What’s software as a service? Well, you take some software, and then you host it, so logically, a SaaS agreement is a licence agreement plus a hosting agreement, right? Wrong. This is a ‘licence+hosting’ model, but in reality, a SaaS agreement should not be drafted like that.

Don’t focus on the software, focus on the service. In fact, you don’t have to mention software at all in the agreement (who knows if your SaaS-based speech recognition technology is some cool software, or just a bunch of people in a call centre somewhere?).

There are 7 reasons why licence+hosting is a bad model to follow when drafting SaaS agreements.

1. 1. The supplier potentially has greater liability under a licence+hosting agreement; because if there is a failure in the software, it can generate two claims, one under the hosting part of the agreement, and one under the software licence part of the agreement.

 

1. 1. In a licence+hosting agreement the licensee has various rights (e.g. to disassemble and reverse-engineer) the software under the Computer Programs Directive. These rights do not apply to a SaaS scenario (except to the extent that there is some client-side scripting, which is normally Javascript, so accessible to the customer anyway, unless obfuscated).

 

1. 1. In a licence+hosting agreement, the customer will have the right to assign their licence to the software to a third party, under the principle set out by the European Court of Justice in the UsedSoft case. It would also enable the customer to assign the licence to a connected entity, to enable them to run the software on-premise, or to move it to another hosting provider (whether they can get hold of the executable code is, of course, a different matter). (You cannot contract out of this right, so the anti-assignment clauses in the agreement are not effective to this extent).

 

1. 1. It’s much more difficult to comply with free/open source software licence obligations (for GPL and other copyleft licences) in a licence+hosting model than in a SaaS model.

 

1. 1. Especially in a multi-tenanted service model, it’s easier to draft the contract so that it’s possible for the supplier to do work on the underlying codebase. This enables the supplier to add and deprecate functionality in a much more flexible way than with a traditional software licence and maintenance agreement (which normally has guarantees about maintaining specific functionality over time).

 

1. 1. In a licence+hosting agreement, the customer is (so far as the law is concerned) running the software, so the customer is potentially liable for IPR infringement claims (which they will insist they pass on to the supplier under an indemnity). In a SaaS model, the supplier is (so far as the law is concerned) running the software, so they will be primarily liable for IPR infringements, so there is no need for the supplier to give an indemnity to the customer (having said that, customers are rarely amenable to this argument, but it is becoming increasingly accepted).

 

1. In practice, SaaS agreements tend to be simpler than licence+hosting.

If you’re having a SaaS agreement drafted, talk through these issues with your lawyer.