SLA penalties vs damages in SaaS: getting the distinction right
Are SLA service credits the sole remedy or not? How to structure SLA penalties alongside additional liability claims in a SaaS contract.
The Service Level Agreement (SLA) is a central component of any SaaS contract. It sets out the agreed service levels — availability, response times, resolution times — and typically provides for service credits or penalties if the vendor fails to meet those commitments. Yet SLA penalties are a frequent source of confusion, particularly regarding their scope and their relationship with broader liability for damages.
An SLA usually includes specific commitments on:
The penalties provided for in the SLA are designed to address non-compliance with the agreed service levels. They typically take the form of a service credit applied against the next invoice.
In practice, service credits cover anticipated, foreseeable shortfalls — such as temporary unavailability or a moderate delay in incident resolution. They are not designed to compensate for more serious consequential losses, such as significant lost revenue or reputational damage suffered by the customer.
Consider a common scenario. A SaaS platform experiences four hours of downtime. The SLA provides for a 5% credit on the monthly invoice — amounting to €250 on a €5,000 subscription. During the outage, the customer lost €50,000 in revenue because its sales team could not access the tool. Is the €250 credit the only remedy available? Or can the customer claim additional damages for its actual losses? That is the central question.
This is where confusion typically arises. Lawyers less familiar with SaaS contracts sometimes assume that SLA service credits automatically replace all other remedies for service failures. This is not necessarily the case.
The key contractual question is whether the SLA credits constitute the sole and exclusive remedy for service level failures, or whether the customer retains the right to claim additional damages under the general liability provisions of the agreement.
If the contract does not clearly address this point, disputes will inevitably arise following a material incident. The customer may consider the service credit inadequate, while the vendor faces unpredictable liability exposure. The resulting friction can damage the commercial relationship and generate significant legal costs on both sides.
To avoid these disputes, the contract should clearly state:
This approach reassures the customer while protecting the vendor’s economic interests. It provides a clear framework to resolve incidents efficiently, without the need for protracted legal debate. The answer to this question must also be consistent with the agreement’s liability cap: if the vendor’s total liability is capped at the annual contract value, any additional claim beyond SLA credits will in any event be limited to that ceiling.
Whether SLA service credits constitute the sole and exclusive remedy is the single most contentious point in SaaS contract negotiations. The earlier and more clearly the agreement addresses it, the less friction arises when an incident occurs. If you need help structuring these provisions, book a call.
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