In the current economic climate, SaaS customers often delay payment of invoices. In order to protect your SaaS business and improve your cash flow, you should consider including the following in the terms of your SaaS agreement.
Right to Claim Interest
There is no requirement to have an interest clause in your SaaS agreement, as you have a statutory right to claim interest on late payments from a business customer (BTB) under the Late Payment of Commercial Debts (Interest) Act 1998 (“Act”). The statutory interest rate to be applied is the applicable Bank of England Base Rate + 8%.
Alternatively you can specify a specific interest rate in your SaaS agreement. This can be a number i.e. 7%, or a reference to an index i.e. the European Central Bank base rate, or a combination of both i.e. the Bank of England base rate + 2%. The interest rate specified can be higher or lower than the statutory rate. Note that if you specify an interest rate in your SaaS agreement, the statutory rate will not apply, even if the interest rate you specify is lower than the statutory rate.
SaaS suppliers should therefore consider the following when deciding whether or not to include an interest clause and specific interest rate in the terms of their SaaS agreement.
- By specifying an interest rate in your SaaS agreement you are inviting a business customer to negotiate a lower rate. If you have a weaker bargaining position, you may have to agree to a rate much lower than 8.5%;
- Time and money could be wasted on protracted negotiations on which index to use and the % rate applicable;
- Many SaaS customers are not aware that you have a mandatory right to claim interest on late payment and that the statutory rate will apply.
Right to Claim Compensation
In addition to claiming statutory interest from a SaaS customer, under the Act you are also entitled to a fixed amount of compensation. The amount is based upon the amount of the outstanding invoice:
- £40 – for debts less than £1,000;
- £70 – for debts between £1,000 to £9,999; and
- £100 – for debts over £10,000.
Recovery of Costs
Since the 16th of March 2013 SaaS suppliers have the additional right to claim the difference between the fixed compensation amount and their reasonable costs in recovering the debt e.g. appointing a debt recovery company or lawyer. However this right only applies to debts accrued after the 16th of March 2013.
Right to Terminate or Suspend SaaS Services
If a SaaS customer fails to pay you on time this will be in breach of contract – but not a fundamental breach (which permits you to terminate the SaaS agreement and claim damages). SaaS supplier’s should therefore state in their SaaS terms and conditions that “time is of the essence” for all payments. If the SaaS customer then fails to pay on time you can terminate the SaaS agreement immediately without notice and claim compensation. However many SaaS customers will not agree to time being of essence.
Alternatively you could include the following specific rights in the SaaS agreement to achieve the same result:
- the right of the SaaS supplier to terminate the SaaS agreement for late or non-payment; and/or
- the right of the SaaS supplier to suspend delivery of the SaaS Services until payment is received.
Irene Bodle is an IT lawyer specialising in SaaS agreements with over 10 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:
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