09 / 27 / 2016

What Is a Master Service Agreement and Why Do I Need One?

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The definition of a Master Service Agreement is relatively simple: it is a contract between two parties in which both parties agree to most of the terms that will govern future transactions or future agreements.

A Master Service Agreement, or MSA, is appealing because it allows the involved parties to negotiate future transactions or agreement quickly. The MSA provides a strong foundation for future business, and the terms do not need to be repeatedly renegotiated; you only need to negotiate terms specific to the latest deal.

Typical Terms Found in a master service agreement

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

  • Payment terms
  • Product warranties
  • Intellectual property ownership
  • Dispute resolution
  • Geographic location
  • Venue of law

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

Two Good Reasons You Need a Master Service Agreement

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. You 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).

Commonly Indemnified Actions

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.

Statement of Work (SOW)

A Statement of Work 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

Before Entering into a Master Service Agreement

There are several things to consider before you sign an MSA. You, your attorney or another representative should read it carefully.

  1. Make sure the agreement accurately describes all the work you could potentially do for the project and negotiate for all your company’s services, not just those apparently needed at signing. This covers you for instances where you 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 you accept the risk for your workers and equipment, that you assess the risk inherent in your role in the project.
  3. Make sure you have the right amount of liability insurance to cover that risk. You may be asked to provide a certificate of insurance as one of the terms of the MSA.
  4. Check the restrictions. An MSA may have terms that conflict with work orders or other contracts. The Master Service Agreement takes precedence, so you do not want language in the MSA that could limit your 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 an MSA that sets your business up for failure.

A Master Service Agreement is not the same as a work order. It does not control the hours you work 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.

Have a contract lawyer review the Master Service Agreement before you sign it, especially if you have never negotiated one before or if there is language you do not understand. An attorney can help you negotiate an agreement that will protect your company’s interests.

Clauses that call for automatic termination for work not performed in a particular time frame are problematic. You do not want the termination clause to be so specific or demanding. You should have the flexibility to take into account the realities of business.

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