Who keeps the customers when a channel deal ends

Four of our agreements leave the customers’ licences with you. They are the referral partner, plain reseller, value-added reseller (VAR, a reseller that adds its own services) and original equipment manufacturer (OEM, a business that builds your software into its own product) agreements.

Their customers usually accept your own end-user terms: the licence or service terms each customer agrees to. Some take terms the partner grants, such as a sublicence (a licence under the partner’s own licence from you), which you approved. When the channel deal ends, those licences continue.

Two kinds of partner sign the customers on their own contracts. One is a SaaS distributor, a distributor of your hosted software (software as a service). The other is a white-label partner, which sells your platform under its own brand.

So our agreements for those deals add a transition period, a way to move customers across and an export of their data. Each is explained below.

The table shows the position under each of our agreements. “You” means the vendor.

If you are the vendor, decide at the start who will serve the customers after the end, and write it in. If you are the partner, check that the agreement deals with existing customers, a transition period and data export. Partner terms that are silent on these points leave your customers exposed, and we always fill that gap.

During the transition period the partner may keep supplying and invoicing its existing customers. A white-label partner may also renew them. It may not take on a new customer without your written consent, and in a SaaS distribution no sales target applies.

If you cancel for the partner’s breach, the customers still get an emergency continuity period. You keep the service available for 60 days by default, so that they can move to another service. That applies only if the partner or the customers pay for the period. During it you may contract directly with an affected customer.

You must also help the partner move customers to another service during the transition period. That means technical information, documentation, interface specifications and access to people who know the service. The help is free if the partner ended the deal for your breach. Otherwise it is charged at rates stated in the agreement.

Our other channel agreements need no transition period, because their customers already license the software from you: see the table above.

If you are the partner, do not sign or renew a customer contract that runs past the transition period after the current term of your agreement. Our agreements forbid it unless the vendor confirms in writing that it will supply for longer. If you are the vendor, set the transition period, the emergency period and the rates for your help at signature.

The transfer of the partner’s rights and duties under a customer contract is called a cession (of rights) and delegation (of duties). Getting each customer’s consent when it signs avoids asking every customer again when the deal ends. In a SaaS distribution, the material customers are named in the agreement. For each one, you, the distributor and the customer sign a transfer agreement that states its date and deals with accrued rights, prepaid fees, service credits and claims.

Who may take the customers depends on how the deal ended:

• SaaS distributor. If you cancel for the distributor’s breach, you may offer the service to each customer yourself or through another distributor. When we draft for you, that also applies if the distributor chooses not to renew. Within 10 business days the distributor gives you a current customer list and helps you introduce yourself.
• White-label partner. Customers move to you or another supplier only through the transition terms and their advance consent.
• Plain reseller. Within 10 business days the reseller gives you a list of its customers and their subscriptions. When each subscription ends, you may sell to the customer directly or through another reseller.
• VAR. Each renewal is made with you or a reseller you appoint.

How you tell customers matters too. Neither side may tell customers about the end of a SaaS distribution or white-label deal except in a form both have agreed in writing. If they cannot agree within 10 business days, each may send a factual message, limited to what is needed to protect the customer’s service.

Our SaaS distribution agreement also requires a written continuity plan within 90 days after signing, reviewed every year. Moving customers is not meant to move a business or its staff: see our white-label page.

If you are the partner, put the consent wording in your customer contracts from the first sale. If you are the vendor, name your material customers at signature so that their move is planned.

Customer data means everything a customer and its users upload to, create in or process through the service, including the personal information in it. The agreement names the format, for example CSV and JSON files, with documents in their original formats. Under our SaaS distribution agreement you must test the export at least once a year.

We never make export depend on a fee. A partner that cannot get its customers’ data out cannot move them, so a paid-only export would undo the transition period.

Our reseller, VAR and OEM agreements contain no export term of this kind. The return or deletion of personal information at the end follows the separate data processing agreement: see POPIA in software channel deals. Who controls customer data during a white-label deal is explained on our white-label page.

