- Service Level Agreements: Understanding Practical Remedies in Data Center Leases
- October 16, 2017
The service level agreement (SLA) is one of the most critical components of a data center lease, providing a number of benefits to both data center operators and their customers. A well-drafted SLA establishes clear performance standards and quantifiable damages in the event of a service level failure, allowing both parties to avoid protracted legal disputes. Notwithstanding the significant financial stakes involved in contracting for data center capacity, SLAs are often misunderstood or not given adequate attention during negotiations.
Understanding the key terms, nuances and pitfalls in SLAs is crucial to avoiding disputes once the customer is deployed in the data center. There are two primary questions that must be answered in negotiating and drafting SLAs: (1) what are the service level standards, and (2) what are the remedies in the event of a service level failure?
Service Level Standards
The most important aspect of negotiating and drafting service level and performance standards is ensuring that they are clear and unambiguous.
At the outset of lease negotiations, each party should consider which services will be covered by the SLA and the desired performance standards. Power availability and environmental service levels are customary in SLAs; however, it is becoming increasingly common to include service levels for other mission critical data center services, e.g., security, connectivity, response time and delivery service levels.
Even for common service levels, it is essential that the parties adequately consider not only the applicable performance standard (e.g. 99.999 percentpower availability), but also how this standard is defined. For example, with respect to power availability, the SLA should expressly state whether downtime occurs when power is lost on one feed on redundant circuits, or whether downtime only occurs when both feeds simultaneously lose power. Similarly, while ASHRAE Guidelines are generally recognized as setting the standard for humidity and temperature service levels, merely citing ASHRAE guidelines as the performance standard is not dispositive, as ASHRAE publishes both “allowable” and “recommended” ranges. The SLA should clearly state which of these ranges applies (or whether another standard applies based on the design of the facility) and the location and quantity of sensors measuring these ranges within the leased space to ensure that there is a meeting of the minds at the time of contract.
Remedies: Service Credits and Termination Rights
To ensure that the parties have a practical and enforceable remedy in the event of a service level failure, the method of calculating credits, limitations on credits, and any rights to terminate for chronic failures should be clearly stated in the SLA. Generally, service level credits and termination rights are the customer’s sole and exclusive remedy for service level failures. This means that the customer is limited to these remedies and cannot pursue a separate claim against the provider for breach of contract or consequential damages resulting from the service level failure.
Most SLAs provide for increased credits over an extended period or incidence of failure. Some SLAs provide for credits that are a fixed dollar value and others are based on a percentage of the recurring monthly charges. When credits are based on a percentage of monthly charges, there are other factors for the parties to consider: is the credit based upon the charges paid or due, and are the monthly charges based upon all leased capacity or only the portion of the capacity impacted by the failure? Also, in the event of multiple simultaneous failures (e.g. power and environmental) that result from the same cause, will the customer be entitled to credits for both of these failures or only the failure with the highest credit amount? The parties should also consider whether there will be a cap on the total amount of credits that will be paid within a particular period.
SLAs generally contain exceptions to providers’ obligations to pay credits for failures. These exceptions commonly include failures caused by the customer and force majeure events. It is important to clearly define these exceptions to avoid unintended consequences. For example, if too broadly defined, force majeure could obviate the SLA altogether and provide an exception to compliance for any event that is arguably outside of the provider’s control, including equipment failure, utility blackouts and labor strikes preventing regular maintenance of systems, among others. Similarly, an exception for planned maintenance of systems could result in the loss of power for a period of time in excess of the service level standard without any remedy to the customer unless the SLA clearly states, for example, that during planned maintenance only one power feed may be taken down at a time with fully functioning backup generators.In the event of recurring failures, both parties may wish to include a right to terminate the agreement. Termination is generally not a practical remedy because it undermines the basic premise of the data center lease: the customer loses data center capacity and the provider loses a customer. However, where there are repeated failures that impact the customer’s business operations and result in the provider paying substantial service credits to the customer, a termination right may be the only remedy available to the parties. It is important in negotiating termination rights to consider the types of service level failures and the number and severity of the failures giving rise to such a right, and the period of time that each party has to exercise such right.