Basics of Master Service Agreements
What is a Master Service Agreement?
A Master Servicers Agreement (“MSA”) is contract between two parties with an ongoing project or business relationship that offers a flexible system for completing a project over time when there will be decisions to be made along the way. The purpose of an MSA is to set the bounds of the contractual relationship, establish a system for accomplishing the work that needs to be done, and to provide an efficient way to keep the work on track and resolve any disputes which may arise during the course of the project. This white paper discusses the fundamental aspects of drafting and negotiating MSAs, best practices for managers working under an MSA, and the common disputes which arise under this regime and how to effectively resolve those disputes.
Why not Use an MSA Found on the Internet?
MSAs, by their nature, need to be customized to the parities and the projects they wish to pursue. There are no form agreements that can take the place of a well drafted agreement tailored to needs and capabilities of the parties themselves and the unique nature of their project. A well drafted MSA needs to serve as the guidepost for the actual managers involved on both sides and operate within the give-and-take that is the reality of any complex project involving multiple stages performed by multiple levels of management and labor.
These projects often involve and analysis phase where the parties evaluate the desired outcome of the project in comparison with the current status of the operations and set the benchmarks or deliverables; an implementation or performance phase where the bulk of the work is done; and a procedure for the testing or evaluating the work with firm guidelines for acceptance of the deliverables. No generic agreement can account for these project and party specific variables.
Since the MSA dictates how the parties will interact, it is crucial that it is tailored to the management structure that will actually be used by both parties to the relationship.
Essential Elements of a Master Service Agreement
As the name implies, the MSA is the master agreement that governs the high-level structure of the relationship. Following the MSA, there are usually a series of Statements of Work or “SOWs” that outline the actual details of each phase of the project. The MSA will define the scope of the work, payment terms, change orders, dispute resolution, and termination.
While the vast majority of disputes over MSAs are settled prior to or before the conclusion of litigation, they are occasionally litigated to completion. And for these there is some data in the reported case law. According to the Lexis legal database, the first time this term appears in the courts is 1966. But prior to 1985 there were only 8 reported cases that mention either “Master Service Agreement” or “Master Services Agreement.” Between 1985 and the end of 2007 there were 324 more reported cases, but for the decade between January 1, 2008 (after the effects of the 2007-2008 economic downturn began to hit) to the end of 2017, there were 1028 reported cases, or just over three times the amount from the previous five decades.
What this means it that a great number of MSAs are not being effectively drafted. Litigation, as an outcome, is more than just a failure of the relationship—it is a failure of the MSA to adjust the relationship to changing circumstances or provide an effective procedure to resolve irreconcilable issues without the need for judicial intervention.
The MSA should provide for a clear end to the project, and if there are any ongoing obligations such as warranties, these obviously need to be clearly defined as well. But one of the most litigated situations is the early termination when one of the parties has either failed to perform or failed to keep up with regular payments. It is not unusual for the parties to end up in litigation because they have failed to act in accordance with the early stage conflict resolution terms of the agreement. Unfortunately, many MSA are drafted in such a way that termination is the only alternative. This often leads to a situation where one party is owed a substantial amount of money and the other is left with a partially completed project that is worthless in its unfinished state. The friction between the parties is magnified if significant funds have already been spent. All too often, at this stage in the dispute, the animosity between the two parties makes it impossible to complete the project.
Final Thoughts on Master Service Agreements
One of the most common litigations scenarios that can be prevented with a well drafted MSA is the situation where one party falls behind in its payments, but the preforming party keeps performing until a significant deficit accrues. Often, the non-paying party will start to complain about the quality of the services or keep rejecting the deliverables to stall the projects or otherwise shift the blame. The flip side to this scenario is where the preforming party just can’t seem to complete some aspect of the project—either at all or as budgeted.
A well drafted MSA should not only anticipate these scenarios and provide a way to resolve them, but should also provide clear guidance to the project managers on how to navigate these situations. The best practice is to not only have a well drafted MSA but to also have a Management Guide to the MSA that is a separate document—stripped of any legalese—that functions like a user manual to the staged conflict resolution process contained in the MSA. For example, if a deliverable is not acceptable, there may be a notice procedure that, if not followed, will waive rights to a warranty obligation. The project managers need to understand this process completely and have forms available to them to facilitate notice and document the process. Likewise, if a scheduled payment is late, the project manager needs to know how to proceed without jeopardizing the project or the relationship. Schedules can be made flexible to accommodate problems but there needs to be a well-defined process, and everyone must understand how abide by that process.
See our Legal FAQs page for the answers to more intellectual property law questions.