Master Service Agreements (MSAs) are commercial contracts that govern services to be performed for a customer, where such services and their associated fees are set forth in a separate statement of work (SOW) along with any additional details, terms, or conditions that are specific to the services described in the SOW. These types of agreements permit more efficient contracting over the long-term in circumstances where a customer anticipates using the services of the same service provider, but the nature of the services is interim, varied, and/or project-oriented such that the services to be provided during the term of the agreement will not remain static and the use of amendments alone to add or remove services from the scope of work is an inadequate mechanism of contracting.

MSAs are one of the most widely used types of agreements in the commercial sphere. They can relate to virtually any type of services, though certain industries have their own specific types of agreements for services (e.g., software as a service (SaaS), clinical research (CTA), etc.). This article aims to shed light on some of the areas of concern from the perspective of both a customer and a service provider, but its focus isn’t necessarily on those provisions most commonly negotiated. Contracting professionals generally negotiate this type of agreement frequently enough to have those issues well in hand. Rather, this article examines nuances in specific provisions or issues that might be overlooked by busy practitioners.

From the perspective of a Customer you will want to be thoughtful of the following:

Even though the specifics of the services and any deliverables should be well-described in subsequent SOWs, it is still important to define the scope of services that can fall under the MSA. This is particularly important if the service provider is large and/or performs a wide variety of services, some of which your organization might not want to utilize under any circumstances or which may require the negotiation of a separate stand-alone service agreement or MSA. For example, if your organization already has in place an exclusive agreement with a provider of landscaping services, and the MSA will be with a property management company that provides a wide range of services (janitorial, landscaping, building maintenance, etc.), you wouldn’t want to accidentally violate the exclusivity clause of the landscaping contract. A defined scope also ensures that all legal provisions applicable to the services that may potentially be provided under an SOW are included in the MSA.

It’s important that the MSA permit the customer to dispute invoiced amounts in a manner that will not burden its accounting systems (require invoice-splitting), incur late fees, or result in a stoppage of the service provider’s performance. Depending on the type of services to be provided, it may also be prudent to include specific criteria for each invoice. Such criteria might include the SOW number or project identifier, the service provider’s ACH deposit information, and itemization of each task or milestone completed during the period covered by the invoice. The MSA may also state that all invoices must include supporting documentation that is acceptable to the customer and can be relied upon by the customer’s upstream clients to demonstrate that the work has been completed, by whom, when, etc. The aim of such a requirement is to avoid litigation. For example, the quality and type of supporting documentation was the central focus of a breach of contract lawsuit in New Mexico between an oil field management company and an excavator hired to work on multiple projects for the company’s clients, each of which required specific documentation for payment. The case eventually settled, but not before the other party countersued, resulting in legal fees for each party.

Consider whether the service provider might have access to your organization’s confidential information or any personal data that is collected, stored, or maintained by your organization. The information may not even be needed for the provider’s performance of the services, but if its personnel could have even indirect access to such information during the performance of the services (e.g., on-site presence in areas where confidential information or personal data may be viewable on employees’ screens or desks, or working in computer systems that house personal data), the best practice is to pre-emptively address that via the MSA. If warranted, a confidentiality article can easily be inserted into the MSA and a data processing addendum or business associate agreement, as applicable, can similarly be attached to and/or incorporated into the MSA by reference.

MSAs generally permit a customer to terminate either a specific SOW and/or the MSA in the event of a breach by the service provider that is not cured within a certain period of time stated in the termination clause (i.e., the “Cure Period”). Usually, this period is 30 days, but the customer should consider whether a shorter period of time such as 5 or 10 days is more appropriate to their needs and/or necessary given the risks associated with breaching the agreement. And not every form of breach is necessarily curable. For example, if the customer is in the health services industry and the customer learns that the provider has been debarred, then continuing to work with the provider may have significant legal consequences for the customer. Customers are better protected if they include contract language that allows them to immediately terminate the MSA and/or any SOW upon written notice for any breach that they reasonably determine is incurable.

It can be incredibly useful, particularly for franchisors or corporate groups where maintaining consistency of service quality across regions or entities can be key, to include language that allows the customer’s affiliates to utilize the MSA. There are a couple of ways to do this. One is to specifically add each of the customer’s affiliates as parties to the MSA, but that would generally require each of them to execute the document. Another is to add language stating that the customer is entering into the MSA on behalf of itself and its affiliates, such that the customer’s affiliates are permitted to enter into SOWs with the provider subject to the terms of the MSA. If, however, such affiliates are not signatories to the MSA, it will be important to also include a clause specifically stating that the affiliates are not merely third-party beneficiaries of the MSA, but instead have all of the rights and responsibilities of the customer under the MSA and shall be considered in privity of contract with the provider. This ensures that if the service provider sues an affiliate for failing to pay under an SOW executed by the affiliate, the customer doesn’t have to be added as a party to the lawsuit. Note, however, that a provider may require the customer to expressly warrant in the MSA that it has the legal authority to enter into the agreement on behalf of and legally bind its affiliates so that they cannot later claim they are not responsible for payment obligations under the MSA. Finally, a provider may want to (a) specifically identify in the MSA which of the customer’s affiliates are permitted to utilize the agreement, or (b) define the term “affiliate” within the contract so that the scope of entities that can use the MSA is limited. This is also an important consideration when negotiating Master Supply Agreements.

