A Master Services Agreement or “MSA” as they are often called is an agreement between a service provider and its customer. Master Services Agreements vary significantly depending on the nature of the services, the type of customer, the industry involved and many other variable factors. Simply put, there is no “one size fits all” Master Services Agreement. Indeed, they are as diverse as the transactions they represent. Questions or comments? Like this article? Leave a review and more will follow! It only takes a few seconds.
With that said, there are certain terms and conditions that you often see reflected in a majority of MSAs. And generally speaking, a Master Services Agreement is intended to establish a platform for the continued provision of services by a service provider to a customer over a longer period of time. One-off and short-term relationships between a service provider and a customer are often dealt with through simpler services agreements, consulting agreements or other less comprehensive documentation.
While some Master Services Agreements are drafted as all-in-one documents that encompass a range of services in a self-contained agreement, most Master Services Agreements expressly contemplate that they will be used in conjunction with shorter related documents such as a Statement of Work. Structurally, the bulk of the legal terms and conditions are negotiated once in the Master Services Agreement, and then specific Statements of Work are executed with respect to specific services ordered by a customer.
This is one of the key benefits of this model. The Master Services Agreement is negotiated once and remains in effect for a longer period of time while Statements of Work can be prepared and executed quickly with respect to the specific services needs of the customer. In this structure, significant time and expense can be saved. The Statements of Work will refer back to the Master Services Agreement and contain provisions indicating that the MSA’s terms govern the Statement of Work.
Whose Form to Use? The Service Provider’s or the Customer’s?
If you are a business that enters into multiple Master Services Agreements per year, it is to your advantage to work with a business lawyer to prepare your own Master Services Agreement and related Statements of Work for consistency, risk mitigation and control purposes. Indeed, many companies work with well-established templates that they have established over time with their counsel and that are then adjusted and tweaked to match a specific deal.
Having an existing Master Services Agreement template can help a service provider quickly move from the proposal phase to definitive documents in a shot period of time. This also decreases the chances that a service provider will have to negotiate a new agreement from its customer’s own template, which is likely far different than what the service provider would agree to and will require significant negotiation.
On the flipside, sophisticated customers develop their own Master Services Agreements and related Statements of Work for the same reasons. They often tell the vendor at the outset, sometimes through a bidding or vendor selection process, that the vendor must let them know up front if they have any material issues with the customer-supplied form of Master Services Agreement.
Ultimately, which form of agreement is used often depends on leverage, the size of the deal and the negotiating posture of the parties. Where the service provider is large, and the customer or deal size is small, the service provider has a better chance of using its “paper”. Where the deal is large and the service provider is small, there is a better chance that the customer’s form of master services agreement will be used as a starting point.
Regardless of what document is exchanged initially, economic factors often drive the willingness of the parties to engage in significant or extended negotiations. Furthermore, many service providers and customers have developed internal guidelines or SOPs governing what types of terms and conditions they will agree to in Master Services Agreements and Statements of Work, or certain provisions that would require approval by a company officer having a certain level of authority.
Timing may also be an important factor. Master Services Agreements and Statements of Work can be put into place quickly if the parties assemble their negotiating teams and the details of the deal are known. However, for larger or more strategic deals, or those involving mission critical services or regulated industries, the process can take significantly longer as there are often many stakeholders involved. Many companies have stakeholders from various departments, each of whom are responsible for approving various aspects of the potential relationship and related terms and conditions.
Customers should also be aware that many larger service providers that are subject to public reporting requirements often close many deals at the end of a quarterly or annual reporting cycle. In some cases, negotiations may lag during the quarter until the service provider is attempting to hit certain economic targets and views a deal as part of the way to do it. In some of these cases, a customer may be able to get better terms later in the process than they would be offered earlier in the reporting cycle.
In short, some service providers discover new-found flexibility on material deal terms when there is a pressing need to book business in a particular quarter. At the same time, service providers often exert pressure on customers to close deals by offering “promotional” or time-locked pricing that will expire at the end of a reporting cycle. These methods are no different than those that arise in commercial negotiations generally.
What is Covered by the Master Services Agreement? How Do SOWs Fit In?
A MSA is a master agreement for the provision of services to be provided by a service provider to a customer. A MSA typically delineates the general types and nature of the services to be provided and, where companies may have multiple contractual relationships, makes clear what the agreement relates to and covers.
