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.6 min read
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 their 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 agree they won't share company secrets with outside parties.
- Delivery requirements: The businesses decide who will deliver what and when.
- Dispute resolution: Should issues arise, the MSA states 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 usage 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 their 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 the expected cost as well as the payment schedule.
- Venue of law: The MSA identifies the place where any legal resolution will occur. This could include arbitration or a specific state/federal court.
- Warranties: The groups agree on the coverage and scope of the warranty.
- Work standards: This part of the MSA states what each party considers acceptable work. Failing to live up to the work standards is a frequent cause of disputes.
An MSA may also cover a few other areas, like 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
Why Is a Master Service Agreement 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, they'll handle all the financial losses caused by the mistake. The other party is free of financial obligations since it's not their fault. The legal term for this is indemnification.
In some instances, one party will take all on all responsibilities. They sign an MSA that gives them full financial responsibility for any mistakes, even if the other party makes them. They'll even pay the legal fees for their partner in the MSA. They also agree not to sue their 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 lifetime of the project. 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 spends 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. That again saves time and money.
The other advantage of the MSA is that it's a good blueprint. When a company drafts an MSA they like, 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, cost, and time required to complete the project.
What Should the Master Service Agreement Cover?
In building an MSA, focus on four things. The agreement should:
- List every responsible issue either party might face
- Say what both companies will do together
- Say what the other company must do
- Say what your company must do
Listing details will help both parties honor their side of an MSA. Deciding potential issues in advance is important since the business world has a lot of 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 they'll pay, how often they'll pay, and how long they'll 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/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/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 your 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/service issues: When a product fails to meet expected goals, the parties will blame one another 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 one will have to agree to alter the terms and then update them with new language. The companies need to have a strong working relationship for such a thing to happen.
If you need help with MSAs, you can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.