Master Service Agreement: Everything You Must Know
A master service agreement is a contract entered into by two parties during a service transaction. This agreement details the expectations of both parties.9 min read
Updated June 24, 2020:
A master service agreement is defined as a contract two parties enter into during a service transaction. This agreement details the expectations of both parties.
Master Service Agreement: What Is It?
A master service agreement is when two parties agree to a contract that will settle most details and expectations for both parties. It'll state what each group has to do to honor its end of the bargain. It'll also show which services apply in the master service agreement.
The goal of a master service agreement is to make the contract process faster. It also should make future contract agreements simpler. A master service agreement (MSA) is also called a service level agreement (SLA). It spells out:
- Confidentiality: The parties both agree they won't share any secrets of the company with outside parties.
- Delivery requirements: The businesses decide who will deliver what and when.
- Dispute resolution: Should issues come up, the MSA outlines how the parties will resolve their conflict.
- Geographic locations: Both groups agree on where the employees will do the job.
- Intellectual property rights: The parties decide how to handle ownership and regulation of all patents and other IPs. The client will get all the IP in some instances. In others, the vendor provides perpetual rights while keeping his or her IP and patents.
- Limitations of liability: The MSA lists who is the responsible party in the event of a lawsuit.
- Payment terms: These terms show what the estimated cost is as well as the schedule for payment.
- Venue of law: The MSA identifies the place where a legal resolution will occur. This could include arbitration or a specific state or federal court.
- Warranties: The groups agree on the scope and the coverage of the warranty.
- Work standards: This section of the MSA defines what each party regards as acceptable work. Not living up to the work standards often causes disputes.
An MSA may also cover a few other areas, such as business ethics, network and property access, and social responsibilities. The goal is to hammer out as many details as possible in broad strokes. That way, corporations don't waste too much time and money in negotiations.
Similar but less important agreements to MSAs are:
- Purchase orders
- Purchasing agreements
- Service level agreements
- Statements of work
- Risk allocation.
What Is the Purpose of a Master Service Agreement?
Businesses often use MSAs to help make contract negotiations simpler. This agreement lets both companies spend their time discussing the terms of the deal. Then, they can proceed with the work outlined in the agreement. If you don't have an MSA, the customers and the company can still work through issues, but there are big concerns that might derail the contract. Having an MSA before having a specific contract lets companies focus on what their particular contractual issues are, such as the time frame and the price, for when the contract actually arises.
Master service agreements are intricate agreements most of the time. When there isn't a particular contract that's being discussed, companies won't have to deal with the pressure of time. This way, they can figure out and tackle any possible issues.
Once a company goes through the MSA negotiation process one time, it'll understand what kind of concerns or issues may come up. This is a benefit, as the company will know what the problems are for the future and be able to address them when it drafts the next MSA.
An MSA can also be used when there's an arrangement that's long term, such as two parties needing to avoid negotiating rates every time a new work order is generated. The companies can quickly move forward and complete the job instead of having to halt and slow their progress to negotiate the new terms. This will save both time and money for the parties.
Why Is a Master Service Agreement Necessary?
Many small businesses use cut-and-paste provisions, or contractual templates, when they need to move quickly from one contract to the next. There may be an opportunity for a partnership that suddenly occurs, or a potential customer wants to see a nonstandard service right away. When implementing an MSA, companies don't have to deal with any problems coming from contracts that aren't well-constructed. This means MSAs assist companies in decreasing their chance of litigation and avoiding any contractual disputes. Since technology, operating environments, and markets constantly change, companies need to monitor their MSAs and make amendments when necessary.
When businesses make a deal, one party doesn't want to take responsibility for mistakes the other party makes. The MSA will guarantee that if one party screws up, it'll handle all the financial losses the mistake may cause. The other party is free of financial obligations, since it will not be held at fault. The legal term for this is indemnification.
In some instances, one party will take all on all responsibilities. It'll sign an MSA that gives the party full financial responsibility for any mistakes, even if the other party makes them. This party will even pay the legal fees for its partner in the MSA. It also agrees not to sue its partner.
Risk allocation is the other factor. When businesses agree to an MSA, the new deal can impact existing contracts. Insurance agreements are especially important. An MSA will protect the parties by outlining the risks each company takes. It'll also decide responsibility for each group during the project's lifetime. With an MSA, resolving disputes is easier. The parties already know the terms and can determine fault quickly.
What Are the Advantages of a Master Service Agreement?
Completing a contract between two businesses is a long and expensive process. A business pays money on hours spent and legal fees. A faster deal is in everyone's best interest. With an MSA, two parties agree to the main points. That speeds up the negotiating process. A motivated company can write an MSA in weeks or possibly days. That's much faster than a standard contract negotiation.
Since an agreement is in place, an MSA still protects both parties. When a dispute arises, the MSA decides who is at fault. Since checking the document is easy, the two businesses are less likely to sue. This again saves time and money.
The other advantage of the MSA is that it's a good blueprint. When a company drafts an MSA it likes, it's simple to copy. Each deal will have its own specifics, but a good MSA works as a template for future negotiations. The parties have more time to focus on the important parts of the discussion, the cost, and time required to complete the project.
