Cloud service reseller agreements

Cloud services reseller agreements seem to be in vogue. Enquiries about agreements for the resale of software-as-a-service systems keep cropping up in my inbox, and I’ve taken on several instructions in the past few weeks.

Software vendors have long relied upon resellers to market and sell traditional software licences. Quite naturally, the reseller model is being extended to cloud services. But the legal issues – and the contract models – can be quite different.

There are three different approaches that I have come across, and another one that I haven’t seen in the wild, but that should work in the right circumstances. I call these:

• the subcontracting model
• the assignment model
• the agency model
• the referral model

In this post, I outline the main features of the different models, and highlight some of the advantages and disadvantages of each.

The subcontractor model

On this model, the cloud service provider enters into a contract for services with the reseller, and the reseller enters into a separate contract for services with the customer. The contracts are said to be “back-to-back” (although “back-to-front” might be more apt).

In some cases, there may be a single contract between the vendor and the reseller for the provision of services in relation to multiple customers; in other cases, each reseller-customer contract will be matched by a corresponding vendor-reseller contract, with the reseller agreement itself operating as a framework.

The advantages, disadvantages and features of the subcontractor model include the following:

• It is highly flexible.
• It can be messy, with multiple legal relationships between vendors, resellers and customers.
• Competition law prevents the the vendor from fixing resale prices or imposing a price floor – hence payments to vendors shouldn’t be calculated as a percentage of payments to resellers.  (They can however be calculated as a percentage of a price list issued by the vendor.)
• The ultimate service provider can be legally hidden, and the model can accommodates white-labelling of the service.
• It can accommodate sub-resellers.
• Depending upon the terms of the reseller agreement, the vendor may have limited influence over customers/end-users and contracts between resellers and customers.

The subcontractor model is particularly suitable where the reseller wants to bundle the resold service with its own services, under a single customer contract.

It is the only one of the four models allowing for the identity of the ultimate provider of services to be obscured.

The assignment model

This model is analogous to that used in classic software resale contracts. Here the reseller buys quantities of contracts from the vendor, and sells those contracts to its customers. In legal terms, the reseller assigns its rights and obligations under the contracts to customers – hence the “assignment model”.

This model does not fit easily with most cloud services. The assignment of rights and obligations is a one-off transaction, whereas cloud services are ongoing, and usually accompanied by ongoing payment obligations. If the reseller is stepping out of the picture once the contract has been assigned, that’s fine; but usually there will be ongoing customer-reseller rights and obligations. Ancillary contract arrangements can be put in place to deal with specific issues raised by this distinction. For example, a customer may be obliged by a side contract to make periodic payments to the reseller. However, in these circumstances the subcontractor model will usually work better.

As with the subcontractor model, the assignment model can accommodate sub-resellers.

This is the model I haven’t yet come across in the wild. Although it can “work” from a legal perspective, the agency model (below) will in many cases be a better fit. I can however imagine circumstances where the parties don’t want all the legal baggage of a principal-agent relationship, and may opt for the assignment model instead.

The agency model

The law of agency enables agents to enter into contracts on behalf of their principals. A reseller appointed as an agent may therefore enter into cloud services agreements on behalf of a vendor. The reseller’s rights to enter into contracts can be suitably circumscribed by contract, to provide some protection to the principal.

So, under the agency model, the customer contracts with the vendor. If the reseller is also providing software or services to the customer, then that should usually be dealt with through a separate contract.

One issue with the agency model is the fiduciary nature of the agent-principal relationship. In a fiduciary relationship, various rights and obligations are placed on each party. For instance, agents should always act in the best interests of their principles, and should not make any secret profits.

Quite often, vendors won’t want to carry the risks of allowing another to contract on their behalf. Resellers, on the other hand, won’t want to be subject to fiduciary duties to vendors.

Where the parties have a close relationship, however, the agency model can work really well.

(In case you’re wondering, the commercial agents regulations shouldn’t apply to agents for the resale of cloud services, as they’re expressly limited to agencies involving “products”.)

The referral model

The referral model is perhaps the simplest. The reseller refers customers to the vendor. The vendor tracks referrals, and grants some benefit to the reseller in relation to each contract entered into with a referred customer. Typically, the benefit will take the form of commission.

I have included this model because it may be used as a substitute or supplement to the above models, although strictly referrals aren’t sales, let alone re-sales.

In one agreement I looked at recently, the vendor’s partner organisations were free to choose whether to resell the vendor’s services under the subcontracting model or to simply refer customers to the vendor in exchange for commission payments.

Which model?

The choice of model isn’t a legal nicety. It fundamentally affects the relationships between vendors, resellers and customers. For this reason, you should speak to your lawyers early in the process of developing a SaaS or other cloud service reseller network.

If you have any questions about these different models, or would like a quote for the preparation of a cloud services reseller agreement, please do get in touch.