The Data Act: What mandatory switching rights mean for fixed-term SaaS models

Our findings are: 

• The two-month “maximum notice” is not a general termination right but a switching mechanism that, once completed, results in termination of the contract.
• Fixed-term contracts remain permitted, but providers will likely be required to refund unused prepaid amounts if customers exit early, affecting ARR.
• Early termination penalties are allowed but must be proportionate, transparent and limited to actual losses net of any costs saved; full recovery of remaining contract value may be treated as a switching barrier under Article 23.
• A practical example is to tie penalties to elements such as upfront discounts or incentives, so customers cannot combine long-term discounts with early termination.

The right to switch and the impact on fixed-term contracts

Chapter VI of the Data Act introduces obligations to facilitate switching between data processing services, including IaaS, PaaS and SaaS (as outlined in the Commission’s FAQ). Under Article 25(2)(d), contracts must allow customers to initiate switching with no more than two months’ notice, with termination taking effect once the switching process is completed. In practice, this appears to give customers a unilateral termination-for-convenience right, even during a fixed term.

This framework conflicts with the commercial model many SaaS providers rely on to secure predictable ARR through pre-paid one- or multi-year subscriptions, often offered at a discount or with other incentives in return for longer commitments. As a result, fixed-term commitments risk being reduced to de facto month-to-month arrangements, undermining revenue predictability and discouraging providers from offering long-term discounts.

The nature and effect of the “maximum notice”

According to the European Commission expert group’s final report on the draft Standard Contractual Clauses (SCCs) for cloud switching, the “maximum notice” under Article 25 is not a general termination right. The Data Act does not create a statutory two-month termination right in all circumstances, but a mechanism that applies only in the context of specific circumstances, including switching.

During the switching period, providers must continue delivering the service and assist with data migration. Normal service fees remain payable, but no additional switching charges may be imposed beyond limited migration costs, and even these must be fully phased out by 2027.

Once switching is complete, however, the affected contract (or relevant part) terminates, and all terms, including payment obligations, come to an end. In practice, this means that although the notice itself is not a termination notice, the process ends in termination - usually after a total of three months (notice plus transition).

This raises the question of refunds. Neither the Data Act nor the SCCs address whether prepaid amounts must be reimbursed if a contract ends early. In the absence of EU-level rules, the matter falls back to national contract law for interpretation. For subscription-based services such as SaaS, which are generally treated as ongoing rather than one-off deliveries, the likely outcome is that providers will be required to refund customers for the unused portion of prepaid terms. This directly conflicts with the business model of pre-paid, fixed-term subscriptions and the predictability of ARR.

One possible alternative is to argue that SaaS subscriptions operate as time-limited licenses or rights of use delivered upfront, which would allow providers to retain the agreed fee even if the customer terminates early. While this could in theory protect ARR, it lacks legal support. 

Mitigating the impact with early termination penalties

Recital 89 appears to soften the commercial impact of the new regime by clarifying that fixed-term contracts remain permitted and that providers may agree proportionate penalties if customers terminate early. Yet the question of what constitutes a proportionate penalty is left open.

Two broad approaches have emerged. A more liberal view holds that proportionate penalties could equal the payments the customer would have made for the rest of the fixed term, effectively allowing the provider to recover most or all of the remaining contract value. This approach preserves ARR forecasts.

By contrast, a more conservative view is that proportionality requires deducting avoided costs (for example, reduced hosting, support, or licensing expenses) so that the penalty reflects only the provider’s actual net loss. This aligns with general contract law principles that damages must correspond to the actual net loss, with compensation reduced to the extent that costs are saved.

Assessed against the Data Act, the conservative view aligns better with its intent. Article 23 prohibits contractual barriers to switching, and penalties equal to the full remaining value without deducting avoided costs risk being treated as such. The same reasoning applies to clauses stating that prepaid fees for ongoing services are non-refundable, as these too could frustrate the customer’s ability to exercise the switching right in practice.

The more realistic interpretation is therefore that penalties should be limited to the provider’s actual net losses, which makes them unlikely to fully safeguard SaaS revenue models.

Practical application and drafting of early termination clauses

The practical effect is that, to remain compliant with the Data Act, providers must adapt fixed-term contracts to include switching provisions and transparent early termination penalties reflecting actual losses.

Providers are not required to introduce a blanket two-month termination right or a general refund obligation. Instead, switching clauses should closely follow the approach set out in the SCCs, ensuring they deliver the intended effect of the Data Act without unintentionally expanding customer rights beyond what is required.

For early termination penalties, the absence of a uniform standard means national law will determine what is proportionate. Providers should be prepared to justify penalties by reference to concrete, amortised costs of each customer relationship, such as onboarding, training, waived setup fees, or other upfront investments. 

A practical example is to link penalties to upfront discounts or incentives. Customers may still benefit from reduced rates for committing to longer terms, but if they exit early, those benefits are clawed back. This ensures that switching rights remain effective, while preventing customers from taking both the discount of a long-term commitment and the flexibility of early termination at the provider’s expense.

In short, while the Data Act reduces ARR predictability, fixed-term SaaS models remain viable if contracts are carefully drafted to clearly identify recoverable costs and allow proportionate recovery when customers exit early.