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This article is written by Shalini Shrivastav, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from


A Service Agreement is nothing but a contract that governs the provision of services in lieu of payment or other consideration. There is no restriction in its usage and can be used by any person or organisation which is in the business of providing services. For example, people or organisations engaged in the construction business, electrical work as well as coaching, personal training, consulting and professional services.

The importance of service agreement can be understood in such a way that it will not only set out the exact scope of work, but also set time frames for completion of the desired work, payment terms and dispute resolution mechanisms in cases of any disputes.

Service Agreements is known for simplifying the process for resolving disputes but actually they also prevent many disputes from arising out in the first place. They do this by forcing the parties to discuss and record the key elements of the arrangement upfront which is why it is pertinent to enter into a written service agreement. If there is no written agreement between the parties and if parties are working on oral basis then there is a maximum possibility that they may miss out the crucial terms such as when payments are due, from where the materials are to be purchased, or who is to pay for materials so purchased. If these issues are not addressed properly, it can lead to costly legal disputes when they are eventually discovered.

Types of Service Level Agreement

A service level agreement (SLA) is nothing but a contract between a business and its customer mentioning that the two parties have agreed to enter in a transaction. The types of SLAs which can be used by an organization depend on many significant aspects. While some are targeted at individual customer groups, others discuss issues relevant to entire companies.

The reason behind this can be that the needs of one user may differ from those of another. Below is a list of the types of SLAs used by businesses today, and how each one is utilized for specific situations:

  • Customer-based SLA

This type of agreement is generally used for individual customers and it comprises all relevant services that a client may need, during leveraging only one contract. It contains details regarding the type and quality of service that has been agreed upon. For example, a telecommunication service can include a voice call, messaging and internet services, the point to be noted here is that they all exist under a single contract.

  • Service-based SLA

This type of agreement is a contract which includes an identical type of service for all of its customers. Due to the kind of service being provided which is unchanged, it is more straightforward and convenient for vendors. For example, if someone is using a service-based agreement regarding an IT help desk it would mean that the same service is valid for all end-users who all sign the service-based SLA.

  • Multi-level SLA

This arrangement is outlined relying on the necessities of the end-client organization. It gives an edge to the client and it permits the client to coordinate a few conditions into one framework to make a more reasonable assistance. It tends to contracts at the accompanying levels:

  • Corporate level:

It is not required to constantly update SLA as its issues are commonly constant. It incorporates a complete conversation of the relative multitude of important parts of the arrangement, and is relevant to all clients in the end-client association.

  • Customer Level:

This contract discusses all service related issues which are associated with a specific group of customers. However, the types of user services are irrelevant. 

For example, where an organization claims that the security level in one of its departments is its expertise. In the present situation, the entire company is secured by one security agency 

  • Service level:

In this kind of agreement, all aspects that are attributed to a particular service with regard to a customer group are included.

Legal Validity of a Service Level Agreement

In order to make a service agreement legitimately valid, following parameters are duly required which are:

  • Offer and acceptance

The agreement shall contain a proposal made by one party and the proposal so made is to be accepted by the other party. Any alterations made in the contract must be agreed by both sides and there must be a free consent i.e. to say that no one should be compelled to consent to the terms. The parties agreeing the terms and condition of the arrangement is meant to be binding for both parties. 

  • Mutual consent

As said earlier that there must be a free consent and the consent must be mutual i.e. both the parties have agreed to certain terms and conditions. 

  • Consideration

Without a valid consideration, a contract is invalid and something of worth must be passed between the two parties in order to be true. Generally consideration is understood in the form of currency but it is not true. It may be products or services as well. There is something the sides have to share, such as money traded for a service. 

  • Competence

The qualification of competency must be fulfilled as no individual should be a minor or someone who is of unsound mind. Both parties must be able to understand what is specified in the agreement. The contract is stands invalid if it is found that any side is incompetent.

  • Legal purpose

The purpose behind entering into the agreement must be legal in nature and no illegal acts should be included in a contractual deal otherwise it would make the contract void ab initio. 

Key Components of a Good SLA

An SLA includes all common elements of a legal agreement like list of parties, start and end date, inclusions, exclusions, non-performance penalties, remedial measures, etc. 

  • Nature of Service

A good service level agreement must contain a detailed description of all services which is being offered by the provider to the business. These services should be divided into categories and if required then into sub categories as well. Any service which is specific to a particular department must be mentioned. 

