7 Must-Have Elements in Your SaaS Agreement for Canadian Businesses

For any SaaS business, having a well-structured agreement is crucial to mitigate risk, ensure smooth operations, and maintain legal compliance. A SaaS agreement outlines the rights, obligations, and responsibilities of both the service provider and the customer. In this guide, we’ll break down the key components every SaaS agreement must include.


1. Service Level Agreement (SLA)

A Service Level Agreement (SLA) defines the expected performance levels of your SaaS product. This includes metrics such as uptime guarantees (e.g., 99.9% availability), customer support response times, service outage protocols, and procedures for a customer to obtain support or to report requested bug fixes. An SLA will also advise if the customer has any recourse or remedies against the service provider if they fail to meet the SLA’s requirements, such as monetary credits to apply against future subscription fees.  It may also specify if there are any options for a customer to terminate the SaaS agreement for cause of persistent software underperformance.

For both providers and customers, the SLA is a critical part of the agreement because it sets clear expectations and accountability for service delivery.

2. Intellectual Property (IP) Rights

Defining the ownership of intellectual property rights is a key consideration in SaaS agreements. At the basic level, the SaaS provider retains ownership of the software and any improvements made to it (including improvements based on feedback provided by the customer), and the customer is granted a license to use the software as part of the agreement. If the SaaS provider builds any customizations or customer-specific functions or dashboards, a customer may negotiate that they own the intellectual property rights to them, or at least the SaaS provider cannot commercialize the same deliverables for another client. Partes may also negotiate whether the SaaS provider has a license to use the customer’s collected data, usually in an aggregated and anonymized capacity, for various activities including benchmarking and developing software improvements. The SaaS contract may also address the use of third-party content or licensed components within the software.

For a SaaS provider, protecting your proprietary technology is essential. SaaS agreements will specify restrictions on reverse engineering, copying, or sharing the software outside of the terms agreed upon in the contract.

3. Data Privacy and Security Provisions

A SaaS agreement’s provisions regarding data privacy and security will depend on the type of personal information gathered about its users, where those users are located, and where the SaaS provider transfers, domiciles and processes that data. Failure to comply with the various international laws governing the protection of personal information may result in significant administrative fines, injunctions and criminal penalties.

In Canada, compliance with PIPEDA is a legal requirement for businesses that collect and store personal data. Your SaaS agreement should clearly outline how customer data will be collected, processed, stored, and protected. For SaaS providers with any international presence dealing with enterprise-level customers, the SaaS agreement is typically supplemented by a Data Processing Addendum (“DPA”), a supplemental contract that outlines how the SaaS provider (usually defined as the “processor”) handles personal data on behalf of the customer (usually referred to as the “controller”). The DPA will address international data transfers if the data will be processed outside of the country or region of the customer’s users.

A SaaS agreement will also detail the measures in place to prevent data breaches, encryption standards, and the steps that will be taken if a security incident occurs. These notice requirements must comply with regional laws and sector-based regulations and usually fall between 48 and 72 hours after an incident. Enterprise-level customers may also push SaaS providers to accept and comply with enhanced cybersecurity obligations and liabilities.

4. Payment Terms and Billing Cycles

SaaS agreements often operate on a subscription model, where customers are billed monthly, quarterly, or annually. The payment terms section of your agreement should define the pricing structure, billing cycles, and acceptable payment methods. It should also address what happens if a customer fails to make a payment, such as late fees or the suspension of services.

If project-based services, such as onboarding, API integrations, or customizations, are added to a SaaS provider’s engagement, order forms are typically appended to a master agreement, detailing a defined scope of work, milestone and payment schedules, team composition, workflow procedures and user acceptance testing criteria.

SaaS companies typically build their businesses’ valuation around an annual recurring revenue, whereby the SaaS agreements will push for automatic renewal of subscriptions.  SaaS providers should be aware of local consumer protection laws that may limit the enforceability of these auto-renewal clauses.

5. Limitation of Liability and Indemnification

Limitation of liability clauses are designed to protect your SaaS business from excessive legal responsibility in the event of a contractual breach. These clauses specify the maximum amount of financial liability that your business can face if something goes wrong. Many SaaS agreements will specify that their contractual liability is limited to a certain time period or percentage of trailing subscription fees received by the provider (for example, the fees paid by the customer over the previous 12 months).

However, it is not uncommon for enterprise-level customers to require carve-outs to these liability caps for damages caused by the SaaS provider’s gross negligence or wilful misconduct, or breaches related to cybersecurity incidents or privacy laws.  A SaaS provider should carefully review any deviations to their precedent agreement with their insurance providers.

6. Representations and Warranties

A SaaS agreement will typically have limited representations and warranties with respect to its software, usually prescribing that the software will not infringe on any third party’s intellectual property rights. Other than such limited representations, a SaaS agreement will specify that the software is provided on an as-is basis and that the provider makes no representation that the software is error-free or fit for any purpose. The customer’s recourse for a software’s failure to meet expectations is usually limited to the remedies provided in the Service Level Agreements (SLAs).

If a SaaS provider renders additional services or is engaged to provide project-related services, the SaaS agreement may provide for detailed user acceptance testing criteria and procedures, and limit warranties to reperform defective work after the customer has accepted the deliverables. A SaaS provider may also offer a customer a “Hypercare” product, where the provider would offer the customer an intensive, short-term support phase that takes place immediately after a new system, software, or feature goes live. The primary goal of hypercare is to ensure stability, quickly address urgent issues, and help customers transition smoothly to the new environment.

7. Termination and Renewal Clauses

The termination and renewal clauses in a SaaS agreement outline the conditions under which either party can end the contract. Common reasons for termination include breach of contract, non-payment, or failure to meet the agreed-upon service levels. Your SaaS agreement should also specify the notice period required to terminate the contract, and whether the customer has a right to terminate the agreement for convenience. Typically, a SaaS agreement may allow for an early termination provided that the customer does not expect to receive any pro-rated refund of any unused portion of their subscription term.

In addition to termination clauses, automatic renewal clauses should be carefully drafted. Local consumer protection laws may require businesses to actively notify customers before automatically renewing their subscriptions, ensuring that customers are not caught off guard by a renewal.

Conclusion

These are only a few of the major risk areas found in a SaaS agreement. A well-drafted SaaS agreement is vital for any software business, protecting both the service provider and the customer. By carefully allocating risk in these key components—service level agreements, the allocation of intellectual property rights, data privacy compliance, and more—you can ensure that your business is prepared for future growth.

At Gusto Law, we specialize in helping SaaS businesses draft and review legally sound agreements that protect their interests. Whether you’re starting out or scaling your business, we can guide you through the complexities of SaaS contracts. Contact us today for a free consultation and see how we can support your business’s legal needs.


Legal Disclaimer

This article is for informational purposes only and does not constitute legal advice. For specific legal advice, please consult a qualified lawyer.

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