For example, in certain technology transactions, the parties enter into a separate technology license agreement that addresses the licensing of technology, and then a Master Services Agreement to address any related services. It there are related agreements to your MSA, you must take care to ensure that the entire structure works together and that the contractual remedies are aligned. This is often a significant area of negotiation when multiple agreements are used.
Assuming that you are dealing only with a Master Services Agreement with Statements of Work (and not any related agreements), the four corners of the MSA should address the bulk of the more “legal” terms and conditions that will serve as the foundation of the parties’ relationship. Statements of Work address more of the “business” terms and conditions relating to specific projects, their economics, timelines, deliverables and acceptance criteria. By using the MSA as a base, the Statement of Work can be relatively short form depending on the services involved.
However, do not be confused by the common practice of labeling certain terms and conditions as “legal” or “business” terms. In reality, all terms and conditions are “business” terms with specific “legal” effect. So, while you may be tempted to lightly peruse a Master Services Agreement with its “legal mumbo-jumbo” and focus on more familiar sounding “business” terms in a Statement of Work, the reality is that the documents must be viewed as a whole.
Common Core Terms Found in Master Services Agreements
While MSAs vary widely, there are many common subject matter areas addressed in Master Services Agreements. Some are heavily negotiated by service providers and customers, while others just have normal contracting variations. These can vary by industry and customer type, and often negotiations center not just on customary areas but other “hot button” issues that may derive from a party’s particular requirements or regulatory landscape. The following is a non-exhaustive list of common terms found in Master Services Agreements:
Warranties; Disclaimer of Warranties in MSAs.
Most master services agreement have warranties that at least address the standards of performance of the service provider and the conformance of any services or related deliverables to applicable specifications or documented requirements. Some service providers take an “AS IS” and “WITH ALL FAULTS” approach to warranties by not offering any at all, and some customers require dozens of warranties, many of which form part of a customer’s standard form but all of which may not be relevant to the services offered by a particular service provider. Obviously, warranties are another area of significant negotiation. Most MSA warranty provisions will be coupled with an express disclaimer of warranties, which attempts to negate any other warranties or representations that may otherwise creep into the terms and conditions or contractual relationship.
Warranties provide customers with certain remedies under law, such as the right to sue for damages for the breach of a warranty. However, Master Services Agreements often provide for specific remedies that are in lieu of any other remedies. For example, a MSA may provide that if certain services fail to substantially conform to the applicable warranty, the service provider must rectify such non-conformance within a specified period of time through additional services at no cost to the customer. Service provides who provide services-related warranties often, as part of a sole and exclusive remedy, require the customer to agree that if their efforts are unable to make the services conform to the applicable services warranty, that they are able to provide the customer with an equitable refund for the affected services. To a service provider, this exclusive “re-perform or refund” structure is a contractual risk-management tool. Customers often resist limiting their remedies under a MSA for specific warranties for a variety of reasons, and customers often push for all contractual remedies to be cumulative.
MSAs and Limitations on Liability.
The Master Services Agreement typically contains provisions limiting the liability of the service provider and, in some cases, the customer. The MSA often contains a limitation on damages provision, which attempts to exclude the recovery of damages other than direct damages. In addition, a Master Services Agreement typically contains a limitation on liability provision which attempts to put a monetary cap on the amount of damages that a party could be liable for under the Master Services Agreement and Statements of Work. Both the limitation on damages and limitation of liability provisions vary widely and are often heavily negotiated.
Conceptually, the concepts themselves are not debated, it is their nature, scope, dollar amounts and exclusions that form the heart of the negotiation of the parties. For example, a customer often wants to make clear that certain limitations do not impair a service provider’s obligations under specific contractual provisions such as confidentiality, indemnification and agreed-upon restrictive covenants. On the other hand, a service provider may focus heavily on the amount of direct damage exposure it has under the MSA and the SOWs so that its liability does not exceed limits established by its risk management team. Like the warranty section, negotiations are often needed to craft a balanced provision that meets the requirements of the parties.
Indemnification in MSAs.
