The SLALOM project: Service levels - Service credits/Variation of the services

08 February 2016

Gian Marco Rinaldi, Debora Stella, Leonidas Kanellos

Read more on our SLALOM series
  1. Introduction - Subject-Matter - Main Obligations of the Parties
  2. Service levels-Service credits - Variation of the services
  3. Intellectual Property - Liability
  4. Consequences of expiration or termination of the agreement - Data Protection - Conclusion

Service levels - Service credits

In cloud computing agreements, this clause requires the Provider to supply the services in accordance with certain service levels agreed between the parties and in accordance with the service level objective. The service levels define the quantitative and qualitative characteristics of the services.

As it is not possible to include all such technical details within the clause of the agreement, the clause generally refers to an attachment which with reference to the agreement executed online is provided in a separate webpage of the Provider. The attachment will provide parameters and formulas to measure the performance of the Provider in relation to the services described in the agreement. The service levels shall also be connected with service credit provisions which are triggered by the breach of the SLAs.

Cloud computing agreements proposed in the market generally contain a section relating to the service levels. Where such agreements are executed via the internet, the section usually refers to webpages providing the details of the service levels.

It is worth noting that some cloud computing agreements establish that the Provider may unilaterally change or update the service level agreement.

Many cloud computing agreements do not specify how any violations of the service level agreement are to be communicated to or shared with the Adopter.

It is common to provide that the only remedy for breach is the application of service credits.

The above-mentioned cloud computing agreements envisage several cases in which application of the SLA is excluded. For instance, in all cases of force majeure; breach arising from the performance or non-performance of certain activities by the Adopter or a third party; breach of the SLA deriving from the Adopter's use of hardware or software not provided by the Provider; failures due to the maintenance of the Provider's systems or in relation to a beta version of the Provider’s products; errors resulting from abuses; or use of the services not consistent with the guidelines of the Provider.

The general terms and conditions of some cloud services provided for free do not contain any service level agreements.

SLALOM CSA set outs clear and measurable technical conditions of service delivery in order to make the services comparable with those provided by other vendors. Accordingly, the Service Levels will be construed in line with service levels generally used by other vendors for the same activities.

From a legal perspective, it is not advisable to specify a "best effort" (or similar language) to meet the SLA because this kind of provision does not make it clear or certain whether specific SLAs have to be fulfilled or not. In addition, the Provider can avoid fulfilling certain SLAs by arguing that, despite its best effort, it was not possible to achieve them. It is therefore advisable to agree an obligation to fulfil SLAs which have been carefully determined and which can be (wherever possible) periodically adjusted by agreement of the parties.

The Provider should also be required to provide, or make available on the Service website, a periodical report which makes clear to the parties whether possible violations occurred. This document shall be issued by the Provider and the parties shall apply the possible Service Credits on the basis of this document.

We also provided the possibility for the parties to review the SLA. This provision will not likely be acceptable for public cloud Providers which have the same SLA for all their customers and are generally not available to periodically discuss them with the customers.

In light of the above, if the parties provide an SLA for the services, we need to understand the consequences of breaches of those service levels, otherwise, the SLA runs the risk of being ineffective.

Two main remedies in case of breach of the SLA are the accruing of services credits and the payment of penalties. The first consists of a reduction of the amount of charges to be paid; the second one relates to the amount to be paid by the Provider.

From a French law perspective, the Provider will usually attempt to qualify the service credits as full and final compensation with respect to the breach of the service levels, exclusive of any additional remedy such as damages or termination for breach.

Under German law and in commercial practice, the service credits are considered the same as contractual penalties seen as a way to stimulate the good performance of the agreement. Generally, the Adopter will have the right to claim further damages. In case of a recurrent penalty, it is common to provide a cap of the penalties to be paid in a certain period of time.

Under English law, a penalty clause is unenforceable while service credits or re-pricing mechanisms are permitted and used.

Under Greek law, service credits are considered to provide a pre-specified financial remedy in the event of poor performance; they are a form of liquidated damages. In order for the service credits to be enforceable by the customer, they must not exceed a reasonable pre-estimate of the customer's likely losses in the event of poor performance defined by market rules.

As underlined in the relevant European Commission's Expert Group discussion paper, with reference to contracts with consumers , providing that the payment of the Service Credits is the only remedy of Adopters in case of breach of the SLA can be considered as an unfair clause under Directive 93/13/EEC. Accordingly, such clause could be considered as void.

Under the Italian Consumer Code (Legislative Decree no. 206/2005, Article 33, paragraph 2, sub-paragraph b)) implementing Directive 93/13/EEC, in the case of contracts with consumers, the limitation of liability in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations will be considered as an unfair term. Accordingly, in the case of contracts with consumers, a clause providing that the payment of service credits is the exclusive remedy could be considered void. Similar provisions are included in Greek consumer law no. 2251/1994, which implemented EU Directive 93/13/EEC.

