Should service credits be the only remedy for a missed SLA?

Service levels in a testing contract only matter if something happens when they are missed. Service credits are the usual answer: a reduction in the next invoice for each miss. The question is what else, if anything, the buyer can do.

Many vendor templates answer "nothing". They state that service credits are the buyer's sole and exclusive remedy for a service level failure. This post explains why that wording weakens the agreement and what public contract models do instead. It is not legal advice; ask your counsel to review the final terms.

What sole-remedy wording does

If credits are the only remedy, then for any service level failure:

• the buyer cannot claim damages beyond the credit;
• the buyer may struggle to argue that repeated misses are a breach that justifies termination;
• the credits are usually capped, so the vendor's exposure has a known ceiling.

For a vendor, that is a predictable cost. For the buyer, it turns a service level into a discount schedule. A team that consistently misses regression deadlines before releases may cost the buyer far more in delayed or failed releases than any credit returns.

How a public model handles it

The UK government's Model Services Contract (MSC) takes a middle position. Its Core Terms say that service credits shall be the buyer's exclusive financial remedy for a KPI failure, except where:

• the supplier has accrued credits above the service credit cap over the previous 12 months;
• the failure breaches the relevant KPI service threshold;
• the failure arises from the supplier's wilful default;
• the failure results in corruption or loss of government data, or in the buyer having to compensate third parties;
• the supplier has fraudulently misreported its performance;
• the buyer is otherwise entitled to terminate, or does terminate, for the supplier's default.

The MSC also has a separate regime for an unacceptable KPI failure, under which the buyer may withhold the charges for that service period, without prejudice to its right to terminate or claim damages. Material failures trigger a rectification plan process.

So even a model that uses the phrase "exclusive financial remedy" keeps termination and damages open where credits would be inadequate.

Set credits at a sensible level

The MSC buyer guidance warns that overly onerous KPIs drive costs upwards and that pre-agreed service credits should not be set at punitive levels. Vendors price the risk of credits into their rates. A credit regime that is harsh on paper will make the proposal more expensive and invite disputes about measurement.

Regulator expectations

For EU financial entities, Article 30 of the Digital Operational Resilience Act requires contracts for ICT services supporting critical or important functions to include precise quantitative and qualitative performance targets, so that corrective action can be taken without undue delay when service levels are not met. The 2023 US interagency guidance on third-party relationships describes service level agreements as a way to monitor performance, penalise poor performance or reward outstanding performance, and warns against measures that encourage volume or speed without regard for accuracy.

What to insist on

• Credits as a price adjustment. State that credits reflect reduced value and are not an estimate of loss, and that they do not limit other rights except as stated.
• Exceptions to any sole-remedy wording. At least: repeated failures above a threshold, wilful default, data loss or corruption, misreporting, and cases where you have a right to terminate.
• Escalation for repeated misses. For example, the same service level missed in a set number of months triggers a rectification plan, and failure of the plan gives a right to terminate.
• Measurement you can check. Define the data source for each service level and who reports it.

Common vendor positions and how to respond

"Credits are our only exposure; that is market standard." Public models show otherwise. Offer the MSC-style exceptions as a compromise: credits are exclusive for routine misses, not for serious or repeated ones.

"Our credits are already capped at a small percentage of fees." A cap is reasonable. Ask what happens once the cap is reached. If the answer is nothing, the service level stops working at the point it matters most.

"We cannot accept a termination right for missed service levels." Tie it to a pattern and a failed rectification plan, not a single miss. That is hard to refuse without saying the vendor expects to fail.

"The service levels are targets, not commitments." Then they are not service levels. Ask which measures the vendor will commit to.

What this means for your selection

The contract clause builder includes a service credits clause that keeps other remedies available. Score how vendors respond to it in the scorecard, and check proposals for vague or remedy-free service levels with the red flags checker. For choosing the measures themselves, read SLA metrics that matter and KPIs for a QA vendor.