If you are the partner, ask for a test export before you rely on it. If you are the vendor, state the standard export format at signature, so that only unusual requests are charged.

How each of our agreements deals with it:

• White-label partner. At the partner’s request, you promise not to approach its customers to win their business, and optionally not to deal with them at all. That runs for the agreement and 12 months after it, and never covers your own customers from before the deal. It protects the partner’s customer connections, not an area. It lifts if you cancel for the partner’s breach, or if the partner goes into liquidation (is wound up) or business rescue (a legal process for rescuing a company in financial distress).
• SaaS distributor. If agreed, you promise not to approach the distributor’s customers to win them away, for the agreement and 12 months after it. It does not cover your earlier customers, or a customer that approaches you unasked after the transition period. It lifts if you cancel for the distributor’s breach and, when we draft for you, if the distributor chooses not to renew.
• SaaS distributor’s own promise. When we draft for you, the distributor in turn may not compete or approach your customers for 12 months. But if it cancels for your breach, it may keep serving its customers elsewhere for the rest of their contracts and one renewal.
• VAR. When we draft for you, the VAR may be barred from competing for 12 months, only if it is still exclusive when the deal ends.
• Plain reseller, referral partner and OEM. No promise about customers after the end, either way.

Twelve months is our default, and longer needs a recorded business reason. No such promise is used where you and the partner compete. Whether a restraint can be enforced is explained on our competition law page, which also covers promises not to poach each other’s staff.

If you are the partner, ask for the vendor’s promise not to approach your customers, and check when it lifts. If you are the vendor, list your existing direct customers at signature so that the promise never reaches them.

The sell-off period covers the partner’s finished products that contain your software, such as integrated systems or devices. The rules are the same in both agreements.

• Within 10 business days after the end, the partner gives you a written list of the stock and commitments it will supply.
• It supplies them on the terms of the agreement, paying your fees or the royalty.
• When the period ends, it deletes or returns every remaining copy of your software and certifies that in writing.
• In the last 90 days before the end, it may not order or make more than the demand it can reasonably expect. That stops stockpiling before the end.

The other agreements work differently. A plain reseller has no sell-off period. When we draft for the reseller, it may renew each subscription ending within 90 days, once.

A SaaS distributor or white-label partner gets a transition period instead. A referral partner sells nothing itself.

If you are the partner, ask for a sell-off period long enough to clear your stock. If you are the vendor, expect the list within 10 business days, and check the last 90 days’ orders against it.

Do not leave survival to the law. Under the Copyright Act 98 of 1978, a non-exclusive licence granted by contract can be withdrawn only as the contract allows (section 22(4)). Where a VAR authorises a customer to do something its own licence lets it authorise, the Act treats that as done with your licence (section 22(8)). So the agreement must say that customer licences continue, and ours do.

When the agreement ends, the partner must also do three things:

• Stop marketing and supplying the software, except during any sell-off period.
• Stop describing itself as your authorised reseller.
• Return or delete every copy of your software and certify that in writing. A VAR may keep one copy to support existing customers.

A plain reseller’s customers contract with you from the start, so their subscriptions are not affected. More on our reseller page. For an OEM the rules are the same, and an embedded online service may run until each customer’s current subscription ends: see OEM agreements.

If you are the vendor, check that your end-user terms survive the end of every channel deal. If you are the partner, keep your records of each customer’s acceptance of those terms.

Two sections of the Companies Act 71 of 2008 matter most:

• The moratorium (section 133(1)). A moratorium is a temporary freeze. During the rescue, no legal proceeding against the company, including enforcement action, may be started or continued. The exceptions include the practitioner’s written consent and the court’s leave. Another is a set-off: deducting what the company owes you from a claim it makes against you.
• Suspension (section 136(2)). The practitioner may suspend, for the rescue, an obligation of the company under an agreement that existed when the rescue began. The obligation must be one that would otherwise fall due during the rescue. The practitioner may also apply urgently to court to cancel it. A party whose obligation is suspended or cancelled in this way has a claim only for damages (section 136(3)).

