A Step-by-Step Guide to Drafting SaaS Agreements

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Introduction

SaaS (Software as a Service) has revolutionized how software is delivered, shifting from licenses and installations to a subscription-based model accessed through the internet. But while the product may be hosted in the cloud, the responsibilities and expectations between service providers and customers must be grounded clearly, contractually, and comprehensively.

A SaaS Agreement governs this relationship. It defines what the provider delivers, how the client can use the service, what happens if something breaks, how data is treated, and much more. A vague or incomplete SaaS agreement can lead to payment delays, disputes over usage, or even lawsuits.

This guide walks you through every clause you need to include, how to write them well, and alternatives where different business models or client expectations apply.

1. Define the Scope of Services

This section sets the tone for the entire agreement. It tells the client exactly what the provider is offering and sets realistic boundaries for delivery and usage. It’s the “what are you paying for” section.

Start with a plain-English description of the software's purpose, such as:

“A web-based customer relationship management (CRM) tool for managing leads, sales pipelines, and customer interactions.”

You should then define the exact modules or functionalities included in the subscription, such as whether API access, mobile usage, reporting dashboards, or integration with third-party tools is available.

What to include:

• Functional description of the product
• Access method (web, mobile, desktop, API)
• Modules included (e.g., basic analytics, email campaign tools)
• Limitations (number of users, storage space, emails per month)

Alternative Options:

Some providers offer modular access or tiered plans. In that case:

• Include a table or annexure mapping out each feature per plan (Basic, Pro, Enterprise).
• Mention if features are subject to change or upgrade.

2. Identify the Contracting Parties

It is critical to define who is legally bound by the agreement. Even in B2B SaaS, a surprising number of issues arise when the contracting entity is unclear (especially when subsidiaries or franchises are involved).

The contract should clearly list:

• Provider’s Legal Name and Registered Address
• Customer’s Legal Name and Address (especially if they operate under a brand name)

Also include the Effective Date, which is when the contract begins.

Alternative Options:

If the SaaS is offered through a reseller or channel partner, specify whether the agreement is directly with the SaaS provider or the partner entity.

3. License Grant or Access Rights

Unlike traditional software licensing, SaaS agreements typically grant users access rather than ownership. The provider hosts the software, and the user accesses it remotely.

Clearly specify:

• That the software is licensed, not sold
• Access is non-exclusive, non-transferable
• Access is limited to the customer’s internal business use

You should also define restrictions such as:

• No reverse engineering, sublicensing, or sharing of login credentials
• Restrictions on concurrent users if applicable

Alternative Options:

For enterprise clients, providers may offer:

• Transferable licenses (useful for rotating teams)
• White-labeled access (for resellers or partners)

If that’s the case, adjust the language to reflect allowed flexibility.

4. Pricing and Payment Terms

This section must be unambiguous. Clearly lay out the fee structure and payment expectations to avoid billing disputes.

Explain:

• Subscription Fees (monthly, quarterly, annual)
• Whether fees are prepaid or postpaid
• Payment methods (credit card, bank transfer, etc.)
• Invoicing cycle and due dates
• Late fee penalties and grace periods

Example:

“Customer agrees to pay ₹15,000/month billed annually in advance. Payment is due within 15 days of invoice. Late payments incur interest at 1.5% per month.”

Alternative Options:

• Some SaaS companies offer usage-based pricing (e.g., ₹1 per 100 API calls). In such cases, describe metering, reporting, and billing logic.
• For pilots or early-stage deals, include free trial or freemium terms and the process for converting to a paid plan.

5. Service Level Agreement (SLA)

The SLA outlines the expected performance of the platform and what happens if those expectations aren't met.

Include details such as:

• Guaranteed Uptime (e.g., 99.95% monthly)
• Support response times based on issue severity
• Remedies for failing to meet SLAs (e.g., service credits)

Example:

“If monthly uptime falls below 99.5%, the customer is entitled to a 10% service credit applied to the next billing cycle.”

Alternative Options:

• High-risk clients (like fintech) may demand custom SLAs with financial penalties.
• Some providers offer tiered SLAs: Basic support for standard clients, Premium support with 24/7 access for Enterprise clients.

6. Data Ownership and Protection

This clause is non-negotiable for clients, especially in regulated industries like healthcare or finance. Customers need assurance that their data is safe, private, and owned by them.

Be explicit about:

• Customer retains full ownership of all data they upload or generate
• Data is not used for any other purpose without consent
• Security standards (e.g., AES-256 encryption, SOC2 compliance)
• Data location (some regions like the EU require local storage)
• How data will be returned or deleted post-termination

Alternative Options:

• For AI SaaS products, you may need to explain if user data is used for model training. If yes, anonymization protocols should be described.
• Include a separate Data Processing Addendum (DPA) if handling PII or sensitive data.