From the perspective of a Service Provider you will want to be thoughtful of the following:

Having the ability to subcontract the provision of the services is particularly important for smaller companies, those with fluctuating levels of staffing or incoming work, and those that are trying to expand without hiring. While the provider may have to agree to flow down substantially similar contract terms to any subcontractors, in most circumstances the provider should arguably be permitted to subcontract the provision of the services to qualified subcontractors without the prior written approval of the customer. If the customer insists on prior written approval due to concerns regarding security or quality, the language can generally be softened with the inclusion of “which approval shall not be unreasonably withheld or delayed.” Obviously, there are certain types of high-risk or non-fungible services that a customer might reasonably object to being subcontracted or to being subcontracted without the customer’s prior approval, but these types of services often utilize a different form of agreement, such as a CTA, SaaS, or Consulting Agreement. In short, the right to subcontract offers a level of flexibility in operating one’s business that may save it significant financial resources.

Sometimes customers will attempt to include an anti-assignment clause in an MSA in order to control who will be performing the services because contracts are generally freely assignable without them. This is most likely when the services are unique and/or the provider has a reputation for exceptional skill or quality in the performance of the services. For service providers, however, executed contracts with customers constitute an asset of the provider’s business. As such, it is especially important that they are assignable in the event that there is an acquisition of the assets of the business. In fact, assessing whether there are anti-assignment clauses in customer contracts is part of the due diligence that is performed by attorneys as part of any such transaction and can affect the valuation of the provider’s business. This is because anything that gives parties to the seller’s contracts, particularly the key customer contracts, leverage to renegotiate the contract has the potential to reduce the value of the seller’s revenue stream. As such, it is important that counsel for a service provider ensure that any clause in an MSA limiting assignability of the contract is carefully negotiated to include appropriate exceptions to those limitations.

Including language in the MSA specifying consequences should the customer fail to timely pay the provider is key. This will both incentivize the customer to pay on time and help to compensate the provider for costs it might incur due to late payments and collections efforts. For example, the provider can include language stating that late payments will incur interest at a certain rate, or the maximum rate permissible under law, whichever is less, provided that it is clear what constitutes a “late” payment. The provider could include language allowing it to suspend performance of any executed SOWs and/or terminate the MSA or any particular SOW on the basis of material breach should the customer fail to make timely payments. Finally, the provider could also include language requiring the customer to reimburse the provider for any collections costs, including attorneys’ fees and court costs, associated with attempting to collect money owed by the customer pursuant to the agreement. It should be noted, however, that the provider’s ability to negotiate these provisions will likely depend on the parties’ relative bargaining power.

Where possible, a service provider should attempt to limit its liability in at least two specific ways. The first way is to exclude certain types of damages that may be indirect or excessive such as those that are consequential (also called “special” or “indirect”) or exemplary (“punitive”). The second way is to cap the service provider’s potential liability at a set amount for each SOW and/or at a set amount in the aggregate for all SOWs executed during the term of the MSA. This could be a dollar value, such as “$1,000,000,” based on project value, such as “any liability stemming from an SOW hereunder is capped at the total value of such SOW,” or some other payments-based calculation. Whatever the case, the MSA should clearly state whether any cap is for all liability arising under the MSA in the aggregate or per SOW or both. It is also a good idea to include language such as “The limitations of this article shall apply to the maximum extent permitted by applicable law, even if any remedy fails its essential purpose,” to ensure that the entire provision is not invalidated in the event it conflicts with state law, public policy, or controlling case law. A savvy customer will likely want to exclude from the limitation of liability clause the provider’s breach of any confidentiality and intellectual property obligations in the contract as well as any indemnification obligations of the service provider, which may require further negotiation. Something else to consider is whether or not there is a data protection clause or agreement (BAA, DPA, DUA) associated with the MSA and, if so, whether the liability cap of the MSA also applies to data breaches.

Since the Covid-19 pandemic, businesses have had a heightened awareness of how circumstances beyond their control can affect the ability of a party to perform its contractual obligations. This is particularly true for the provision of services, which is dependent on the ability of the business to employ adequate labor and provide a safe working environment for such employees to perform them. As such, it is important (particularly for the industries that provide services using union labor and/or that cannot be performed remotely) to include a well-written force majeure clause in their MSAs. Notably, however, a provider will not want this clause to be entirely mutual and should carve out the customer’s obligations to timely pay the provider for services rendered.

