Service level agreement (SLA): what to check before signing, and how to enforce a breach

Service page: Commercial contracts lawyer: drafting, review and enforcement.

What actually is an SLA, and why does it matter?

A service level agreement (SLA) is the part of the contract in which the supplier commits to minimum performance: what percentage of the time the servers will be available, how fast it will respond to a fault, and what happens if it fails to do so. In the technology world (cloud providers, SaaS companies, IT services), the SLA is often the only clause that protects you when something goes wrong. Legally, it is a contract in every sense. The Contracts (General Part) Law, 5733-1973 applies to it, and it is enforced with the tools of contract law.

The main problem: large suppliers come with a standard SLA written by their lawyers. It is full of limitations that look reasonable but in practice turn the SLA into an empty piece of paper. Many companies sign without reading.

99.9% uptime: how much is that in practice?

Here is something most people do not notice. 99.9% availability sounds impressive, but it translates into 8.76 hours of downtime a year. 99.5% is already 43.8 hours. And 99% is 87.6 hours. If your business depends on the service, think about what an hour of downtime is worth to you before you agree to the availability percentage the supplier offers.

What is more, many suppliers define “maintenance windows” (planned maintenance periods) and leave them out of the uptime calculation entirely. A 4-hour maintenance window every week = 208 hours a year that are not counted. Make sure the windows are clearly defined and limited in frequency and length, and that you get advance notice.

5 clauses you must check before signing

When you receive an SLA for review, these are the points that decide whether it is worth anything. First, the definition of the service: exactly what is covered and what is not. “The cloud service” is vague; “access to the API of service X in region Y” is precise. Second, specific performance metrics with numbers: not “a fast response” but “a response to Severity 1 within 30 minutes”. Third, the measurement method: who measures, how, and on what basis. Fourth, the compensation mechanism: what the credits are, what the reporting process is, and what the maximum limit is. Fifth, and most important: the liability cap (Limitation of Liability). In most commercial contracts you will find a clause that limits the supplier’s compensation to the amount of the subscription. If you have real business damage that exceeds that, this is the clause that ruins the whole claim.

Service Credits: what compensation actually looks like when an SLA is breached

Most SLAs do not promise direct monetary compensation for a breach. They promise a “Service Credit”: a credit on part of the monthly subscription payment, in tiers based on the percentage of uptime actually achieved. What this means: if the service went down for a whole day and caused significant business damage, the typical credit can be worth only a few dozen shekels, not the actual damage. So it is worth checking in advance whether the SLA also allows a claim for further damages beyond the credit, or whether it includes a clause that limits liability to the Service Credit alone. In a standard-form contract, such a term (one that limits a remedy the customer has by law) is presumed to be an unfair term (section 4(6) of the Standard Contracts Law), unless the parties specifically agreed on it. A court that finds a term unfair will cancel it or change it (section 19(a)).

How do you prove a breach of an SLA?

The supplier did not meet its commitment, and now you need to prove it. The SLA is the basis, but the evidence is the logs. If the supplier is the only one that holds the logs, and you have no access to them, you are in a weak position in a dispute. So before signing, ask who keeps the logs, for how long, and what access you have to them.

Without the supplier’s logs, third-party monitoring tools that you ran on your side can serve as evidence. Pingdom, Datadog and other similar services produce reports that can serve as evidence in court. If your company depends on critical service providers, set up independent monitoring today.

What are you entitled to when the supplier did not meet its commitment?

The standard remedy in an SLA is Service Credits: credits deducted from the next bill. They are usually a marginal sum compared with the real damage. But credits are not the end of it. For real damage that can be proven (deals that fell through, proven damage to reputation, emergency expenses), you can claim compensation for the damage beyond the credits, if the Limitation of Liability clause allows it.

Even if the SLA is not explicit about compensation, breach of a contractual obligation in Israel gives a right to compensation under the Contracts (Remedies for Breach of Contract) Law, 5731-1970. Section 10 of the Law entitles the injured party to compensation for the damage caused by the breach that the party in breach foresaw or should have foreseen. The issue is proving the damage, so documentation is extremely important.