SaaS Services, Implications of the representations and warranties

Everyone involved in technology contract negotiation has to deal with them, but do we really understand all the terms, implications of the representations and warranties that we spend so much time discussing?

Generally no – even the lawyers often don’t. And when you are talking about the unique issues associated with SaaS contract, that is even more true.

This post draws on the negotiation of a hundred or so SaaS services agreements to help shed some light on the issues that really matter.

A Very Small Dose of the Law

Before getting to the points you should keep in mind with your next negotiation, let’s define what representations and warranties are exactly. Technically, a representation is a promise that something is true at that moment in time, and a warranty is a promise that something will remain true in the future. A contract is nothing but a series of exchanged promises – you’ll give me something, and I’ll give you money, and we both agree on a bunch of other smaller points (that we each own our intellectual property, what state’s laws apply, etc.). So aren’t representations and warranties just more promises? That’s certainly what they look like:

“SaaS Service Provider represents and warrants to User that:
(i) it has the right, power, and ability to enter into and perform under this Agreement;
(ii) it has all necessary rights to grant the rights and licenses granted under this Agreement;
(iii) its performance under this Agreement and provision of the SaaS Services will comply with all applicable laws; and
(iv) it will maintain all licenses, permits and other permissions necessary to provide the SaaS Services.”

So yes, they are promises but special ones. Under the Uniform Commercial Code adopted in all states as well as the most common court interpretations, when a representation is breached the aggrieved party not only has a routine breach of contract claim, but also has a tort claim for fraud or deceit. If you are lucky enough not to have been sued before you may not know this, but there is a big difference in the damages you can get for a tort claim and the burdens of proof. Under a tort claim for deceit or fraud for breach of a representation, an aggrieved party can seek punitive damages, for example. Or can unwind the contract and get all payments back – even after likely receiving many of the benefits of the contract.

Similarly, while breach of warranty is a contract claim, the aggrieved party will win if the warranty is untrue – that is, the breaching party will be held to a strict liability standard, which is a much lower burden of proof than will apply to other contract claims. The legal logic is that the purpose of a warranty is to relieve the recipient from any burden of determining if the fact is true – so it is a critical basis for inducing the aggrieved party to enter into the SaaS contract deserving of this lower burden of proof. This makes sense for many warranties; would it even be possible to figure out at the time of signing if your SaaS service provider was complying with all applicable laws? And how could you make sure that they stay in compliance for the term of the agreement? Yet ensuring that your SaaS service provider stays compliant is critically important since your business could be substantially disrupted with little or no warning if they are shut down even temporarily.

So here are your takeaways so far:

• Reps and warranties are different and much more powerful promises;
• So give them and get them thoughtfully.

If a SaaS provider is not willing to give you at least the reps and warranties in the example above, you should be wary. They may have good reasons, but you should make sure you hear those reasons and agree. Conversely, if you are the one giving reps and warranties, make sure you understand the relevant parts of your service and your ability to comply.

Four Keys with SaaS Representations and Warranties

SaaS contracts are, at their core, service agreements and not software license agreements. As a result, much of the legacy language from the past 30 years of software licensing does not fit well. And the form files of the lawyers drafting SaaS agreements sometimes need updating for provisions that better fit.

While an exhaustive discussion of the pros and cons of the most common representations and warranties is beyond the scope of this post, I can offer some guidance.

1. Do not casually use “represent” or “warrant” anywhere in your contract except the representations and warranties section.

Many contract drafters will show that they care about a provision by ‘pumping up’ the promise with either “represent”, “warrant” or both. Rather than say “The SaaS Services will be available via an API connection for the Term” some customer’s lawyers will ask it be revised to “SaaS Service Provider represents and warrants that the SaaS Services will be available via an API connection for the Term.” There is a world of difference for the SaaS Service Provider between those two options. (And this “availability” promise should be addressed through your Service Level Agreement in any event, which is not something that is reasonably expected to be backed by a rep and warranty.)

2. If you give a rep and warranty, you can also limit what happens if it is breached.

The law in general and contracts in specific can and should conform to the deal that the parties both want. If getting a certain representation and warranty is important to one party, the other has the option to fence-in their potential exposure by stating what specific, limited recourse can be had if breached. This is most common when agreeing to a rep and warranty regarding intellectual property rights – “SaaS Service Provider represents and warrants that it is the legal owner of all intellectual property rights of the Service, or has received all intellectual property licenses or rights necessary to provide the service without further consent from any third party.”

It is common to specifically detail that breach of this rep and warranty will entitle the User to receive one of three alternative remedies – either the missing rights will be secured, or replacement and non-infringing intellectual property will be provided, or the User can get their money back. In this way, the parties will have narrowed the potential exposure and both will have a clear idea of how the situation will be handled. This is particularly key with newer technology based on intellectual property that has not been tested in the courts.

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3. Make sure you include a broad disclaimer of all other warranties.

Most technology contracts will include a warranty disclaimer, whether or not any warranties are provided. In a contract where warranties are provided, the disclaimer may look like this:

“Except as expressly provided in this SaaS Services Agreement, and to the maximum extent permitted by Law, neither party makes any warranties to the other party, and each party disclaims all warranties, oral or written, express, implied or statutory, with respect to its performance under this Agreement, fitness for a particular purpose, non-infringement and implied warranties arising from any course of dealing, course of performance or usage in trade.”

This key provision helps close off common ways that parties have been found to have provided unintended warranties, and should not be objectionable. But if overlooked it can have deep consequences.

4. Coordinate your reps and warranties with your Indemnities and Limitation of Liability

This is the topic of the next blog post, so apologies for the teaser. But it is key to sync your representations and warranties with the indemnification promises that each party provides the other as well as the limitation of liability provision (which should, for example, exclude either party from seeking punitive damages from the other to close-off one of the key threats of a breach representation).

So while every word in any contract matters, hopefully if you have read this far you now have a better appreciation that the words “representation and warranty” matter a bit more. Handle them with care.