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What is software as a service?

SaaS is a way of delivering a software product to customers, whereby the product is accessed by the customer via the internet. Access to the product (ie the service) is usually provided to the customer in exchange for either a subscription fee or a fee paid per use. This differs from the provision of software services by allowing customers to actually download and install the software on their own computing systems. SaaS customers can be individuals or businesses. 

A SaaS product exists in the cloud (ie a network of remote servers, rather than local servers or hardware). It is operated and maintained in a centralised manner by the service provider (ie the business providing the software product) rather than by its various users (ie the provider’s customers) individually. Essentially, a customer purchasing SaaS will be paying to use the seller’s services, rather than paying to ‘have’ their product (eg as you would have if you purchased a word processing programme on a CD-ROM years ago).

Although SaaS products are not downloaded software, some can be accessed via mobile apps. 

Some examples of types of software that are often provided as SaaS include:

  • payroll systems

  • email systems

  • sales and customer relationship management systems

  • information storage systems

  • legal document platforms

  • streaming platforms

Why do businesses use SaaS?

Running a software business using a SaaS model has many benefits for providers and customers. These include: 

  • they’re easier to keep up to date - there are no outdated versions of the software being run by different customers, so when suppliers introduce updates, they only need to be applied to the current software version. Centralised updates also reduce the effort customers need to put into keeping their software operational

  • flexibility for users - users of SaaS systems can access their systems and information from anywhere that they have internet access. They may also be able to change between various subscription models that their supplier provides (eg by purchasing a plan that allows them to store or process more data) as their personal or business needs grow or change

  • cost savings - customers often avoid the large upfront costs required to purchase and download a traditional software product. Instead, they can pay a regular subscription fee for SaaS or just pay to use the service when they require it. Offering services in this way can also help SaaS providers to draw business from their non-SaaS competitors

How do I sell or purchase a SaaS product?

Traditional software products are often provided for customers to use with a software licence (or ‘software licensing agreement’) (as well as a general contract of sale). A software licence is a form of intellectual property (IP) licence, by which an IP owner (ie the supplier) grants the customer the right to use their IP (ie the software). A software licence usually includes conditions on its use, for example, it may licence one or multiple people to use the software and may dictate how it can be used. For more information, read Software licensing and business.

SaaS products can also be provided with a licence granting the customer the right to use the software provided by the service in a certain way. As selling SaaS products also involves service provision, a Services agreement or a similar contract will also be in place to set out the terms for the provision of services more widely. Often, a services agreement will incorporate IP licensing considerations. For example, it may licence the customer to use the supplier’s software (IP), without a separate licence agreement needing to be created. 

Liability and indemnities

Contracts for SaaS products are often formed between businesses that each deal with multiple other customers. This makes it important to have adequate provisions limiting each party’s responsibilities in the event that a legal claim is brought against them. 

For example, if one party is accused of violating a third party’s IP or data protection rights, they may be able to claim compensation for any losses due to this claim. This is called an indemnity

For example, if a customer (let’s call this ‘Customer A’) of a business (‘Customer B’) that uses a SaaS supplier’s product for their customer service has their data protection rights breached, they may take legal action against the SaaS supplier. If successful, the SaaS supplier may have to pay Customer A compensation. An indemnity clause in the SaaS supplier’s contract with Customer B may allow the SaaS supplier to claim this money back from Customer B.  For more information, read Indemnity

A limitation of liability clause (ie restricting the legal claims that the other party to the contract can make and/or how much compensation they can claim) can be particularly important for SaaS providers. SaaS products are all about making their customers’ lives and businesses easier to manage. So, if a relied-upon system fails, this can be very damaging for a customer’s business. A SaaS supplier does not want to bear the losses incurred due to any failures in their systems beyond their control, and so clauses can be included in agreements which limit this liability. Both providers and customers should be aware of this when negotiating or signing agreements. For more information, read Limitation of liability clauses

If you need bespoke documents drafted (eg a software licence or terms and conditions for your SaaS product), consider using our Bespoke legal drafting service.

Data protection considerations when selling or using SaaS

Many SaaS products provide services to businesses, which help them to organise and manage their own businesses. For example, it’s common to use a SaaS product to hold a customer’s data to manage their customer service, staff payroll, or general data storage. Therefore, using a SaaS product requires businesses on both sides of the services relationship to be aware of the significant data protection obligations imposed on the parties.

If a business uses another business’ SaaS software to process (eg record, store, or organise) personal data (ie data from which individuals can be identified) about their customers, they are outsourcing data processing to the software provider. To ensure that this is done in compliance with the UK General Data Protection Regulation (GDPR) and the Data Protection Act 2018, certain data protection documents may need to be in place, including: 

For more information on data protection documents that may be needed for businesses that use or sell SaaS, read Data protection for businesses

Other considerations for SaaS providers 

A SaaS provider is a business like any other, and as such, they must be aware of multiple other legal matters. These include: 

  • protecting their intellectual property beyond licensing to customers - creating a new software product involves creating an innovative and valuable new piece of IP. You should consider protecting your IP to ensure no rival businesses can use and profit from your creations. For more information, read Protect intellectual property 

  • adhering to online business regulations - for example, by following legal requirements for the information you must provide to consumers (ie private individuals) when selling online. For more information, read Online business regulations

  • being aware of consumer rights - consumers have various rights enshrined in law, such as the right to cancel purchases within a certain period of time. Different rules often apply to the cancellation of purchases of digital products. For more information, read Consumer rights when purchasing digital content and Doing business with consumers 

If you have any questions about using or supplying SaaS, do not hesitate to Ask a lawyer.

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