Master service agreement

A master service agreement, or MSA, is a contract reached between parties, in which the parties agree to most of the terms that will govern future transactions or future agreements. A master service agreement allows the involved parties to more quickly negotiate future transactions or agreements, because they can rely on the strong foundation of the master agreement for future business, so that the same terms need not be repetitively negotiated, and you only need to negotiate terms specific to the latest deal.[1]

Contracts in the information technology, contract research, and similar "open-ended" fields are often negotiated as a "Master Service Agreement" and a "Statement of Work". Typically, the Master Service Agreement specifies generic terms such as payment terms, product warranties, intellectual property ownership, dispute resolution, and the like. Each project - a program to be written, a research project to investigate murine effects of a compound, or the like - is negotiated in a Statement of Work, a project-specific rider to the Master Service Agreement, to specify the problem to be solved, schedule, price, and the like.

A Master Service Agreement is not the same as a work order. The MSA does not control the hours one works or the amount of payment. It does not address specific projects or jobs. However, since those terms are often in a work order, and if the work order conflicts with the terms of the MSA, the work order will be nullified.[1]

It is recommended one have a contract lawyer review the Master Service Agreement before it is signed, especially if one has never negotiated a MSA before, or if there is language you do not understand. An attorney can help one negotiate an agreement that will protect the company's interests.[1]

Clauses that call for automatic termination for work not performed in a particular time frame can be problematic. Typically, one does not want the termination clause to be so specific or demanding. One should have the flexibility to take into account the realities of business.[1]

Typical terms found in a Master service agreement[1]

An MSA, by design, specifies generic terms, typically the following:

The service agreement may also cover other items, such as corporate social responsibility, business ethics, network or facility access, or any other term critical for all future agreements.

Often, an MSA is used in fields that tend to be open-ended and support an organization's functional areas such as Human Resources, Marketing, and Finance. For example, in the oil and gas field industry, an MSA sets contractual terms among the companies involved in:

  • Exploration
  • Drilling
  • Production
  • And service[1]

Two good reasons you need a Master service agreement[1]

An MSA allocates risk, and it provides indemnification.

  • Risk Allocation: Master Service Agreements let a business implement a comprehensive risk allocation strategy that takes business realities into consideration. Before signing, all parties need to understand how the MSA might interact with other contracts, especially insurance contracts. One should also be aware of how the provisions of the MSA may be impacted by the law. Within the MSA are terms that outline the risk and responsibility of contractors and employees included in the agreement for the duration of the project. It can eliminate the need to negotiate and reduce disputes if and when the project work changes.
  • Indemnification: Indemnification is a method to allow one party to hold harmless or safeguard another party against existing or future losses. The indemnifying party agrees to pay for damages it has caused or may cause in the future, regardless of which party is at fault. This means the indemnifying party must hire any lawyers needed and pay all legal fees and costs associated with litigation. You will often see the term "release, defend, and indemnify," where the party undergoing indemnification agrees to release (not to sue the party at fault for damages), defend (pay for lawyers to defend the party at fault), and indemnify (pay for any damages to a third party).[1]

Commonly indemnified actions[1]

A few of the actions that are common in indemnity agreements include:

  • Personal injury to the other party's employees
  • Property damage to the other party's property
  • Downhole indemnity (found in oilfield operations)

When personal injury and property damage indemnification occur together, it is called "knock for knock" indemnity. In downhole indemnity, the operator is taking responsibility for anything that occurs "downhole" such as pollution, damage to tools, harm to the resources or well, and blowouts.

Indemnification keeps everyone from pointing fingers at everyone else, making it more cost effective to defend the suit. It also allows a service contractor to shift the risk to its insurers. In downhole situations, indemnification keeps the service company from making a counterclaim. The service contractor shifts the risk to the operator.

Indemnification clauses are subject to common law limitations and anti-indemnity limitations. Insurance is a critical part of the equation of shifting risk and providing Fair Notice, which places responsibility on a party that would not be imposed by law.[1]

Statement of work

A statement of work (SOW) is a provision found in Master Service Agreements. It is a formal document outlining the specific work to be executed by a service vendor for a client. It puts into writing the work activities, the deliverables, and the timeline for work to be accomplished.

Common elements of a SOW include:

  • Purpose
  • Scope of work
  • Location of work
  • Period of performance
  • Deliverables schedule
  • Applicable industry standards the service provider must follow
  • Acceptance criteria
  • Any special requirements
  • Payment schedule[1]

Before entering into a master service agreement[1]

There are several things to consider before one signs a MSA. You, your attorney or another representative should read it carefully.

  1. Make sure the agreement accurately describes all the work one could potentially do for the project and negotiate for all the company's services, not just those apparently needed at signing. This covers the company for instances where one is hired to do welding, for example, and then have equipment leasing added on.
  2. Determine who, precisely, is held harmless. If there is a high risk of injury or accident, as there is in the oilfield, it is essential to know who is indemnified. In the type of case just mentioned, the indemnification clauses will go much farther than "knock for knock." They also include pollution and environmental damage. Using the Deepwater Horizon oil spill in 2010 as a guiding example, make sure, before one accepts the risk for one's workers and equipment, that one assesses the risk inherent in one's role in the project.
  3. Make sure one has the appropriate amount of liability insurance to cover that risk. One may be asked to provide a certificate of insurance (COI) as one of the terms of the MSA.
  4. Check the restrictions. A MSA may have terms that conflict with work orders or other contracts. The Master Service Agreement takes precedence, so one does not want language in the MSA that could limit one's ability to do work and make a profit on the project.
  5. Finally, look at the terms for termination of the agreement. It should show the expectations for all parties and what is considered a breach of contract. You do not want to sign a MSA that sets your business up for failure.[1]

References
  1. Law, Vethan. "What Is a Master Service Agreement and Why Do I Need One?". Retrieved 2018-03-12.
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