Master Services Agreements commonly contain indemnification provisions as a mechanism to allocate risk between the customer and service provider. In some cases, such as personal injury and property damage, indemnification is mutual. Some customer forms look for broad-form indemnification covering all possible breaches of the Master Services Agreement and obligations under the Statement of Work. Service Providers vigorously resist these types of indemnities and seek to limit indemnities – if not to personal injury and property damage, then to additional other possible risks such as violations of third-party intellectual property rights.
These additional indemnities are often themselves coupled with sole and exclusive remedy provisions intended to provide a path for rectifying a third-party intellectual property issue while managing overall monetary risk if a service provider is unable to achieve a satisfactory resolution despite using commercially reasonable efforts. Indemnification provisions can be lengthy and detailed, and negotiations can involve discussions over the panoply of risks and potential exposures, both first and third party, that coverage may be sought for by a party.
Nearly all MSAs contain a confidentiality provision, which is typically mutual between the parties. Those that lack one may incorporate a prior confidentiality agreement’s terms into the Master Services Agreement if it was separately negotiated and dealt with issues likely to arise during the course of performance of the MSA. Either way, confidentiality is nearly always addressed and more recently, its provisions are provided in tandem with data protection and data security provisions if certain types of information (e.g., personally identifiable information or “PII”) will be disclosed and processed as part of the relationship.
Most relationships under a Master Services Agreement will involve the use, disclosure and/or creation of intellectual property rights (“IP”) by the parties. Allocating these rights among the parties is common in MSAs. IP may fall into a variety of buckets, including the following:
IP to Be Owned by Customer.
Many MSAs involve the creation of deliverables and related IP that the customer desires to own. In these cases, the Master Services Agreement often contains provisions relating to IP ownership such as those relating to the work made for hire doctrine under the United States Copyright Act and provisions with present language of assignment of IP rights. These are often joined by related provisions to buttress the customer’s ability to register, protect and defend the IP rights it receives.
In many relationships, a service provider comes to the relationship with an established set of existing IP rights that it uses with each customer. This may be referred to by many names, such as Background IP, Background Technology or Pre-Existing IP. The customer typically receives a broad license to use the Background IP as part of the deliverables that it will own, so that it is able to use and exploit what it has paid for through a combination of owned IP and licensed IP.
The Background IP bucket is often negotiated and tied to specific items in a Statement of Work to avoid disputes over what the customer owns and what it has licensed. Customers often scrutinize these items closely as the terms of the license and the items included in Background IP may provide significant limitations on future exploitation of deliverables down the road, and the commercial risks involved are different when something is owned rather than licensed.
It is not unusual for customers to bring a significant amount of customer IP to the relationship, and for a service provider to need to use this IP to perform services and create deliverables. In these instances, an MSA may grant a service provider limited license rights to customer IP to fulfill its obligations to the customer under the MSA and applicable Statements of Work, but not for the benefit of third parties.
Third Party IP.
MSAs may address a wide variety of third-party IP including that licensed by the customer as part of its normal business operations. To perform services and create deliverables, service providers may need to use or access this third-party IP. Customers need to check their third-party agreements to make sure that this use or access is permitted under their applicable agreements as, in many cases, license rights restrict usage by third parties. At the same time, service providers may need to use third party tools, code libraries and resources to perform the services and create the deliverables. In certain instances, this third-party IP becomes integrated with or incorporated into customer deliverables.
As part of negotiating the Master Services Agreement and Statements of Work, both the customer and the service provider must inventory all third-party IP to ensure that there are appropriate chains of title and usage rights in place to address third-party IP. This is especially important as certain third-party IP, such as code subject to certain open source licenses, can have significant effects on a customer’s IP rights in deliverables. In some cases, third party licenses may require a customer to adhere to notice, marking and disclosure obligations that a customer may not be comfortable with for a given project.
Other IP Issues.
The foregoing are some of the examples of IP rights that may need to be addressed in a Master Services Agreement. There are others and combinations unique to particular MSAs that are outside of the scope of this article. It is important to remember, however, that when dealing with IP rights the parties must also consider whether other areas of the MSA need adjustment or expansion to accommodate the issues that various types of IP bring to the transaction. These can include representation and warranty coverage, indemnities and their relation to the overall risk allocation in the MSA.
Additional Terms Found in Master Services Agreements
In addition to terms and conditions found in commercial agreements generally, Master Services Agreements often address other important areas impacting the relationship between the customer and the service provider. Here are some examples of additional issues that are often addressed:
Service Provider Personnel.