The freeze is on legal proceedings, not on cancelling. The Supreme Court of Appeal has held that cancelling an agreement is not “enforcement action” under section 133(1): Cloete Murray v FirstRand Bank [2015] ZASCA 39, para 33. So the partner’s right to cancel for the vendor’s breach stands in business rescue, and generally needs neither the practitioner’s consent nor the court’s leave. But cancelling may end the very supply its customers need.

Our agreements add four things:

• They can let a side cancel at once if the other begins business rescue, but only “to the extent that the law permits”. Whether such a clause works is not settled, so we never rely on it alone.
• They can let a side hold back what it owes in return for anything the other side does not deliver while it is in business rescue.
• Escrow releases the source code on business rescue, again only to the extent the law permits. A material failure to support, not remedied within 20 business days after the partner’s notice, is a separate release event. We take the view that a practitioner’s suspension of support can trigger it. See escrow below.
• After a release, the partner keeps paying for its continued supply, to the vendor or its practitioner. A paid continuation is harder to attack than a free one.

Liquidation. Liquidation, or winding up, closes a company down and sells its assets for its creditors. Our agreements can let the partner cancel at once if the vendor is placed in provisional or final liquidation or resolves to wind up.

That is also an escrow release event. Whether a release after a winding-up has begun can be challenged is not settled.

If you are the partner, take advice before you cancel, hold back payment or ask for the source code: each step can affect the others. If you are the vendor, your partners’ escrow and continuity rights are designed for your rescue, though the law on them is not settled. Their payments continue to your practitioner.

The release events. Our escrow agreement has one list of six events, used by every channel agreement:

• Liquidation. A provisional or final order to liquidate the vendor, or to sequestrate it (the insolvency process for an individual or a partnership). Its deregistration or its resolution to wind up also counts, as does the matching procedure under another country’s law.
• Business rescue. Business rescue proceedings begin for the vendor, to the extent that the law permits a release on that event.
• Abandonment. The vendor stops business or abandons the software, and no successor has taken over its support duties in writing.
• Support failure. A material breach of the vendor’s support duties that it does not remedy within 20 business days after the partner’s written notice.
• Early end of support. The vendor ends support before its minimum support period ends, other than for the partner’s breach. That period is 36 months in our OEM and white-label agreements.
• Transfer. The vendor transfers its rights in the software to someone who has not taken over support in writing.

The vendor may also instruct the agent to release. A change of control, someone new taking control of the vendor, is not a release event.

Deposit and procedure. The vendor keeps its code on deposit, and for a hosted platform the instructions for building and running it, but never customer data or live passwords. If the vendor disputes a release notice, an arbitrator (an independent person the dispute is referred to) decides while the agent keeps the code. How deposits and releases work in general is on our source code escrow agreements page.

The partner’s right after release. It may use, build, host, correct and support the released code, and keep supplying the product to the customers it had on the date of the release event. It may take on no new customers, and may show the source code only to its own staff and contractors bound to confidentiality. It may not sublicense the source code.

It may use the vendor’s trade marks only as the channel agreement allows, so check that the marks licence lasts long enough. The right survives the end of the channel agreement, unless the vendor had already cancelled it for the partner’s breach. Under our white-label agreement the partner may also, if agreed, take over running the platform itself.

It is not free. For each customer it keeps supplying, the partner pays the fees the channel agreement would have required. It may deduct the reasonable, documented cost of the support and fixes the vendor no longer provides, but may not set off a damages claim. The payments go to the vendor, or to its liquidator or business rescue practitioner.

What escrow cannot promise. The release licence is granted when the escrow agreement is signed, to take effect on release. Under the Copyright Act, a licence granted by contract can be withdrawn only as the contract allows (section 22(4)). A copyright owner’s licence also binds later owners, except a buyer in good faith without notice of it (section 22(7)).

