Mastering MSAs: Unveiling Hidden Pitfalls and Pro Tips for Efficient Long-Term Contracting

Master Service Agreements (MSAs) are the unsung heroes of efficient long-term contracting between customers and service providers, providing a streamlined framework for diverse, project-oriented services. Instead of renegotiating all contract terms for every new project, businesses can include the provisions applicable to all projects in a single MSA and then, as new work is contemplated, execute project-specific Statements of Work (SOWs) containing those terms that can’t be recycled across projects. This saves time and money, radically simplifying the negotiation and management of service contracts between the parties. 

Because MSAs are one of the most widely used types of agreements in the commercial sphere, contracting professionals are well-versed in their commonly negotiated provisions. As such, this article explores the nuances of specific provisions that might be overlooked by a busy practitioner, offering insights and tips for negotiating from both the customer and service provider perspectives. 

Key Considerations for Customers:

From the customer’s perspective, there are a number of less obvious pitfalls that can result in problematic MSAs, such as failing to include the scope of services covered by the MSA, adequate data protection measures, invoice dispute language, or flexible termination clauses. Additionally, the customer would do well to consider whether its affiliates, if any, should be permitted to use the MSA.

1. Defined Scope: Even with detailed Statements of Work (SOWs), it's crucial to define the overall scope of services that may be contracted for under the MSA. This prevents accidental violations of exclusivity clauses in contracts with other providers, ensures all necessary legal provisions are included in the MSA given the contemplated services, and in larger organizations, where attorneys may not be negotiating the SOWs, it provides guidance as to whether an SOW may be an inappropriate means for contracting for a specific service or project. 
2. Invoice Disputes: Structure the MSA to allow for invoice disputes without disrupting operations or incurring penalties. Consider specifying that the customer is only responsible to timely pay undisputed invoices, rather than undisputed amounts in order to ensure invoice errors don’t negatively impact the customer’s accounting operations. Finally, setting forth invoice criteria and any documentation requirements that must be met can help to avoid potential litigation.
3. Confidentiality and Data Privacy: Even if confidential information and personal data is not directly needed for the provision of the services, the provider’s personnel may have access to it, for example in situations where the service provider is going to be present on the customer’s premises or working in the customer’s computer systems. Including appropriate confidentiality clauses and data protection language might be legally required and could be of substantial benefit if such information is later misused or impermissibly disclosed as a result of such access.
4. Cure Period for Breach: Carefully consider the appropriate cure period for breaches, and include provisions for immediate termination in the case of incurable breaches. While a thirty day cure period is relatively standard, it may be either too short for the service provider to effectively address the issue or much too long. Where the breach is incurable and continuing the relationship is likely to increase the risk of further damage to the customer, the right to immediately terminate is extremely important.
5. Use by Affiliates: It can be incredibly useful, particularly for franchisors or corporate groups that need to maintain consistency of service quality across regions or entities, to include language that allows the customer’s affiliates to utilize the MSA. There are a couple of ways to do this, but they should all be considered thoughtfully as there are different legal implications for each.

Key Considerations for Service Providers:

Service providers face unique challenges in MSAs that can impact their operational flexibility and financial stability. These agreements can inadvertently restrict the ability of the provider to scale, allow for financial losses, or burden the provider with an excessive level of risk. Furthermore, a failure to carefully negotiate assignment language can result in the future diminishment of the service provider’s assets.

1. Subcontracting: 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. 
2. Assignment: For service providers, executed contracts with customers constitute an asset of the provider’s business so it is especially important that they are assignable without the customer’s prior consent in the event that there is an acquisition of the assets of the business. If they are not assignable without consent, the customer gets leverage to renegotiate the contract, potentially reducing the value of the seller’s revenue stream in the estimation of the provider’s acquirer.
3. Remedies for Late Payment: 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. 
4. Limitation of Liability: Limiting liability by excluding certain types of damages and capping potential liability at a set amount for each SOW and/or in the aggregate for all SOWs executed during the term of the MSA is fairly standard. It is also a good idea to include language limiting such exclusions to the maximum extent permitted by applicable law to help reduce the likelihood that the entire provision is invalidated in the event it conflicts with state law, public policy, or controlling case law.
5. Force Majeure: In order to avoid incurring liability in situations beyond the service provider’s control, such as a pandemic, where it is prevented from performing the contracted for services, a well-written force majeure clause can be vital. This is particularly important for the industries that provide services using union labor and/or that cannot be performed remotely. While a customer may suggest a mutual force majeure clause, provider-friendly clauses of this type typically carve out the customer's payment obligations.

Mutual Considerations:

Both parties benefit from addressing often-overlooked aspects of MSAs that affect the overall contractual relationship. Lack of clarity as to the relationship between the MSA and SOWs, ambiguousness regarding the effects of termination, and misalignment between legal terms and operational realities can create significant issues. Aside from including clearly drafted provisions in the MSA that address these issues, internal communication can be key to ensuring the organization receives all of the benefits of this contract type.

1. Nature of the Agreement: Clearly explain the relationship between the MSA and associated SOWs to ensure all parties understand the contracting structure.
2. SOW Content: Specify minimum requirements for SOWs to be considered valid under the MSA, for example the requirement that SOWs incorporate the terms of the MSA by reference.
3. Conflict of Terms: Clearly state which document, the MSA or an SOW, takes precedence in the case of conflicting terms.
4. Effect of Termination: Address how termination of the MSA affects any SOWs in effect at the time of the MSA’s termination.
5. SOW Usage: Educate business partners about when it's appropriate to use the MSA and when a standalone agreement might be necessary.

By paying attention to these often-overlooked aspects of MSAs, both customers and service providers can create more robust, flexible, and effective long-term contracting relationships. Remember, while MSAs provide a valuable framework, they should be tailored to the specific needs and circumstances of each business relationship. When in doubt, always consult with legal professionals to ensure your MSA adequately protects your interests and supports your business objectives.

Learn more about how you can accelerate reviewing and redlining MSAs on our AI contract review platform by booking a meeting with a member of our team here.

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