SaaS reseller agreements revisited

Back in October 2012 I wrote this post on the different relationship models that may be used in software-as-a-service (SaaS) channel partner agreements. To my surprise, the post provoked quite some interest. Since 2012, I've drafted and negotiated many more such agreements. Nonetheless, I still find that SaaS reseller agreements can be tricky; and if the initial approach isn't right, you can waste a lot of drafting and negotiation time.

This post is for those who wish to write a SaaS reseller agreement, perhaps for the first time, and would like some insight into the special issues these agreements present.

Definition of a SaaS reseller agreement

When I refer to a SaaS reseller agreement, I mean an agreement under which either:

  1. a software services provider (the vendor) grants to another business (the reseller) rights to enter into contracts with third parties (customers) as principal for the provision of the vendor's services to those third parties; or
  2. a process is specified under which the reseller may enter into such contracts.

Accordingly, this post is not concerned with referral or introduction relationships, agency-type relationships or any of the other possible models for SaaS channel partner contracts.

Bottoms-up?

There are two different ways in which the contractual terms obtaining between the reseller and the customer may be formulated, which I call top-down arrangements and bottom-up arrangements.

In a top-down reseller agreement, the terms upon which the reseller may contract with customers are set out in the reseller agreement, typically in a schedule, and often closely reflecting the standard customer terms of the vendor. This sort of agreement is more suitable for high-volume deals with SME customers (who are more likely to be content with the imposition of vendor terms).

If you want to use a top-down agreement with enterprise customers, you will need to ensure that it is not overly unbalanced and includes all the compliance provisions (covering for example information security, record keeping, anti-bribery and audit) that such customers commonly expect.

By contrast, in a bottom-up arrangement, the terms between vendor and reseller governing provision of the services arise out of the negotiations between the reseller and the customer. This sort of agreement can place a significant administrative and cost burden on both the reseller and the vendor, but may well be necessary for large corporate customers.

So, top-down agreements are generally better for both vendors and resellers, but are not always practicable.

Three's a cloud

On occasion, a customer will request that the vendor be added as a party to reseller-customer contract.

Where possible, vendors should resist this suggestion. If customers want a direct relationship with the vendor, it is better if the reseller steps aside, acting as a referral partner rather than a reseller. Resellers may resist this if they are keen to boost revenue, but from a lawyer's perspective that is a poor reason to agree a three party contract. Such contracts tend to be complex at the best of times, and even the most standard boilerplate clause can have unexpected implications when more than two parties are contracting. Three party contracts tend to be more expensive to draft and negotiation, and are more likely to contain mistakes, ambiguities and gaps. If the customer also needs services from the reseller, those can be dealt with under a separate contract between those parties.

From the customer's perspective, by contrast, a three party agreement may be advantageous, especially where it may be difficult to allocate responsibility for service issues between the reseller and vendor. In these circumstances, a customer may seek to impose joint and several liability on the vendor and reseller in relation to all breaches of contract.

Revenue sharing and price fixing

The parties often agree for a particular "commission" to be paid to the reseller, some percentage of the fees payable under the reseller-customer agreement, with the balance being passed on to the vendor.

This approach to payments is misleading. It is the vendor that is being paid by the reseller, not the reseller being paid by the vendor.

Worse, this approach can lead to the appearance or actuality of price fixing.

Suppose that I'm a software vendor, and I agree to pay 25% commission to the reseller in respect of the resale of my services. How am I going to protect myself from the reseller selling the services at a very low price? One way would be to specify that the services must be resold at some defined price, or alternatively not below some minimum price – but that would be (highly illegal) price fixing. I could rely upon the reseller's goodwill, but may be flimsy protection indeed, and in any case could create the impression that there is a non-contractual understanding to fix prices.

A better approach is to specify the percentage that the vendor will receive (in my example, 75%) and apply this to the greater of:

  1. the actual sale price (which the reseller is free to set); and
  2. some specified recommended sale prices.

Payment risks

Who takes the hit if a customer is late paying, or refuses to pay at all, or becomes insolvent before paying?

There is no simple answer here.

If the reseller is large enough to handle potential losses, "owns" the customer relationship, has some responsibility for delivery and/or has wide discretion over payments, then it may be more appropriate for the reseller to carry these types of loss.

If, on the other hand, the reseller is a small business, and the contract is just a "pass-through", it may be more appropriate for the vendor to bear the losses.

Value-added resellers

Resellers add value if they do more than simply sell-on the vendors services. Examples of services which may be provided by resellers include:

  • set-up services;
  • account management services;
  • support services (often first line support); and
  • integrated software-based services.

When appointing a value-added reseller, vendors should to the extent practicable clearly define the vendor's and the reseller's responsibilities.

A vendor may request indemnities from a reseller in relation to value added services; but unless the vendor is prepared to exploit an advantageous bargaining position, it can expect such a request to meet with a counter-request for equivalent indemnities in respect of the vendor's services.

Till insolvency do us part

How long should a SaaS reseller contract continue in force? In what situations should the contract be terminable? And, most problematic of all, what happens to reseller-customer contracts when the reseller agreement is terminated?

In addition to the usual provisions dealing with termination upon breach or insolvency, there should be some mechanism for the parties to exit the contract.

If the parties decide that reseller-customer contracts will continue in place following termination of the reseller agreement, than the reseller can be a little more relaxed about rights of termination.

If however reseller-customer contracts may terminate, or may be transferred to the vendor, upon the termination of the reseller agreement, the reseller should insist upon the protection of a reasonable minimum contract term and a reasonably long notice period for without-fault terminations that follow the end of that minimum term. In some contracts there may also be compensation provisions for resellers – for example where reseller-customer contracts are transferred to the vendor, the vendor may then begin paying commission to the reseller as if the reseller were a referral partner.

Mixed models and contractual complexity

I'm sometimes asked to prepare a document to cover both reseller relationships and referral relationships. There are some advantages to using a single document, but there are also disadvantages.

The main disadvantage is complexity: the addition of multi-aspect relationships to any contract tends to increase complexity considerably – and complexity leads to costs and mistakes.

The main advantage is that a single document is easier to maintain than multiple documents.

Final remarks

In this post I've discussed some of the special issues that SaaS reseller (and indeed some other kinds of services resale agreement) give rise to.

If you have any particular questions about your own SaaS-related contractual arrangements, or would like a quote from SEQ Legal, please contact me using this form or in the comments below.

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