7. Confidentiality Obligations

This clause ensures that both parties agree not to disclose or misuse each other’s confidential information, such as source code, customer lists, or business strategies.

It should cover:

• What qualifies as confidential information
• How long the obligation lasts (commonly 2–5 years)
• Exclusions (e.g., public knowledge, required disclosures by law)

Alternative Options:

Some companies prefer a mutual NDA signed before entering into the SaaS agreement. If that’s the case, reference the NDA in this clause.

8. Intellectual Property Rights (IPR)

This section defines who owns the software and any new developments.

Clarify that:

• Provider retains all rights to the platform, source code, and improvements
• Customer owns their own data and content
• For custom integrations or features, specify whether ownership lies with the provider or if a license is granted to the client

Alternative Options:

• In co-development scenarios (e.g., custom-built dashboard), negotiate joint ownership or a royalty-free, perpetual license.
• For white-label platforms, define how IP is used under the client’s branding.

9. Limitation of Liability

This clause limits the amount each party can be held financially responsible for. It protects the provider from huge losses due to small errors and ensures both parties take balanced risks.

Typically, this includes:

• Caps on liability (e.g., 12 months of subscription fees)
• Exclusions for indirect or consequential damages (e.g., lost profits, business interruptions)
• Exceptions for gross negligence or data breach

Alternative Options:

Some enterprise clients may push for a higher liability cap or request uncapped liability for specific breaches (e.g., data loss, IP infringement).

10. Term, Renewal, and Termination

The agreement should state how long it lasts and how it can be ended.

Include:

• Initial term (e.g., 1 year)
• Renewal conditions (automatic or manual)
• Termination rights (for convenience or cause)
• What happens post-termination: data return, continued support access, etc.

Example:

“Agreement auto-renews for successive one-year terms unless either party gives 30 days’ notice.”

Alternative Options:

• Offer rolling month-to-month terms with shorter cancellation periods for SMB clients.
• Include early termination fees if the client exits mid-term in exchange for upfront discounts.

11. Warranties and Disclaimers

This section provides assurance to the customer while also protecting the provider.

A typical warranty might promise that:

• The software will function as described in documentation
• It will be free of malicious code or backdoors
• Any support or bug fixes will be handled professionally

Disclaimers should clarify that:

• No warranty is made for uninterrupted performance
• The software is not guaranteed to be error-free
• Liability for client misuse or third-party integrations is excluded

Alternative Options:

Add industry-specific warranties, e.g., compliance with HIPAA for healthcare clients or ISO standards for manufacturing platforms.

12. Indemnification

This clause explains when one party must cover the other’s losses if their actions cause legal issues.

Common examples:

• The provider indemnifies the customer for third-party IP infringement claims
• The customer indemnifies the provider for illegal use or misuse of the platform

Alternative Options:

Some clients will want the indemnity clause mutual, especially in custom development scenarios.

13. Governing Law and Jurisdiction

Always specify which law governs the contract and where disputes will be resolved.

Example:

“This Agreement shall be governed by the laws of India. All disputes shall be subject to arbitration under the Arbitration and Conciliation Act, 1996, seated in Goa.”

Alternative Options:

• Cross-border deals often include neutral jurisdictions like Singapore or London
• Some parties may prefer court litigation, while others opt for arbitration to ensure confidentiality

14. Miscellaneous Clauses

Though often overlooked, these clauses tie the agreement together.

Include:

• Force Majeure: Covers events like natural disasters or pandemics
• Entire Agreement: This contract overrides previous discussions
• No Waiver: One delay in enforcement doesn’t waive future rights
• Amendments: Must be in writing, signed by both parties
• Assignment: Can the client transfer the agreement to another entity?

15. Annexures and Addendums

Finally, attach all relevant documents referenced in the agreement to maintain clarity.

Typical annexures include:

• Detailed SLA
• Pricing sheet with add-on costs
• Privacy Policy
• Data Processing Agreement (DPA)
• Onboarding and Support Schedule

Final Checklist Before Signing

Before finalizing the contract, confirm:

• Have all legal and operational teams reviewed the content?
• Are annexures and references consistent and complete?
• Is pricing aligned with what was quoted in proposals?
• Are dispute resolution and SLA clauses fair and enforceable?
• Is the contract ready for eSign with proper version control?

Also read : Basics of signing a contract

Conclusion

A good SaaS Agreement is a reflection of professionalism, trust, and long-term thinking. It ensures that your customers know what they’re buying, how it’s delivered, what happens when things go wrong, and how data is handled.

By following this comprehensive structure and considering alternative models and scenarios you can draft a SaaS Agreement that is not only legally sound but also business-smart.

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