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Contract Drafting Tips Series: Service Level Agreement Clause

This article is part of a series on drafting tips for contract clauses.

A service level agreement, or SLA, is a legally enforceable contract, or provision of a contract, between a supplier and a customer that specifies the supplier's obligation as regards the level or quality of service or goods delivered.

Service level agreements differ from conventional services agreements by not only specifying what will be provided by the service provider, but also making the service provider accountable to supply at a particular quality, standard or performance level. Setting a service level is about defining standards and quality - and ultimately price and value.

Legislation

Different legislation affects different transactions. For example, today the sale of a motor vehicle is regulated by:

  • Motor Dealers Regulation 2004 (NSW) (which imposes a post-purchase cooling off period);
  • Fair Trading Act 1987 (NSW);
  • Sale of Goods Act 1923 (NSW); and
  • Consumer Credit Code.

Understanding precisely what legislation, regulations or other laws are relevant to you specific circumstances is critical in assessing risks and ensuring compliance.

Nowadays service level agreements commonly set out provisions for:

  • service definition;
  • timing standards;
  • minimum and maximum quality needs;
  • compliance with set standards;
  • payment (incentives and rebates);
  • consequences for performance drops;
  • current and future needs;
  • monitoring methods;
  • security of premises and information;
  • alternative dispute resolution; and
  • variation of arrangements.

For suppliers and customers, flexibility for variations is achieved by providing for regular reviews, factors which must trigger costs variations, and compliance with changing market and technical standards and business specific needs, processes and technology.

Further, for customers good service level agreements also include both remedies and penalties for missing set service levels. These penalties need to motivate the vendor to achieve customer objectives. They may set liquidated damages.


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