From April 2014 the UK government plans to change the Insolvency Act under the provisions of the Enterprise and Regulatory Reform Act 2013 (ERRA). This will make a SaaS supplier’s right to terminate or alter the terms of an existing SaaS agreement void if a SaaS customer becomes insolvent. From this data no SaaS agreement may be terminated or have the pricing and payment terms changed due to a customer’s insolvency. Furthermore the SaaS supplier must continue to provide SaaS services without receiving any payment or having any right to arrears.
Section 233 of the Insolvency Act 1986 prevents suppliers of gas, water, electricity and telecoms from ceasing to supply utilities to insolvent customers. ERRA will widen the scope of section 233 to anyone designated by the Secretary of State as providing essential services and includes the “supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means” i.e. an IT supplier. All SaaS suppliers could fall within the scope of ERRA.
The terms of existing SaaS agreements and any agreements entered into after April 2014 will be affected as follows:
- SaaS suppliers will no longer be able to withdraw or suspend the supply of SaaS services from insolvent SaaS customers;
- SaaS suppliers will no longer be able to make it a condition of continuing to supply SaaS services that all outstanding debts are paid;
- SaaS suppliers will no longer be able to “unfairly” or “unreasonably” increase prices for the continued supply of SaaS services to an insolvent customer; and
- Sub-contractors of SaaS suppliers, such as the hosting centre, backup providers or software developers may also be obliged to comply with the ERRA in relation to the SaaS provider’s insolvent customer.
Protection for Suppliers
SaaS suppliers should however be partially protected against being tied into loss making SaaS agreements, by being given the following rights:
- to request a personal guarantee for payment from the insolvency practitioner of the insolvent customer as a condition for continuing to supply the insolvent SaaS customer;
- to terminate the SaaS agreement if the relevant insolvency practitioner or a court agrees;
- to terminate the SaaS agreement if post-insolvency charges are not paid within 28 days of the date that they fall due.
However such safeguards need to be introduced by secondary legislation.
Avoiding Potential Problems
SaaS suppliers should now check the terms of agreements with sub-contractors to ensure they are not liable to sub-suppliers for providing services to insolvent customers unless the SaaS supplier itself receives payment from the insolvent customer i.e. a software developer is working on a project specifically for the insolvent SaaS customer under a consultancy agreement.
SaaS suppliers should also review the terms of their existing SaaS agreements, in particular to check that:
- SaaS customers have no right to assign the SaaS agreement, then an insolvency practitioner will not be able to transfer it; and
- regular price reviews are built into the terms so that prices do not remain static indefinitely.
The consultation process on the changes to the Insolvency Act is not yet finalised and SaaS suppliers should therefore look out for further developments.
Irene Bodle is an IT lawyer specialising in SaaS agreements with over 15 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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