Software as a Service (SaaS) is a unique business model that has some unique issues when it comes to the law. Effectively the centralized nature of SaaS products (in that the product is developed and hosted in one geographic region or country) coupled with the distribution model of being cloud-based, meaning that anyone, anywhere can access and use the product, makes the idea of legal jurisdiction a very important one during your contracting process.
One often overlooked but important aspect of a SaaS agreement is the choice of jurisdiction that governs the contract. The jurisdiction refers to the laws and regulations that govern the agreement, and the choice of jurisdiction can significantly impact the parties’ rights and obligations. The wording that reflects this will usually look something like this:
“This Agreement shall be governed by and construed in accordance with the laws of California without reference to conflict of laws principles. Any disputes under this Agreement may be brought in the state courts and the Federal courts located in San Diego, California, and the parties hereby consent to the personal jurisdiction and venue of these courts.”
It’s something that often comes up in contract negotiations and it can be an area of risk for SaaS companies, let’s have a look at why the jurisdiction a SaaS contract is governed by is important.
First and foremost, the choice of jurisdiction determines the legal framework that will be used in interpreting and enforcing the SaaS agreement. The laws governing SaaS agreements can vary very widely from different continents, country to country, state to state, or even province to province. Because of this, it is essential (but often really hard) to agree on a jurisdiction that is familiar to both parties to ensure that the agreement is enforceable and binding. For instance, if a SaaS provider based in the United States is entering into a contract with a client in the European Union, you’re put into a position where you need to negotiation a jurisdiction that is agreeable with the data protection laws that govern the European Union.
Another reason why the jurisdiction a SaaS contract is governed by is important is that it determines the court system that will have jurisdiction over any disputes arising from the agreement. Different countries have different court systems with varying procedures and processes. One of the core issues that arise with this for SaaS companies is that the issues that could arise for them from contract issues are often likely to be issues that affect a number of customers at once. If you think about the way a SaaS company provides its product to customers and the way it manages data, if there is a data breach for example, it’s more likely than not that this data breach will affect multiple issues. Breaching a contract with multiple customers in this way may trigger legal issues in multiple jurisdictions. Something that the majority of startups do not have the resources to deal with. Choosing a jurisdiction that is familiar to both parties can help in resolving disputes efficiently and effectively. Additionally, it is essential to consider the enforceability of judgments in a chosen jurisdiction. In some countries, judgments from foreign courts are not enforceable, which can result in parties being unable to recover damages or enforce their rights.
Moreover, the choice of jurisdiction can significantly impact the taxes and fees that the parties are required to pay. Different jurisdictions have different tax and fee structures that can impact the cost of doing business. For example, if a SaaS provider is based in a jurisdiction with high tax rates and enters into a contract with a client in a jurisdiction with low tax rates, the provider may be required to pay taxes and fees in both jurisdictions, significantly increasing the cost of providing the service. This is something to pay attention to when it comes to contracting with customers in other countries. There are a lot of times where a customer can withhold tax from a payment on your behalf unless you’re able to provide certain documentation such as company tax residence certificates.
The choice of jurisdiction can impact the level of protection afforded to the parties’ intellectual property rights. Intellectual property laws vary widely from jurisdiction to jurisdiction. Choosing a jurisdiction that provides robust protection for intellectual property rights can help in safeguarding the parties’ investments and ensuring that their proprietary information remains confidential. As a SaaS company you should always look to protect your IP rights in the country that they are developed or owned by the entity that owns them.
Finally, the choice of jurisdiction can impact the parties’ ability to comply with legal and regulatory requirements. Different jurisdictions have different legal and regulatory requirements that must be met to operate legally. For example, the European Union has stringent data protection laws that require companies to comply with specific data protection principles. Choosing a jurisdiction that is familiar with these legal and regulatory requirements can help in ensuring compliance and avoiding legal and financial penalties. By contracting in a jurisdiction that you’re not familiar with you may have some risk just in keeping up to date with your responsibilities.
The jurisdiction a SaaS contract is governed by is an essential aspect of the agreement that should not be overlooked. The choice of jurisdiction can significantly impact the parties’ rights and obligations, the court system that will have jurisdiction over any disputes, the taxes and fees that must be paid, the level of protection afforded to intellectual property rights, and the parties’ ability to comply with legal and regulatory requirements. As such, it is crucial to carefully consider the jurisdiction that will govern the SaaS agreement to ensure that it is enforceable, binding, and compliant with applicable laws and regulations.
How do SaaS companies deal with data sovereignty issues?
Although outside of the topic of legal jurisdiction of a SaaS contract it is becoming more and more common for companies to offer their customers the option to select where their data is hosted and create local business entities to handle this. The customers then contract with the local business entity which helps with the issue of the software provider and the customer being in two different geographic regions.
One reason for doing this is the ballooning need for compliance with data privacy laws. Different countries have different laws and regulations regarding data privacy and security. For example, the European Union has the General Data Protection Regulation (GDPR), which requires companies to adhere to strict data privacy and security standards. By allowing customers to select where their data is hosted, SaaS companies can ensure compliance with local data privacy laws. This can help SaaS companies that are based outside of the EU and looking to get into the EU market to access growth from more customers the opportunity to do so without a lot of the legal headache that can occur.
Additionally, offering customers the option to select where their data is hosted can provide them with both greater peace of mind but also it opens up more possible customers. Some customers may either feel more comfortable knowing exactly where their data is stored and who has access to it or they may have local requirements to have a copy of their data stored within the legal jurisdiction that they do business in (this is common for financial data, legal data or other highly sensitive data). By allowing customers to select the data center location, SaaS companies can provide a greater sense of security and control to their customers.