What Should the Master Service Agreement Cover?
When building an MSA, focus on including four things in the agreement:
- Every responsible issue either party might face.
- What both companies will do together.
- What the other company must do.
- What your company must do.
Listing details will help both parties honor their side of the MSA. Deciding potential issues in advance is important, since the business world has many possible problems. Something as simple as a third-party vendor going bankrupt could derail an MSA. The two companies in the agreement must plan for such potential pitfalls. These areas of conflict include:
- Delivery and installation: The MSA should say when a product ships and who is responsible for setting it up the first time.
- Background checks: The MSA will list any requirements for potential employees who want to work on the project.
- Project management: Things could go wrong if neither side decides who is in charge. Spelling out who's the boss is important.
- Expected charges: The parties should agree on the projected cost to participate in making the product.
- Terms of payment: One party should tell the other when it will pay, how often it will pay, and how long it will continue the payments.
- Insurance: The parties will agree on how to handle all insurance coverage and expenses. Should they fail to do so in the MSA, any setback will lead to problems and possibly even litigation.
- Escrow: The groups will decide whether either one places money in a trust and, if so, what the circumstances are that will allow the other party to earn it.
- Security: Both companies must agree on who will handle and pay for the protection of their project or product.
- Government requirements: The parties will decide where to work on their project. Settling this has city, state, and federal tax implications.
- Liabilities: Should an incident occur, the MSA must spell out which business will assume the risk. Otherwise, they'll fight over who is responsible.
- Taxes and tax responsibilities: Once taxes are known, the two businesses must choose how they will split the tax expenses.
- Third-party coverage and concerns: Many projects require the involvement of more than two parties. When this happens, an MSA has to say how all the above applies to a third party.
- Out clauses and causes for agreement termination: Businesses split up all the time. The MSA shows how the parties should handle a corporate divorce.
What Are the Most Common Disputes and Risks With a Master Service Agreement?
While an MSA works as a way to lessen legal concerns during negotiations, issues occur. The most common MSA disputes involve:
- Employee injury or death: The parties in an MSA are likely to debate blame for such incidents unless they're specifically listed in the agreement.
- Property damage: This should be clearly addressed in the MSA.
- Failure to communicate: This problem happens when one business requests updates, but the other doesn't respond in a timely manner.
- Failure to meet deadlines: Like anything else in the business world, a failure to meet deadlines is cause for disagreement.
- Failure to pay as agreed: The only thing worse than missing deadlines is missing payments. This sort of conflict is the quickest way to lead to a dispute.
- Performance or service issues: When a product fails to meet expected goals, the parties will blame each other for the failure.
- Product defects: A product that breaks down after usage will set back expected revenue.
- Unauthorized charges: Similar to payment issues, a slew of surprise charges will cause one party to believe the other is cheating the agreement.
How Would You Add Additional Language to a Master Service Agreement?
A recent court case, Duval v. Northern Assur. Co. of Am., 2013 US App. LEXIS 13680, showed that additional language isn't always OK. A third-party insurer asked for the court to honor insurance requirements in the MSA that didn't apply to one of the companies, BHP. The court ruled in favor of BHP, citing no earlier cases.
Adding more language to an existing MSA will require both parties to proceed. Each will have to agree to alter the terms and then update them with the new language. The companies need to have a strong working relationship for such a thing to happen.
Where Can You Use a Master Service Agreement?
These types of agreements are very common in government and commercial work. They're also often seen on the consumer side of things. An example of a master service agreement is what you have with your telephone company. You enter into a continuous agreement where service rates are charged each month, and the company states the conditions for its maintenance tasks.
What is the Difference Between a Contract, an Agreement, and a Master Service Agreement?
The words "agreement" and "contract" are often used as if they're the same, but they are not. Black's Law Dictionary defines an agreement as "a mutual understanding between…parties about their relative rights and responsibilities." It also states this is an agreement that creates obligations between parties that the law can enforce. An MSA is also defined as a legal document that puts together separate but similar agreements between the two signing parties.
There isn't one clear answer as to which agreement or contract is best for your company. You should keep a few items in mind, however. Agreements aren't seen as formal as contracts and won't be as enforceable as a contract. On the other hand, contracts are legally enforceable and binding, but they must meet certain requirements. You can quickly draw up an agreement, while contracts can take as long as months to finish negotiating.
Some companies like MSAs, since the parties can negotiate any future terms and agreements at a quicker rate on a basis that's per deal. An MSA often outlines what the business relationship is in casual terms and focuses on:
- Product warranties
- Processes for dispute resolutions
- Payment terms
- Intellectual property.
Some might include terms by geographic locations as well, especially if one of the parties is located in a differing state or country.
The most common areas you'll see MSAs are in marketing and finance or human resources, as one party or company is provided support that's open-ended to another one. Once an MSA is put in place, and deals are negotiated or services are added, the companies often write up agreements such as a contract or a statement of work to define what the particular service area is according to the MSA.
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