Customers are often quite particular about who performs services under a Master Services Agreement. Many Master Services Agreements and Statements of Work have mechanisms for a customer to vet service provider personnel and establish standards for their performance. In larger deals, it is not uncommon for customers to request the right to have members of certain types of personnel be replaced upon request, with a mechanism to address the allocation of cost associated with onboarding their replacements. Furthermore, many projects performed under a Statement of Work may involve a service provider using independent contractors ranging from individual consultants to multinational companies who provide specified services or deliver certain required items.
A Master Services Agreement may restrict a service provider from involving anyone other than a direct service provider employee from performing services, and for anyone else to be involved (e.g., an independent contractor), the service provider must seek the customer’s prior consent. This is often addressed in a Statement of Work, but the parties must make sure to align themselves on any flow-down provisions contained in the Master Services Agreement. For example, a customer form often requires that any independent contractors (no matter what size) that are involved in performing services adhere to all of the requirements and obligations of the Master Services Agreement. This can difficult for a service provider in many different scenarios including individual contractors who have much-needed expertise, but not the resources to carry levels of insurance commensurate with those held by the service provider.
On the other side, a service provider may be a SMB that involves a much larger company through a reseller or other relationship to provide services or licensed materials as part of a transaction. The service provider often does not have the leverage or practical ability to foist its negotiated terms on a company much larger than it, and in some cases will even be unable to get them to the table to discuss the issues. In certain cases, transaction structuring may be necessary to have the customer directly deal with the third party provider and, in some cases, customers may already have a master agreement in place with the third party that can be used as a platform to address that part of the structure.
Regulatory Requirements in MSAs.
Many customers are subject to a multitude of Federal, State and local laws and requirements which they must ensure are followed by their personnel – including service providers. It is not unusual to for a service provider to receive forms of MSAs from customers that differ greatly based on regulatory requirements. While financial institutions, insurance companies, pharma and healthcare industries are some of the most heavily regulated in the United States, many other customers live in a complex regulatory environment that may also involve binding rules of non-governmental entities. Service providers must flex to address these requirements if they want to close transactions, but at the same time they must understand the increased costs of delivering services to highly regulated customers.
In addition to regulatory requirements, the larger a customer gets, the more often the customer has detailed policies that it requires all of its vendors to follow. In some cases, these general policies are not wholly applicable or are out of scope for the level of services being provided by the service provider. Accordingly, in long duration MSAs or where the service provider is providing only specific roles, the parties often spend significant time reviewing and agreeing upon carve-outs to certain policy requirements to right-size them for the deal. Service providers typically request the right to charge for additional costs and expenses associated with policy compliance, and negotiations sometimes center on what is expected of vendors generally as part of their provision of services and what is unique and should be subject to cost-sharing or whole cost allocation to one party or the other.
Master Services Agreements typically contain detailed insurance requirements that service providers must follow including the obligation to procure and maintain specific types of insurance in specific amounts, naming of the customer as an additional insured or other insurance-related status, and providing confirmatory documentation evidencing their compliance. It is important that the insurance advisors of both the customer and the service provider understand the relationship between the parties, where and what services will be conducted, what types of deliverables are involved, and the risk allocation between the parties. In many cases, insurance is the primary funding source for risks allocated between the parties through the Master Services Agreement, such as certain indemnification obligations. It is important to note that a customer’s request for insurance does not serve as the service provider’s guidance for insurance coverage. Indeed, customer requests often focus on specific commonly addressed risk areas, while a service provider may require coverages (and far higher limits) not requested by a customer to protect itself and its operations.
Acceptance Testing in MSAs.
Services provided in connection with Master Services Agreements run the gamut. Some may be time-based services with little or no deliverables output and subject to just a general standard of performance on a T&M (time and materials) basis. Other services are intended to create complex deliverables over a long period of time, with payment and performance milestones subject to specific pre-determined acceptance criteria. Other projects use an Agile methodology or other rapid development process to avoid some of the problems associated with legacy “waterfall” development methodologies.
