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SaaS Agreements 101: Managing Risk with Liability Indemnification Clauses (Part 4)

Articles » SaaS Agreements 101: Managing Risk with Liability Indemnification Clauses (Part 4)

By Joanne Hue, published: 2023-03-21

A SaaS agreement is a legally binding contract between a company that provides software as a service and its client. These services mostly concern cloud-based applications that a client may subscribe to. After the subscription, the client can access these internet-based services in exchange for a recurring fee. The content of the SaaS agreement varies vastly based on the parties entering the contract. SaaS transactions carry a fair share of risks. Understanding the concepts of limited liability and indemnification is crucial to understanding the risks that are associated with SaaS. Customers can adopt methods to reduce the impact of these risks. A well-drafted SaaS agreement is vital to minimize the risks associated with the SaaS transaction. 

If you’re looking for templates to draft an efficient SaaS agreement, you can create SaaS agreements through Zegal’s templates.  

What are the risks associated with SaaS?

The transaction of software services may bear the following risks: 

  1. As the services are interned-based, they have limitations. These services are absolutely dependent on the network and any service disruption leads to disruption in services. Users often face issues with data bottlenecks and security vulnerabilities associated with their browsers. 
  2. The customers do not have control over the support, performance or availability of the service. They also do not have privacy over the customer’s data that may be stored by the SaaS provider. Most of the time customers are reliant on the good faith compliance of the provider. They do not hold the leverage to control potential exchanges of data by the provider with multiple clients. The clients may not always be aware of the location of the vendor’s server unless it has been specified in the agreement. If the provider faces insolvency or bankruptcy, the subscriber may lose access to the services.
  3. The effects and costs related to transferring the customer’s data to the SaaS system may be disproportionate.  
  4. Larger providers may form contracts that are aggressively beneficial to them. These contracts may include disclaimers for data losses, data security, breaches, service interruptions or backup. The vendor may also secure limited liabilities or remedies for the loss of the client. The provider may monitor the customer’s SaaS usage and employ its collection of data for third-party usage.

Minimizing and mitigating SaaS risks

If the customer has sufficient bargaining power, they may mitigate and minimise the problems associated with SaaS through the SaaS agreement. If the terms provided by the SaaS vendor are non-negotiable, the subscriber needs to consider their alternatives prior to entering any contract with the vendor. They can adopt the following measures to minimise the risk associated with their SaaS contract:

  • Align Your App Strategy with Your Business Strategy: The software that you are purchasing or using should align and cater to the needs of your business. In order to mitigate the risks associated with SaaS customers should align the software with the objectives of their business. This may be a particularly challenging task as companies tend to use a vast array of software services as they expand. However, it is an important step because the awareness of the applications brought to use by the company can help the company recognize what applications are truly helpful for the company. While creating a strategy for the application and its usage, the customer should answer how they may determine the type of SaaS application that their company requires and which SaaS application is tailored to their business strategies.
  • Gaining an insight into your employee’s experience: The technologies utilised by your company has a significant impact on the experiences of your employees. If you cannot collaborate with your employee they may feel disengaged or disoriented. Therefore, customers need to partner with business managers who understand what applications the employees in their company are using. This gives the subscribers a better understanding of how their employees feel about using the specific SaaS applications.
  • Understand the contractual obligations that you create with SaaS providers: The contractual obligation that a subscriber creates with the SaaS provider extends beyond cost. However, usage is just as significant. If only a limited number of employees can use the application at a time, the SaaS may not cater to the needs of the subscribers. Likewise, if an application is rarely utilised by the customers, then the price-to-cost ratio of the service may be disproportionate. This extends to certain features of the contract that the customer may not be using.
  • Create a roadmap for the adoption of the software: This can be considered the final step in the risk minimization of the SaaS. building a road map for application adoption can be done by setting realistic expectations. The customers need to make sure that their employees understand when and how they may access the software services. Creating a road map can be particularly helpful because it helps the customer make their workforce productive by critically weighing the cost and benefit of SaaS usage.

Limited Liability Clauses

A limited liability clause is a legal protection that a SaaS vendor may employ in their contract by restricting the customer’s ability to seek recovery for any potential damages. For instance, if the application has a bug or is dysfunctional for a period, and the company of the client bears damages, the limited liability clause prevents the client from seeking a remedy for the harm caused by the provider’s product. 

Usually, SaaS vendors draft limited liability clauses in the SaaS agreement considering the risks that are involved with their unique or developing products. Vendors may often seek to disproportionately benefit by limiting their liabilities in their contracts. The liabilities related to the provider are reduced or eliminated by putting disclaimers concerning the harms that may be caused by the vendor’s services.

Indemnification Clauses

 In any licensing transaction, indemnity is a key issue and it needs to be carefully reviewed. Most commercial agreements including the SaaS agreement include an indemnification clause. Indemnification clauses establish a responsibility for the licensor through which they have to bear responsibility for the damages. Usually, the SaaS agreement outlines the issues in which the SaaS vendor may have limited liability or may have to bear indemnity. Usually, indemnification clauses concern the damages caused to the third party. It is a standard part of software licensing agreements.

When it comes to commercial agreements, a key component that is often included is an indemnification provision. This is essentially an obligation for the licensor to be held responsible for any losses that can happen if an issue arises (sometimes the licensor can get an indemnity from the customer as well, but this is less common). For example, if you were to license a piece of tech, and there was an inherent flaw that ended up causing a data breach, the indemnification clause would clarify that you are responsible for things like legal fees or damages to the third party. While having an indemnification clause is a pretty standard part of tech-licensing contracts, there are some potential parts of a clause that can lead to greater issues. 

Conclusion

Often larger vendors tend to formulate contracts in a way that is disproportionately beneficial to their interests. They may do so b limiting the liabilities that they will have to bear for damages borne by a customer. This is a primary risk associated with SaaS agreements. Customers can minimize the risk prior to entering the contract by understanding their own needs in relation to the applications they access through the vendors.

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