren't able to offer the extent of the protection needed.

Termination and Renewal Clauses

Termination provisions outline the conditions under which either party can end the SaaS contract. Common elements include:

  • For cause: Either party may terminate if the other breaches a material term and fails to cure within a specified period.
  • For convenience: Some agreements allow termination without cause, with advance notice.
  • Automatic renewal: Many SaaS contracts auto-renew unless one party provides notice.
  • Post-termination obligations: Include data return, deletion, and final payment responsibilities.

Well-drafted termination clauses protect both parties from abrupt service loss and help manage operational risks.

Availability of the SaaS Application (Uptime Commitment)

Any SaaS customer should have a reasonable expectation that the software is functional and available to the degree that it would be if it were installed in their on-site computing environment. If a mission-critical SaaS application is not available, the customer's business and operations can be hit hard. Vendors should include in the SaaS contract sufficient warranties concerning performance and also remedies for any issues.

Any good vendor will agree that the application will be accessible and available at least 99.5 percent of the time, out of the 24 hours in a day, seven days in a week, and 365 days in a year. In a service-level agreement, a SaaS vendor might outline this part of the contract. Today's marketplace demands that a SaaS platform is available and accessible. Exceptions to this uptime commitment include routine maintenance upgrades and outages, which should be performed during non-peak times, as well as general outages and equipment failures that are outside the vendor's control.

Intellectual Property Rights and Licensing

SaaS contracts should clearly distinguish between ownership of the software and the license to use it. Customers typically receive a non-exclusive, non-transferable right to access and use the platform during the contract term. The agreement should:

  • Specify whether customizations or configurations belong to the vendor or customer.
  • Address rights to derivative works or jointly developed features.
  • Protect the vendor’s proprietary technology while granting the customer sufficient usage rights.

Including clear IP provisions helps prevent disputes over ownership of new developments and ensures compliance with licensing terms.

Frequently Asked Questions

1. What is typically included in a SaaS contract? A SaaS contract usually covers data security, uptime guarantees, intellectual property rights, payment terms, termination rights, and liability limitations.

2. Who owns the data in a SaaS agreement? In most cases, the customer retains full ownership of their data, while the vendor has limited rights to use it for service provision.

3. Can I terminate a SaaS contract early? Yes, if the agreement allows for termination for cause or convenience. Terms vary, so review notice periods and post-termination obligations carefully.

4. What is a standard uptime commitment in SaaS contracts? Commonly, vendors commit to at least 99.5% availability, excluding scheduled maintenance and uncontrollable outages.

5. Why is intellectual property important in SaaS contracts? IP clauses clarify who owns the software, customizations, and derivative works, preventing future disputes over usage rights.

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