If your software company is like most software companies these days, you likely set up a software interface and train your customers on how to use the product at the very beginning of the relationship. You probably even charge some sort of fee for these initial services that you provide. And the set-up process may run anywhere from days to weeks to complete.
Moreover, if you are like most companies, you are probably relying on a software license or SaaS Agreement which is either completely silent or almost completely silent on the specifics on how this “implementation” phase of the relationship will work, except for all of the fees you will be charging for the services. And you probably are charging your customer other fees on top of the implementation fees while the implementation process is ongoing.
If this sounds familiar, you are likely committing one of the most common contracting mistakes I see: leaving your company extremely vulnerable to a dispute over the implementation phase of your company’s software services.
Now, I know it is easy to say “I’ve always done things this way and I’ve never had a dispute.” I hear this from clients frequently as well as the argument “This is the real world. We don’t have the time to spend on such issues. You are just overlawyering.” However, from my side of the desk, whenever there is a customer dispute involving a software license or SaaS Agreement, it virtually always involves a dispute over an implementation process and the financial obligations tied to that implementation process.
Why is this? Well, software companies are largely using software licenses or SaaS agreements copied from other companies to contract with their clients. When they actually hire an attorney to draft a correctly drafted license or “SaaS agreement,” they retain the services of an attorney who lacks industry-specific knowledge about drafting these contracts and who fails to ask the right questions about the software company’s business model or set-up practices. And, in the rare cases where the software company actually does retain a knowledgeable attorney, the company may discount the importance of addressing the implementation process in the contract and not provide to the attorney the necessary information regarding the implementation process in order to enable the attorney to draft the appropriate terms required in the contract.
If you wonder what the “real-world” consequences are of this approach, they are as follows: if something changes at your customer’s company while implementation is continuing, your customer will likely call up an attorney like me to find a way to terminate your contract for material breach, and the attorney will point to the fact that the customer cannot use the software as intended to argue that a material breach has occurred. And then the customer or its attorney will demand a refund of all previously paid fees in conjunction with the breach. Alternatively, if the customer is a bit more aggressive, the customer may just terminate the contract for material breach and hire a litigator to pursue a breach of contract case against your company.
What can your software company do to avoid falling into the “implementation” trap with your software license or SaaS contract?
First of all, if you sell a software product that your customer cannot immediately utilize upon the execution of the software contract, you need to make certain there are well-drafted, company-specific terms regarding your implementation process in your contract. Those company-specific terms should address such issues as the specific milestones for your implementation process, what will constitute the successful performance of each milestone by the software company, what date each milestone will be completed, and what steps are required from the customer during the process and whether failure to perform any step constitutes a material breach or changes the software company’s implementation obligations in any way.
Second of all, if your software company will charge the customer fees for the implementation process or during the implementation process, your contract needs to contemplate how the fees are deemed “earned” in relation to the implementation services performed. It is not uncommon today to see contracts where hundreds of thousands of dollars are being exchanged during the implementation period, but if the contract does not actually articulate how those fees are earned by the software company, it could be argued that the fees were not actually incurred until the implementation process is complete and the customer provides final approval to the successful implementation. Also, if the contract is drafted in such a way that fees are being charged for services and functionality that are unavailable until a future date, this could be used against your company in a dispute to allege the occurrence of a material breach.
Third, if the customer is promised “training” as part of the implementation process, the specific terms of the exact training extended to the customer should be carefully defined. Does the “training” constitute pre-recorded webinars made available over the Internet, or does it constitute live, on-site, seminars taught by instructors on a particular date? Who can attend the “training”? When can they attend? How long will the training sessions last? What will be taught in the training sessions? Who absorbs the fees to provide the training sessions? What happens if the training sessions do not happen as scheduled? It is not uncommon for disgruntled customers to argue that they did not receive the training promised to them and that they were therefore unable to use the software as promised, and argue that this failure constituted a material breach.
The bottom line is that if your software license or SaaS agreement fails to provide detailed, company-specific terms on implementation and your software company does in fact have an implementation process that is necessary before a customer will “go live” with your software product, then you are leaving your software company very vulnerable to potential customer disputes. Taking the time to draft the appropriate customer contract terms before you retain a new software customer can significantly reduce your software company’s risk of a very costly customer dispute down the road.