Hours of operations & resolution times are significant segments for any IT Services business, and these should be properly mentioned leaving no scope for ambiguity. 

  • Key Performance Indicators (KPI)

A crucial aspect of any SLA is how the measurement of the provider’s performance. The KPIs should be clearly mentioned for the evaluation of service levels. Some of the essential KPIs are – First Contact Resolution (FCR), Turn Around Time (TAT), Closure Rate (CR), Number of cases handled, etc.

  • Risk Management

In the SLAs the ownership of risk and the risks to individual processes must be clearly mentioned. 

  • Disaster Recovery

One should always make a note of the cost involved towards disaster recovery measures and the liability of each party towards it.

  • Exclusions

This is another very important component. Both parties must agree on all the exclusions which include exclusion of services, days, time, environmental conditions, geographies, etc.

  • Penalties

The question as to what penalties should be charged if the vendor fails to meet the KPIs must be asked. One needs to clearly identify the situations that can be considered as exceptions. This is a vital clause and the most common cause of conflicts. Hence the document must be very precise with this clause.

  • Reporting

Reporting is an expensive and time-consuming process. So, the type of reports & frequency of submissions of each of these reports must be clearly mentioned and the cost of additional reporting which may be demanded by the client from time to time must be mentioned as well.

It is important that the metrics are within the vendor’s control while deciding the metrics which is to be measured. And, if it is beyond the control of the vendor then it is unfair to hold them responsible for the metric.

Importance of a Service Level Agreement

  • Alignment of Expectations and Requirements With Service Providers

In order to align expectations with their service providers companies use a Service Level Agreement. Most importantly, SLAs aid service providers in moving forward with an understanding of what’s expected.

Finally, they outline how that work will be measured.

  • Measuring Service Quality 

Second of all, there’s no room for providers to avoid taking responsibility for poor performance when SLO’s and service quality expectations are clear.

It is the responsibility of the providers to meet client expectations and for the quality of their work. This ensures a long-term business relationship.

Clear expectations make everything easier.

  • Documentation of Procedures and Best Practices 

Before one can measure quality, one needs to outline procedures and best practices. Thus, having systems in place makes it easy for providers to keep focused on customers.

Work quality is predictable when best practices are followed.

Best practices help people adapt to tough situations. They are at their best when they are put down in writing, and easily accessible. The best case scenario would be the service providers giving their employees a quick reference guide for these best practices.

  • Ensuring Clear Communication

Clear communication makes life comfortable. It can be challenging to keep everyone on the same page with the modernization in technology and difference in communication styles. 

It’s fairly easy to get distracted from the task in hand and put too much emphasis and time on the tasks that are unimportant when looking at the bigger picture.

Due to this challenge, few things are to be considered:

  • First, will we be communicating via email?
  • Or, will we be on online messaging platforms like Slack or Microsoft Teams?
  • Thirdly, will we use project management software like Trello or Asana?
  • Finally, how often will we meet? What is the meeting format?

Having a fair understanding of how people communicate is paramount because this understanding keeps people at ease and working together toward goals.

  • Mutual Protection and Peace of Mind 

Also, service level agreements end presumptions. The working relationship between a company and its service provider is clear if there aren’t any presumptions.

Companies have peace of mind with an SLA because it provides them protection in worst-case scenarios. Accordingly, the mind of the service provider is at peace when they know the work they’re doing is valuable and leading toward a common goal.

  • Remedies for Those Negatively Affected 

Based on established SLOs, there can be service level agreements in place including remedies. The clients of a service provider can ask the following if a service provider fails to deliver quality service:

  • Discounted rates,
  • Service credits, and
  • Fines.

Even though the remedies are not usually needed but they serve as a protection.

  • Impact on Customer Service Quality

The impact on service quality of a Service Level Agreement is irrefutable. 

It could be messy and troublesome to force the customer service providers to design workflows, set goals without standards, measure work performance, and report on their success. And when SLAs are available there is no need to go down this path.

It is not unreasonable in asking companies to rely on the service providers for doing high-quality work without measuring performance. SLAs are not perfect. Nonetheless, they provide a framework for high-quality work.


To build a profitable relationship between the service provider and the customer, service level agreement is essential. They shun conflicts and disputes by bringing in accountability & transparency among the parties to the agreement. It plays a vital role in smooth functioning of the business which results in happy customers and growth.

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