Software-as-a-Service agreements have become ubiquitous in modern business operations. Companies of all sizes rely on cloud-based software for critical functions from customer relationship management to financial operations. Yet many businesses sign SaaS agreements without careful review, accepting vendor-favorable terms that can lead to significant liability exposure, unexpected costs, and operational disruptions. Understanding common red flags helps you negotiate better terms and avoid costly mistakes.

Unlimited Liability Exposure

Perhaps the most dangerous provision in any SaaS agreement is unlimited liability for the customer. Many vendor agreements include broad indemnification clauses requiring customers to defend and indemnify the vendor against virtually any claims arising from the customer's use of the service, regardless of whether the vendor's own negligence or defects contributed to the problem.

These provisions can expose your business to catastrophic liability far exceeding the value of the software subscription. For example, if a data breach occurs due to vulnerabilities in the vendor's platform, but your data was involved, you might be required to indemnify the vendor for regulatory fines, litigation costs, and other damages potentially totaling millions of dollars.

Look for indemnification provisions that are mutual and appropriately limited. Each party should indemnify the other only for claims arising from their own negligent or wrongful conduct. The indemnification should be subject to the same liability caps that apply to other damages. Resist vendor attempts to impose one-sided indemnification obligations without corresponding vendor obligations.

Inadequate Service Level Commitments

Many SaaS agreements include either no service level agreement (SLA) at all, or SLAs with inadequate uptime commitments and meaningless remedies. A vendor promising 99% uptime might sound good, but that actually allows for over 87 hours of downtime per year - more than three full business days. For mission-critical applications, this could be devastating.

Even more problematic are SLAs that provide only service credits as remedies for downtime. If your business loses $50,000 in revenue due to a day-long outage, a credit for one month's service fee of $1,000 provides inadequate compensation. Some vendors exclude certain types of outages from SLA calculations entirely, including scheduled maintenance, network issues, or problems they deem beyond their control.

Negotiate for uptime commitments appropriate to your business criticality - 99.9% or higher for essential applications. Ensure that SLA credits are meaningful, potentially tied to the actual impact of downtime on your business. Require transparent uptime reporting and verification. Most importantly, ensure that SLA breaches give you termination rights if the vendor repeatedly fails to meet commitments.

Excessive Data Rights and IP Claims

Some SaaS agreements include provisions granting vendors overly broad rights to your data. These might include perpetual licenses to use your data for vendor's own purposes, rights to create derivative works from your data, broad licenses to share your data with third parties, or claims of vendor ownership over analytics or insights derived from your data.

Your business data is valuable, and you should not grant vendors unlimited rights to exploit it. Particularly concerning are provisions that allow vendors to aggregate and commercialize data across their customer base, potentially including your confidential business information in their benchmarking products or sharing competitive intelligence with your rivals.

Carefully review data ownership and licensing provisions. Ensure you retain all ownership rights to your data. Limit vendor's ability to use your data only to what's necessary to provide the service. Prohibit sharing of your data with third parties except as necessary for service delivery and subject to confidentiality obligations. For sensitive data, negotiate specific restrictions on vendor's ability to access, process, or derive value from your information.

Vendor Lock-in Through Data Hostage Tactics

Related to data rights are provisions that make it difficult or impossible to retrieve your data upon termination. Some agreements allow vendors to delete customer data immediately upon termination, charge exorbitant fees for data export, provide data only in proprietary formats that can't be easily imported into competing systems, or impose unreasonably short windows for data retrieval.

These provisions create vendor lock-in by making switching costs prohibitive. Even if you're dissatisfied with service, you may feel compelled to continue the relationship rather than lose access to years of accumulated data.

Negotiate clear data portability rights including the right to retrieve all data in standard, machine-readable formats at no charge, a reasonable period (at least 30 days) after termination during which you can access and download data, and vendor assistance in migrating data to replacement systems if needed.

Unilateral Modification Rights

Many SaaS agreements give vendors unilateral right to modify terms, pricing, or functionality at any time with minimal notice. This creates significant uncertainty about your future obligations and the service you'll receive. Vendors can increase prices dramatically, eliminate features you rely on, impose new restrictions on usage, or change security practices - all without your consent.

While some flexibility is reasonable given the nature of cloud services, completely unilateral modification rights are problematic. At minimum, ensure that material changes to pricing require advance notice (at least 90 days) and give you termination rights if you don't accept the changes. For changes to functionality or terms of service, negotiate similar protections. The agreement should clearly define what constitutes a material change requiring notice and opt-out rights.

Inadequate Security and Compliance Obligations

For SaaS vendors handling sensitive data, vague or absent security commitments create significant risk. Generic promises to maintain "reasonable" security are inadequate. Your agreement should specify concrete security requirements including encryption standards for data at rest and in transit, access controls and authentication requirements, security audit rights, and incident response obligations including specific timelines for breach notification.