While some MSAs will contain specific acceptance testing provisions directly in the body of the agreement, other Master Services Agreements relegate these issues to the Statements of Work, where the can be tailored on a project by project basis to match the services and deliverables being provided. While this may make some of the Statements of Work more complex, it will make other SOWs simpler to produce and issue. If the service provider and customer know in advance the range of services and deliverables involved, they may provide for multiple different acceptance testing mechanisms in the MSA, and then simply designate one as applicable to a specific project in the applicable SOW.
Master Services Agreement typically establish a variety of terms and conditions regarding payment and payment disputes and, in many cases, these rules defer to more specific rules in a Statement of Work. Items frequently negotiated are the service provider’s right to suspend services in the event of a customer breach, the right for the service provider to charge interest and the right for it to be reimbursed for attorneys’ fees and collection costs if the customer fails to make payment when due.
The payment provision also typically addresses the allocation of responsibility for taxes, which can vary by jurisdiction and involve sales, use and other taxes. Customers and service providers alike are often surprised to find that the services and deliverables that they create and receive may be subject to taxes. This issue is one that may need to be reviewed on a SOW by SOW basis, as the services and deliverables, and the location where they may be provided or delivered, may result in the imposition of taxes from a variety of taxing authorities. In the United States alone there are thousands of possible taxing authorities when Federal, State, County and Local entities are considered.
Disputes are not uncommon in the commercial world, and often a MSA has a provision that addresses disputes over invoices. In some cases, the customer is required to pay all undisputed amounts and then the parties work together to resolve the outstanding disputed items. If unresolved, service providers often want the right to recover attorneys’ fees and collection costs as in most jurisdictions they are not available as a matter of right unless an agreement expressly provides that a party may recover them.
In addition to terms and conditions addressing confidentiality and data protection, a MSA may contain other restrictive covenants such as provisions prohibiting a customer from soliciting or hiring a service provider’s personnel. These provisions are sometimes mutual and in certain cases, the parties negotiate a structure that will permit a customer to hire a service provider’s staff member subject to the payment of a fee. Service providers may also want a clear statement that they are free to provide services and deliverables to any third party, and customers often condition this to make clear that this ability is subject to the terms and conditions of the MSA including its confidentiality and intellectual property provisions. There are situations where customers may want more exclusivity and limitations on a service provider’s future activities. While beyond the scope of this article, these are often best raised and negotiated early in the process as service providers and customers often have highly divergent views on this topic.
As with all commercial agreements, a Master Services Agreement and a Statement of Work will address termination rights. The Master Services Agreement typically has a fixed initial term that automatically renews on an “evergreen” basis, subject to the rights of either party to terminate the MSA by giving the other party a fixed period of prior written notice. Customers often desire the right to terminate a MSA or any current SOW for convenience upon notice, and this is an area that varies based on the economic relationship envisioned by the relationship.
In some cases, a service provider will permit a termination for convenience right by a service provider provided that any stranded costs are able to be recouped. In other cases, the MSA by its nature is really intended as a fixed term obligation of the customer, and termination is only available through a termination for cause provision. This framework is much more prevalent in agreements where the service provider will itself need to establish and procure committed services from third parties in order to fulfill its obligations. Whether or not termination for convenience is an option, termination provisions typically address the effects of termination, what terms and conditions survive and what obligations the parties have in connection with termination such as the obligation to continue to provide transition services, and the parties’ obligations to return and/or destroy the confidential information of the other party in its possession or under its control.
Do not forget the “boilerplate” in a Master Services Agreement. As with all commercial agreements, the miscellaneous section typically contains provisions that are just as important as those contained in the core of the agreement such as governing law, choice of venue and jurisdiction, assignment and subcontracting, independent contractor status, dispute resolution, force majeure and procedures for making amendments to the Master Services Agreement and Statements of Work.
Conclusion – The Importance of Master Services Agreements
Whether you are a customer or a service provider, a Master Services Agreement is a critical tool to achieve your business objectives. Working with a business lawyer who understands your business and the mechanics of Master Services Agreements and Statements of Work can help you optimize your contracting processes and set a solid foundation for your company’s success.
Copyright 2020 Geoffrey G. Gussis. Learn more about me, the legal services I provide, and other articles I have written. All rights reserved. Contact: email@example.com or (732) 898-0549. Licensed to practice in New Jersey and New York. Like this article? Leave a review and more will follow! It only takes a few seconds.