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IT contracts
Service credits are pre-agreed reductions in the charges a supplier gives a customer when it misses a service level in an SLA. They matter for insurance because professional indemnity (PI) cover is built to pay damages for negligence, not refunds of your own fees, so credits usually come out of your margin rather than your policy.
Part of: Professional indemnity for IT professionals
In short
Service credits are the price reductions an IT supplier, MSP or SaaS provider gives when availability, response or fix times fall below the levels in its service level agreement. They are usually capped and deducted from the next invoice. The contract decides whether they are the customer’s only financial remedy for a missed service level or come on top of damages, and whether persistent failure allows termination. The penalty rule applies only to payments triggered by breach, and the Supreme Court has said a fee that falls when performance falls is not penal for that reason alone. PI policies commonly exclude service credits and fee rebates.
Last reviewed 7 October 2026 by the Apex professional indemnity team.
A service level agreement (SLA) sets measurable targets, such as monthly availability, response and fix times, or the size of a ticket backlog. When performance misses a target, points or percentages build up and convert into a credit against the charges. Three features are typical:
In BT Cornwall v Cornwall Council [2015] EWHC 3755 (Comm), a public sector ICT and shared services contract defined a service credit as a deduction from the monthly charge, or a credit for additional services, worked out under a price performance mechanism in which each performance point carried a fixed value. The Cabinet Office’s Model Services Contract, the government template for large IT and outsourcing deals, works the same way: a KPI failure produces service credits deducted from the service charges, and all credits in a rolling twelve months are subject to a Service Credit Cap. Its buyer guidance adds that pre-agreed service credits “should not be set at punitive levels”.
Two separate questions often get blurred: whether credits are the customer’s only remedy, and whether they are a price adjustment or compensation for breach.
Under a sole and exclusive remedy clause, the customer takes the credit and cannot also sue for damages for that service failure. Under a without prejudice clause, the credit is paid and the customer can still claim its losses, usually with credits set off. The Model Services Contract makes credits the authority’s exclusive financial remedy for a KPI failure, except where credits have passed the cap, a service threshold is breached, the failure arises from wilful default, it causes loss of government data or third-party compensation, performance was misreported, or the authority is entitled to terminate.
A sole remedy clause restricts the customer’s remedies. Section 13(1)(b) of the Unfair Contract Terms Act 1977 treats restricting a right or remedy as restricting liability, so if the SLA is on your written standard terms, the clause must pass the reasonableness test under section 3.
This matters for the penalty rule. In Cavendish Square Holding v Makdessi [2015] UKSC 67, the Supreme Court held that the rule applies only to secondary obligations triggered by breach, and asks whether a clause imposes a detriment “out of all proportion” to the innocent party’s legitimate interest in performance (para 32). It also said there is no reason in principle why a party should not earn its pay by performing, and that a reduction in pay for non-performance is not penal for that reason alone (para 73). That is why many SLAs describe credits as a price adjustment reflecting the lower value of the service delivered. Modest, capped credits sit comfortably with that reasoning; credits large enough to dwarf the charges invite argument.
Only if the contract says so. In BT Cornwall, a build-up of service credits at set levels was itself defined as a material breach. The court held the council was entitled to terminate forthwith and refused the supplier an injunction (para 81). Credits are often the early warning, not the end of the matter.
Whether credits use up the liability cap is also a drafting point. The Model Services Contract gives credits their own Service Credit Cap, and its guidance says deductions such as credits are left out when calculating the supplier’s main liability limit, so paying credits does not shrink the cap available for damages. By contrast, in Triple Point Technology v PTT [2021] UKSC 29, which concerned liquidated damages for delay rather than service credits, the Supreme Court held that the liquidated damages counted towards the general cap. Decide which you want and write it down.
Professional indemnity (PI) insurance pays damages and defence costs when a client alleges you breached your professional duty, typically through negligence, subject to the policy terms. Service credits fit badly with that, and wordings commonly reflect it:
| What the customer seeks | How PI commonly responds |
|---|---|
| Monthly service credits for missed availability or response times | Usually excluded; your business bears them |
| Refunds or withheld fees for poor service | Commonly excluded or limited |
| Damages for real losses caused by a negligent change, configuration or piece of advice | The core of PI cover, subject to the terms, limit and excess |
| The cost of redoing your own work | Commonly excluded, though some wordings give limited mitigation cover |
| Losses from a data breach or cyber incident | May sit with a cyber policy rather than PI |
Some technology wordings extend cover to certain contractual liabilities by agreement. Check your own policy rather than assuming either way.
The aim is a contract where ordinary SLA misses are settled by modest credits you can absorb, and only serious losses caused by negligence become claims your PI policy is built for.
If this affects your business, these are the points a broker will ask about:
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Not usually. Under Cavendish Square v Makdessi, the penalty rule catches only secondary obligations triggered by breach that are out of all proportion to the innocent party’s legitimate interest. Credits drafted as a capped price adjustment for a lower level of service are unlikely to meet that test. Very large credits, or credits that look designed to punish, are more open to challenge.
It depends on the wording. If credits are the sole and exclusive remedy for a service level failure, the customer cannot also claim damages for that failure, subject to any exceptions. If credits are without prejudice to other rights, the customer can still sue, usually giving credit for amounts already received. Read the SLA schedule and the main liability clause together.
Usually not. Credits are a contractual price reduction triggered by a missed metric, not damages proved to flow from negligence, and PI wordings commonly exclude contractual liabilities, liquidated damages and fee rebates. PI is aimed at a client’s claim for real financial loss caused by your negligent work, subject to the policy terms. Check your own wording with your broker.
Only if the contract says so, or its wording has that effect. The government’s Model Services Contract gives credits a separate cap and leaves them out when calculating the main limit. In Triple Point, the Supreme Court held that liquidated damages for delay counted towards the general cap. Spell out which approach applies in your contract.
Yes, if the contract allows it. Many contracts define persistent failure or a build-up of credits as a material breach. In BT Cornwall v Cornwall Council, the High Court held the council was entitled to terminate on that basis. Negotiate a rectification plan step and clear thresholds before termination rights arise.
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Start your PI proposal Call 0117 325 0027Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances. Cover is always subject to the insurer’s acceptance and the policy terms, and this page does not guarantee that cover will be available or on what terms.