For regulated industries, ensure the vendor commits to compliance with applicable regulations such as HIPAA for healthcare data, PCI-DSS for payment card information, SOC 2 for general security controls, or GDPR for European personal data. The vendor should provide evidence of compliance through certifications or audit reports and update these regularly.

Negotiate audit rights that allow you or your auditors to verify vendor's security practices. For high-risk data, consider requiring third-party security assessments. Ensure breach notification obligations are specific - the vendor should notify you within 24-48 hours of discovering a breach affecting your data, not the vague "promptly" or "without undue delay" language common in vendor agreements.

Automatic Renewal Traps

Auto-renewal provisions are standard in SaaS agreements, but problematic terms include automatic renewal for multi-year terms without opt-out rights, short notice windows for termination (30 days or less before renewal), automatic price increases upon renewal without notice or caps, and penalties for mid-term cancellation that apply even to renewed terms you didn't actively choose.

These provisions can lock you into long-term commitments with unfavorable economics. I've seen businesses accidentally renew three-year agreements they wanted to terminate simply because they missed a 30-day notification window buried in the contract.

Negotiate for reasonable renewal terms: automatic renewal for periods no longer than one year, notice periods of at least 90 days before renewal, caps on price increases, and clear termination rights. Consider negotiating for affirmative renewal rather than automatic renewal, particularly for large or multi-year commitments.

Warranty Disclaimers

Many SaaS agreements disclaim virtually all warranties, stating that the software is provided "as is" without any warranties of merchantability, fitness for particular purpose, or even basic functionality. This means if the software doesn't work as described, fails to meet your needs, or causes problems, you may have no recourse.

While vendors legitimately cannot warrant that software will be error-free or meet every possible use case, complete warranty disclaimers are unreasonable. At minimum, vendors should warrant that the software will substantially conform to its documentation, that they have the legal right to provide the software and won't infringe third-party IP rights, and that they will comply with applicable laws in providing the service.

Push back against complete warranty disclaimers. Negotiate for specific warranties appropriate to your use case. If the vendor sells the software for a particular purpose, they should warrant fitness for that purpose. For enterprise agreements, warranty protections become negotiating points that can be won even from vendors with standard "as is" terms.

Limitation of Liability

Nearly all SaaS agreements limit vendor liability for damages. While some limitation is reasonable, watch for caps that are too low relative to potential impact (many vendors cap liability at fees paid in the prior 12 months, which might be just a few thousand dollars even though a breach or outage could cost you millions), exclusions of all consequential damages even when caused by vendor's gross negligence, and one-sided limitations that don't apply equally to customer's liability to vendor.

Negotiate liability caps that reflect the actual potential damages. For mission-critical applications, caps should be higher than for nice-to-have tools. Ensure that liability caps don't apply to certain critical obligations like confidentiality breaches, IP indemnification, or gross negligence. Make sure limitations apply equally to both parties.

Jurisdiction and Dispute Resolution

Buried in the back of most SaaS agreements are provisions specifying where disputes must be resolved. Vendors often require litigation in their home jurisdiction, potentially requiring you to travel across the country and hire local counsel for any dispute. Some require binding arbitration with rules favorable to the vendor, prohibit class actions even for systemic issues affecting many customers, or impose short time limits for bringing claims.

These provisions can make pursuing legitimate claims impractical. If a $10,000 dispute requires you to litigate in a distant state, the costs may exceed the amount at issue, effectively preventing you from enforcing your rights.

Try to negotiate neutral jurisdiction or your own jurisdiction for disputes. If arbitration is required, ensure the rules and location are reasonable. Preserve your right to seek injunctive relief in court for critical issues like data breaches or IP disputes that require immediate action.

The Review Process

When reviewing SaaS agreements, don't rely solely on vendor summaries or sales representations. Read the entire agreement including all referenced policies and terms. Vendor sales teams often misrepresent what agreements say, either through lack of knowledge or desire to close the deal. Verbal promises that aren't in the written agreement are generally unenforceable.

Pay particular attention to sections on data rights, liability, security, termination, and pricing. These areas present the greatest risk. For enterprise agreements or business-critical software, have legal counsel review the agreement before signing. The cost of review is minimal compared to the potential liability and business disruption from problematic terms.

Remember that SaaS agreements are negotiable, particularly for enterprise customers or longer-term commitments. Vendors may present agreements as non-negotiable, but most will make concessions when asked, especially for significant deals. The worst they can say is no - and even then, you've identified the issues and can make an informed decision about whether to accept the risk.

Conclusion

SaaS agreements create ongoing relationships that can last for years and affect critical business operations. Taking time to identify and address red flags before signing protects your business from liability exposure, operational disruptions, and excessive costs. Whether negotiating as a customer or as a SaaS provider trying to create balanced agreements that attract sophisticated clients, understanding these common issues leads to better outcomes for everyone involved.