Master Service Agreements: key drafting considerations for your business

A Master Service Agreement (“MSA”) is a foundational document that governs the relationship between two parties. It’s designed to outline the terms and conditions under which services will be provided, mitigating potential disputes and establishing a clear framework for both parties.

For businesses entering such agreements, understanding the critical clauses of an MSA is essential to safeguarding interests and ensuring smooth operations.

Key clauses to include in an MSA

1. Scope of services

The scope of services is a cornerstone of any MSA. This section defines the services to be provided and how they will be delivered. While the MSA may reference specific statements of work (“SOWs”) for detailed descriptions, the overarching framework should be clear. Ambiguity here can lead to disputes later.

Why it matters: a well-drafted scope ensures that both parties have a mutual understanding of expectations and deliverables, reducing room for misinterpretation.

2. Payment terms

This clause covers how and when payments are made, including the payment schedule, method, and any late fees or penalties.

Why it matters: transparent payment terms prevent cashflow issues and disputes concerning compensation.

3. Term and termination

Terminating an MSA can become difficult, especially when there is work in progress under, for example, an SOW associated with an MSA. These clauses outline the duration of the agreement and the conditions under which it can be terminated.

These clauses should address both termination for convenience and termination for cause, including any required notice periods, and outline the process in the event that work has not yet been completed under a SOW.

Why it matters: clearly defined termination clauses provide a safety net if the relationship needs to end, reducing financial and legal risk for both parties.

4. Confidentiality and intellectual property

Confidentiality provisions protect sensitive business information shared during the engagement. Intellectual property clauses specify ownership rights over materials created during the relationship.

Why it matters: these clauses ensure proprietary information and created works are adequately protected, maintaining the integrity of the business.

5. Indemnification

Indemnification clauses determine who will bear the cost if something goes wrong, while liability clauses, as set out below, cap or exclude certain types of damages.

Why it matters: these clauses can significantly impact financial exposure in the event of a dispute or breach. Ensuring fair terms here is crucial.

6. Order of precedence

This clause establishes a hierarchy among the documents in the agreement, such as the MSA, SOWs, or purchase orders. It ensures that, in the event of a conflict between provisions, one document will take priority.

Why it matters: an order of precedence clause prevents disputes by clarifying which document’s terms will prevail, ensuring consistency and reducing ambiguity.

7. Dispute resolution process

An effective dispute resolution clause outlines how conflicts will be managed, whether through mediation, arbitration, or litigation. This clause should specify the process, timeline, and jurisdiction.

Why it matters: a clear dispute resolution process minimises disruptions by providing a roadmap for resolving conflicts efficiently and cost-effectively.

8. Amending the agreement or SOW

Flexibility is crucial in long-term agreements. The MSA should outline the process for making amendments, whether to the main agreement or to SOWs.

Why it matters: a well-defined amendment process ensures that changes are documented and agreed upon, reducing the risk of misunderstandings or unauthorised alterations.

Clauses that raise concerns

1. Limitation of liability

Although services are typically provided under the SOW rather than the MSA and therefore liability is often more likely to arise under the SOW, liability may also arise under the MSA – for example, breach of confidentiality.

Parties should consider appropriate limitations and exclusions of liability in respect of both. In addition, while limiting liability is advisable, overly restrictive caps can be a red flag. For example, a clause that absolves one party from any liability, regardless of the circumstances, could unfairly burden the other party.

Tip: negotiate the liability clause carefully, considering the specific risks and rewards of the relationship, as well as the value of the individual SOW or the aggregate value of all existing SOWs.

2. Automatic renewal

Clauses that allow for automatic renewal without explicit consent can lead to unintended obligations.

Tip: ensure there is a clear opt-out process and defined renewal terms.

3. Exclusive MSAs

Entering into an exclusive MSA can limit your ability to engage with other providers or clients. While exclusivity might offer certain benefits, it can also restrict flexibility and create dependency.

Tip: carefully consider the implications of exclusivity and negotiate terms that provide adequate safeguards, such as performance benchmarks or exit provisions.

Conclusion

An MSA’s strength lies in its clarity and ability to foresee potential issues. Poorly drafted MSAs can result in:

• Disputes: ambiguities can lead to misunderstandings about responsibilities and expectations
• Financial loss: unclear terms on payment, liability, or termination may expose a party to unforeseen costs
• Reputational damage: protracted disputes or breaches can harm relationships and public perception.

A well-drafted MSA is more than a legal formality – it’s a strategic tool that sets the tone for a successful partnership. By focusing on key clauses, addressing potential red flags, and ensuring balanced liability provisions, businesses can protect their interests while fostering trust and cooperation.