So a licence granted at the start is harder to attack than a promise to grant one later. But no South African court has decided whether a release on business rescue survives the moratorium. Escrow improves the partner’s position; it does not guarantee continued supply.

Our reseller and referral agreements carry no escrow. Where a reseller’s customer needs it, the customer signs an escrow agreement directly with the vendor.

If you are the partner, ask for escrow on business-critical software, and for an OEM device or embedded online service. If you are the vendor, expect the request, and agree it with the fee terms that keep you paid after a release.

Business rescue is a Companies Act process in which a business rescue practitioner supervises a company in financial distress while a rescue plan is prepared. What the moratorium and the practitioner’s powers mean is explained above. For a vendor whose partner is in rescue:

• Cancelling for a breach. Cancelling is not “enforcement action” under section 133(1) of the Companies Act, so it generally needs neither the practitioner’s consent nor the court’s leave.
• Suspended obligations. The practitioner may suspend the partner’s obligations under the agreement, such as payment falling due during the rescue. Your claim for a suspended obligation is then for damages only.
• Holding back. Our agreements can let you hold back your own performance in return for performance the partner does not give.
• Liquidation. Our agreements can let you cancel at once if the partner is placed in provisional or final liquidation or resolves to wind up.

The customers come first either way. In a SaaS distribution or white-label deal they get a transition period or, if you cancelled for the partner’s breach, a paid emergency period. Under our white-label agreement, your promise not to approach the partner’s customers lifts once the partner goes into liquidation or business rescue.

If you are the vendor, take advice before you cancel, suspend supply or enforce a claim against a partner in or near business rescue. If you are the partner, remember that under our white-label agreement the vendor may approach your customers once you are in liquidation or business rescue.

The 60 days for giving notice run from the notice of the change or, if none was given, from when the other side learns of it. The rule works both ways. A partner whose vendor is bought by the partner’s competitor may leave, and a vendor whose partner is bought by its competitor may leave. A new owner that does not compete gives no right to leave.

Ending the agreement this way does not end the customers’ licences, and the usual exit terms on this page apply. A change of control is also not an escrow release event. The code is released only if the vendor transfers its rights in the software to someone who has not taken over support, or another listed event happens.

A change of control can also be a merger that must be notified to the competition authorities. Check that separately: see our competition law page.

If you are selling your business, list your channel agreements early: a buyer that competes with a partner gives that partner a way out. If you are the partner, give notice within the 60 days, or the right lapses.

That payment is optional and set per deal, as a percentage of the fees invoiced to the distributor in the 12 months before your notice not to renew. We never use a standard figure.

It applies only where the agreement renews automatically, because the payment is tied to your notice not to renew. When we draft for the vendor, our SaaS distribution agreement also says that no other payment for goodwill or compensation is due when it ends. That holds to the extent the law allows.

A termination charge is different. In our VAR, white-label and OEM agreements, it is the price a side pays for leaving early without a breach. It is not compensation for goodwill: see the VAR, white-label and OEM pages.

Goodwill in your brand. Goodwill in a brand can vest in a distributor that markets the goods so that the brand comes to indicate the distributor as their source. Whether it has is a question of fact: Etraction v Tyrecor [2015] ZASCA 78, para 18.

Section 36(1) of the Trade Marks Act 194 of 1993 protects continuous, good-faith use of a similar mark from before the owner’s own use or registration. A registered owner cannot stop that use.

So our reseller, VAR, SaaS distribution, white-label and referral agreements say that goodwill from the partner’s use of your marks belongs to you. The partner may not register your marks. Our SaaS distribution and white-label agreements also make it assign back to you any registration or goodwill it acquires, by a separate signed document.

If you are the partner and expect to build the brand in your territory, negotiate any payment at the start: the agreement is where it must be. If you are the vendor, keep the marks licence and its goodwill terms in every channel agreement.