This article examines the growing use of a master services agreement to speed up future contractual negotiations within a flexible legal framework.
What is a master services agreement?
A master services agreement (MSA)is a contract which sets out most (but not all) of the key terms between a supplier of services and its client. The MSA (sometimes called an ‘umbrella’ or ‘blanket’ agreement) sets up a legal framework which applies to all future dealings. The parties then only have to agree and sign off the specific commercial details for each new project in a brief schedule, sometimes called a ‘statement of work’, ‘work order’ or ‘transaction schedule’. This process speeds up the negotiations for future projects. Instead of having to negotiate and sign a comprehensive new contract for every new project, the legal groundwork has already been established already in the MSA.
The MSA specifies the generic legal terms, such as ownership of intellectual property, limitations of liability and dispute resolution. A separate statement of work, which is project-specific, effectively acts as a rider to the main agreement. The statement of work (which is expressed to form part of the MSA from a legal perspective once both parties sign it) sets out the relevant practical and commercial details of each particular project, such as the specification, key personnel, price and payment dates.
Is an MSA suitable for my business?
An MSA is particularly useful where the client and the supplier work together on a number of projects over a long period. Whilst typically adopted in the information technology sector, MSAs are useful in any situation where there is a long-term client/supplier relationship in relation to services. They are relevant both where services are ordered occasionally or where there is an ongoing arrangement.
There does, however, need to be an element of ‘give and take’ by both parties, with a firm commitment on both sides to invest the time and effort in establishing a legal framework of reasonable expectations for their future dealings. It is crucial that the right personnel are involved on both sides, drawing upon a cross-section of management, commercial and legal expertise to identify past experiences and address potential contractual traps. This entire process is often much easier where there is an existing relationship between the parties which has already fostered a significant degree of trust and collaboration.
What is in included in a MSA?
The MSA sets out the key terms which are likely to apply to all projects between the two parties, such as general payment terms, quality standards and confidentiality and other ‘good practice’ provisions. Risk management is an important element of any MSA, with the parties deciding at the outset on any relevant caps of their liability and indemnities to determine how risk is divided between the parties if either party is sued by a third party.
Any divergence from the MSA can be addressed in the statement of work, perhaps to reflect local conditions for a particular project or the specific nature of the deliverables. Typically a statement of work will include the specific pricing structure, the payment dates and milestones and a detailed description of the services or deliverables to be provided for a particular project.
It is important that the statement of work does not contradict the key legal framework already agreed by the parties in the MSA. Usually the MSA is deemed to prevail in the event of any such contradiction, to ensure that neither party is prejudicing its position by adding clauses into the statement of work which may have important legal ramifications not contemplated at the outset. Some degree of flexibility, however, may be built into the MSA.
What are the advantages?
- The main advantage is that an MSA speeds up the contracting process in the future, whilst maintaining control and minimising risk within an established framework.
- Once the MSA has been negotiated and signed off, it is relatively easy to add new projects or transactions by signing off a statements of work without having to renegotiate the whole contract. Often a statement of work can be less than five pages long.
- Controversial issues, such as risk and liability, can be resolved at the outset, leaving the procurement and contracts staff to focus on the key commercial issues for future projects without the added distraction of complex legal negotiations for every project.
- MSAs, where the parties negotiate only once, assist efficiency and consistency because they are easier to manage and monitor.
- Once the MSA has been concluded, the contracting process is simplified and streamlined. Future projects can be signed off swiftly with no (or only minimal) involvement of lawyers and further expenditure on legal fees is minimised.
- Commercial and procurement personnel may be prepared to work more closely with their lawyers on an MSA to obtain a satisfactory solution than on a number of individual contracts, mainly because they know that they have to go through this process only once.
- Future business opportunities between the parties can be agreed more easily within a flexible structure.
What are the disadvantages?
- A poorly drafted MSA can have serious legal ramifications for both parties, given that it will apply to all future relationships – a bad contract at the outset is always a bad contract and can be a ticking bomb waiting to explode into dispute and protracted litigation. However, this is not a problem which is peculiar to MSAs.
- It takes time to negotiate and finalise an MSA. It is a learning process on both sides. Negotiations over several weeks or even months are not uncommon and the detailed input of both parties’ commercial teams and lawyers is required.
- There has to be a commitment by both parties to invest time and effort in creating an acceptable legal framework for a future and mutually-beneficial relationship.
- MSAs may not be appropriate for new or untested relationships, but are useful tools for regular and stable business dealings.
- The MSA has to second-guess legal issues that might arise in the future, but still allow a sufficient degree of flexibility to deal with new projects in a statement of work.
- It may be more expensive in legal fees at the outset, but there are likely to be longer term savings by using an MSA.
For those suppliers and clients willing to invest time and effort in concluding a suitable MSA, it can be a satisfying and cost-effective business experience. Once the MSA is signed, both sides can move on swiftly with their ongoing commercial dealings with the comfort of knowing that they already have an established legal framework for future projects. Like all relationships, however, the business collaboration required to conclude a satisfactory MSA requires a significant degree of commitment, compromise and trust to create a fruitful and mutually-beneficial future together, based upon shared expectations within a streamlined contractual framework.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.