Service Credit
Also known as: SLA Credit, Service-Level Credit, Performance Credit.
What is Service Credit?
A service credit is a contractual remedy under a service-level agreement (SLA) entitling a customer to a percentage refund or invoice credit when the supplier fails to meet a service level. In South African law, if framed as liquidated damages, the credit is subject to the Conventional Penalties Act proportionality review.
Drafted and reviewed by
Attorney & Founder, My-Contracts.co.za · Legal Practice Council of South Africa (LPC F17333)
Definition and context
Service credits are the principal financial remedy in service-level agreements (SLAs), particularly in IT outsourcing, cloud, telecommunications and managed-services contracts. They function by entitling the customer to an agreed percentage reduction of fees (typically 5% to 100% of monthly fees, tiered by severity of breach) when the supplier misses a defined service-level target. In South African law, service credits are analysed either as a limitation of remedies (the customer\'s sole and exclusive remedy for service-level breach) or as liquidated damages. The distinction matters because the two tests differ.
If framed as liquidated damages, the service credit is subject to the Conventional Penalties Act 15 of 1962. Section 1 provides that penalties are prima facie enforceable, but section 3 permits a court to reduce a penalty that is out of proportion to the prejudice suffered. The SCA in Steinberg v Lazard 2006 (5) SA 42 (SCA) confirmed that this is a proportionality inquiry, not a "genuine pre-estimate" test imported from English law. Service credits that scale roughly with the customer\'s actual loss from degraded service tend to survive; credits that amount to a windfall or an enforcement mechanism without connection to actual loss risk reduction.
If framed as a "sole and exclusive remedy", the service credit operates as a limitation of liability and must comply with (i) CPA sections 48 and 49 for consumer transactions (unfair and onerous terms must be plain and conspicuously flagged), and (ii) the common-law prohibition on exempting liability for gross negligence or wilful default (Wells v Shield Insurance 1965 (2) SA 865 (C)). Best-practice drafting distinguishes between routine service-level shortfalls (governed by service credits as sole remedy) and chronic or material breach (which breaks the cap and exposes the supplier to termination, damages and specific performance). Service credits are typically calculated monthly, capped at 100% of monthly fees, and forfeit on early termination for non-payment.
Where this term lives in law
Consumer Protection Act 68 of 2008
Sections: 48, 49, 51
Protects consumer rights in transactions for goods and services within South Africa.
Frequently asked questions
Are service credits enforceable in South Africa?
Yes, subject to the Conventional Penalties Act 15 of 1962 if framed as liquidated damages, and subject to the common law and CPA if framed as a limitation of liability. Reasonable credits scaled to severity of breach are routinely enforced.
Can a service credit be the customer's sole remedy?
Yes for routine service-level shortfalls, provided the cap is reasonable and compliant with CPA section 49 where applicable. Best-practice drafting carves out gross negligence, wilful default and chronic/material breach from the cap.
What is a "chronic failure" clause?
A provision that if service-level breaches exceed a threshold (e.g. three consecutive months below target, or aggregate credits above 25% in a quarter), the customer may terminate without cause and/or claim damages uncapped. It acts as a safety valve for the credit-only remedy.
Does the Conventional Penalties Act apply?
Yes, if the service credit is framed as a liquidated-damages remedy. Section 3 permits a court to reduce the credit if disproportionate to prejudice, but the inquiry is proportionality, not pre-estimation.
How are service credits calculated?
Typically as a percentage of the monthly service fee, tiered by the severity of the miss (e.g. availability 99.9–99.5% = 5%, 99.5–99% = 10%, below 99% = 25%). Credits are usually capped at 100% of the monthly fee and forfeit on termination for non-payment.
Contract templates using this term
3 templates reference Service Credit.