Both parties will want to be thoughtful of the following issues, which are specific to master agreements:

Any type of master agreement (also called a “framework” or “umbrella” agreement) should include language explaining its nature, specifically how it relates to SOWs or similar dependent contract documents such as Work Orders, Purchase Orders, Order Forms and the like. An example of such a clause follows: “As a master form of agreement, this Agreement allows Service Provider and Customer, including Customer’s Affiliates, to contract for the provision of multiple types of services in multiple locations through the execution of Statements of Work, each of which is a separate and distinct contract that expressly incorporates the terms and conditions of this Agreement, without having to re-negotiate the basic terms and conditions contained herein, and accordingly this Agreement represents a vehicle by which to efficiently contract for a broad range of specified services.” It is important to include language in the MSA explaining its nature to ensure that the parties have a clear understanding of the contracting structure and a court will understand the intention of the parties should litigation involving the MSA ever ensue.

Well-written MSAs specify the minimum requirements for what should be included in an SOW in order for the SOW to be valid. For example, the MSA may specify that in order to be effective each SOW issued under the MSA must be fully-executed and expressly incorporate the terms and conditions of the MSA into the SOW. (It is most advantageous for purposes of litigation and amendment if the SOW incorporates the terms of the MSA and not vice versa.) The MSA may also require that certain topics be adequately addressed in the SOW such as the term, the scope of the services to be rendered, including the detailed requirements of any deliverables to be created, a delivery schedule and/or project milestones, acceptance criteria, compensation, key personnel, etc. An MSA may even go one step further by also stating that each SOW must be in substantially the form of an example SOW or SOW template that is attached to the MSA as an exhibit. This allows the parties to agree on what should and shouldn’t be included in an SOW and ensures consistency across SOWs, which minimizes the risk of impermissible deviations being overlooked and increases the speed at which SOWs can be reviewed.

It is important to specify somewhere in the MSA which of the documents, the MSA or the SOW, will control should their terms conflict. One of the efficiencies in utilizing MSAs for contracting is that it should enable the parties to centralize the negotiation of legal terms into a single agreement that will apply to all future SOWs, which lessens the contract review burden of each party’s in-house counsel. As such, most of the time the parties will want the MSA to control under all circumstances so that their attorneys will not have to review every SOW for risky language. However, sometimes the parties might need to have more flexibility and will choose to add language in the MSA stating that the MSA will control if there is a conflict, except where the SOW expressly overrides a specific provision of the MSA that is specifically cited in the SOW. Sometimes, the MSA will even dictate the exact wording that needs to be included in an SOW in order for it to take precedence with respect to any conflicting language in the MSA. For example, the exact wording might include language clarifying that the conflicting language does not function as an amendment to the MSA and only takes precedence over the MSA for the SOW in question and not for all future SOWs. However the parties want the SOW and MSA to operate with respect to each other, the order of precedence if there are conflicting provisions needs to be addressed in the MSA to avoid confusion or potential end-runs around the authority of the MSA.

How does termination of the MSA affect any SOW in effect at the time of the MSA’s termination? Does the termination of the MSA automatically terminate all SOWs then in effect or do the provisions of the MSA survive in respect to SOWs then in effect, which continue until fully-performed unless each is specifically terminated? This question needs to be answered somewhere in the MSA, whether in the article addressing termination or in a separate article specific to the effects of termination. The parties should consider any financial and regulatory risks associated with each scenario. Generally, though, where the nature of the project or work pursuant to each SOW is expensive and/or not easily transitioned to another service provider without starting over, termination of the MSA will not, by itself, terminate SOWs then in effect.

One final thought for the parties to consider is whether a single master agreement is really appropriate given the types of projects to be performed or services to be provided. Because where it is not, there can be substantial risk that the negotiation of legal terms (like ownership of intellectual property, confidentiality, payment terms, warranties, etc.) will end up moving to the SOW. However in some in-house legal departments SOWs are reviewed by paraprofessionals or those without any legal training as all of the legal terms were intended to have been negotiated upfront in the MSA by attorneys. A business development team member may also see that a master agreement exists and assume it is appropriate for all potential services or projects with the counterparty when it may not be. A helpful tip is to educate your business partners about the fact that the presence of a single master agreement with a vendor doesn’t mean it should be used for all purposes (a stand-alone agreement, amendment to the master, or negotiation of a separate master may be more appropriate) and that any questions about whether a specific master is appropriate to use under the circumstances should be brought to your legal team’s attention. Similarly, contract analysts and other non-attorney SOW reviewers should be apprised of when to flag an SOW containing legal terms for counsel to review.