Furthermore, in accordance with Italian law (Article 1341 of the Italian Civil Code), providing that Service Credits will be the exclusive remedy for breach by the Provider of the SLA may be considered a burdensome clause because it limits the liability of the Provider. If a burdensome clause is provided in a standard agreement drafted by one of the parties, such clause (mentioned by its name and number) needs to be specifically approved in writing by the counterparty (even if it is not a consumer). If not specifically approved, the clause will be void. Written approval may not be given by electronic means, unless a digital signature is used, but only with a signature on the hardcopy of the agreement.

The cloud computing agreements proposed in the market generally provide the criteria for calculating such service credits.

Most of the agreements specify that the application of service credits is the exclusive remedy in case of breach of the SLA and that no other remedy or penalty is granted in favour of the Adopter.

In some cases, the Adopter, in order to have the service credits applied, needs to start a specific procedure providing the Provider with all of the information relating to the service level violations.

The data and information provided by the Adopter then need to be "validated" by the Provider. If they are not validated, no payment of service credits is due.

In some cases, the Providers provide a deadline for requesting the payment of service credits. After this deadline has expired, no service credits are due.

Some Providers reserve the right to unilaterally change the service credits.

Some CSAs provide a maximum amount of service credits which may be paid.

It is worth noting that in a few cases, the Providers do not provide for the payment of service credits, but establish that in the case of breach of the SLA the remedy is the termination of the Agreement and the refund of any prepaid fees covering the remainder of the term of the Agreement after the date of termination.

The clause of the SLALOM CSA provides service credits for most cases of breach of the SLA.

In the SLALOM CSA, we will provide two alternative clauses concerning the effects of payment of the Service Credits as this point is very often negotiated and discussed between the parties.

In the first option, we will provide that the payment and amount of Service Credits will be the exclusive remedy for the damages suffered for the breaches of specific SLAs. In the second one, we will provide that the Adopter may claim further damages within the limits provided under Section 12.2.2 of the Agreement (i.e., liability cap).

The criteria for calculating the Service Credits will be defined in Attachment 2 of the Agreement.

The SLALOM CSA also provides clear obligations for reporting SLAs that have been accomplished and those that have not.

Variation of the services

This clause concerns the possible variation of the services to be provided.

Changes to services can normally derive from:

  1. external causes (including change of circumstances affecting the services, change of legislation, or order of the authorities having effect on the services);
  2. requests by the Provider;
  3. requests by the Adopter.

It could be important to provide a process governing this variation so that if a change request is made, the parties already know how to manage it and the contract relationship will not affected or endangered in any way. Moreover, it would be easier to implement the provision of additional service or content in favour of the Adopter.

In contract with consumers, according to Directive 93/13/EEC (Annex 1, (point k)), the unilateral alteration of the services without a valid reason is considered to be an unfair term. Therefore, if not specifically negotiated by the parties, a clause including a unilateral right of variation could be considered as void.

With reference to terms and conditions proposed in the market, especially in relation to public cloud services, it is common to establish that the service, as well as SLAs, or other profiles and details of the contractual relationship with the Adopter (including the terms and conditions of the cloud computer agreement itself) may be unilaterally changed by the Provider without the approval of the Adopter.

These changes generally do not need to be justified by the Provider, which can implement them at its discretion without having to provide the reasons for the change.

In some cases, it is not clear if and how the changes are to be communicated to the Adopter.

In most cases, the Adopter does not have the right to withdraw from the cloud computing agreement if changes to the services are made by the Provider.

This is because Providers want to be free to adjust, change, improve their services at any time without this changing their relationship with Adopters.

The proposed SLALOM CSA will clearly distinguish between the different scenarios illustrated above.

Where the Provider instigates a change: the proposed text of the SLALOM CSA will provide a mechanism to effect prior notification of such changes (as suggested by ECP C-SIG group and the CSCC guide) and the right of termination in favour of the Adopter.

In accordance with the proposals of the DG Justice Group, the notice period or right of termination will not apply to improvements necessary to cure security vulnerabilities; we also added to this exception services for fixing bugs or defects.

These scenarios are however limited to material changes to the services. Accordingly, minor changes will be excluded.

As an optional clause, which would likely not be applicable for standard services of public cloud Providers,  Service change requests can be made by the Adopter.

According to the proposed SLALOM CSA, the Provider shall provide the Adopter within a specified deadline an estimate of any potential increases in the consideration due (e.g., fees) together with the potential impact on the delivery and use of the Services and applicable Service Levels.