• May 2019
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At What Point Do SaaS Companies Typically Have a Formal Contract Signed vs. Relying on Terms of Service?

lawtrades contract creation

Software-as-a-Service businesses routinely list the terms of service in user agreements or on their websites. These terms are meant to establish the rights and obligations of the company and those employing the company’s software. Most companies expressly state that by using the company’s software the individual expressly and impliedly agrees to the terms of service. At some point, however, it becomes necessary to enter into formal contracts with the users of the company’s software. While agreeing to the terms of service may constitute a contractual agreement, entering into an express contract naming both parties and establishing terms specifically tailored to that relationship may be preferred.

In this article, we discuss the primary considerations for when to abandon reliance upon the terms of service in favor of an express contract.


How to Set Up Terms of Service to Be a Contract

Let’s begin with the understanding that including terms of service on a website is generally considered a contract. A contract consists of an agreement between two parties pursuant to which each side exchanges value with the other. There is generally an offer to provide value by one party in exchange for some form of return value. Then, there is and an acceptance by the other party of the other party’s offer. This can be either by providing the value demanded by the offeror (an unilateral contract) or promising to provide the value demanded (a bilateral contract). In either event, this forms an enforceable contract.

In the case of terms of service on a website, the SaaS provider is making an offer to users of the software. In exchange for using this service, you agree to the terms laid out in the terms of service. This will generally include some form of payment and agreement to limitations on how the software can be employed. Of course, there is always an argument that users were not aware of the terms of service. In such a case, there is an argument that there was no true meeting of the minds. This is an argument that no true contract existed. This would normally arise in a scenario where the SaaS provider is bringing a lawsuit against a software user for some sort of misuses or use that does not comply with the terms of service.

To avoid the above referenced scenario, it is advisable to make certain that any users of company software expressly agree to the applicable terms of service. This puts the onus upon the user to read the terms of service. This can be done by employing a click-through or check-the-box feature in the software before a customer is able to deploy it. This will solidify the argument that there is a contract between the SaaS provider and the user and the terms of the contract are listed in the terms of service.


Entering into a Formal Contract

While the terms of service may constitute a contract between the SaaS provider and software user, it is often advantageous to enter into an express agreement (contract) directly between the parties. This is the case when the terms of agreement between the parties need to be specified or tailored further than is possible or feasible in the terms of service.

This situation is common when the SaaS provider is contracting to provide the software under specific conditions to a business. It may be that the business is licensing multiple accounts. Or, it could be that the SaaS provider is somehow tailoring the software to meet the specific needs of the business. In such a case, the SaaS provider would not want to engage in customer software development without assurance that the terms of agreement between the parties is firmly memorialized in a contract. There can be any number of scenarios where the SaaS provider will undertake special efforts in providing services to an end user. It is best practice to memorialize these in a traditional, formal contract directly between the parties.



Contracts are the life blood of many businesses. This is particularly true for SaaS businesses that seek to scale their value offering. When entering into customized agreements with end users, its best to have a formal contract in place. The legal professionals at LawTrades can provide you with all of the advice and legal services necessary to establish a legally enforceable relationship.