What is a Master Service Agreement?

April 27, 2022

A contract may cover a one-time activity between parties, but what happens when the relationship or conditions are ongoing? This problem can be solved by the master service agreement which simplifies the future agreements and speeds up the negotiation process when the signing parties know they will continue to work together in the future. In a master service agreement, the additional contracts are not required to be negotiated because the fundamentals of the initial agreement can be included in all the future contracts.

These agreements are not only used in the tech industries, but are also suitable for any long-term, continuous commercial engagements, such as client/vendor contracts, government contracts, and union discussions. In this blog, you will understand the meaning, purpose, and advantages of a master service agreement.

What is a Master Service Agreement?

A Master Service Agreement (“MSA”) is a contract between two parties with an ongoing project or commercial connection that provides a flexible mechanism for finishing a project over time while making decisions. The objective of the Master Service Agreement is to define the contractual relationship’s boundaries, develop a mechanism for completing the work that needs to be done, and provide an effective way to keep the project on track and address any disputes that may emerge during the project’s course.

What is the purpose of a master service agreement?

The contract negotiation process is simplified and streamlined with a master service agreement. By outlining the deal’s terms at the outset,  Both parties establish a business association while still refining their rights, obligations, and expectations.  Companies can transfer their focus from the basics and unimportant matters to the specifics of their contract without jeopardizing the foundational agreement by establishing the framework of their business association with a master service agreement.

This agreement allows the parties to plan for the future and respond to changes in the business landscape, along with flagging possible areas of dispute or concern. MSAs also remove the pressure of a deadline by allowing time for parties to respond and change.

Finally, a master service agreement is ideal for long-term business collaborations that require room and security to develop and expand. Its flexibility can avoid conflicts by allowing both the parties to preserve their core relationship when the circumstances evolve and also save their time and money. If the events of property damage, missed deadlines, product defects, failure to pay, unauthorized charges, miscommunication, employee injury, or unsatisfactory performance occurs, then the master service agreement delineates the responsibility between the parties.

What are the advantages of a master service agreement?

When a company needs to move quickly from one contract to the next, they usually use the cut-and-paste provisions or contractual templates. This is not required when you have a master service agreement because of the following advantages it encompasses:

  • It provides an opportunity for the partnerships that occur suddenly without any notice or a potential consumer can avail of a nonstandard service without any formation of a new agreement. Hence, the companies do not have to deal with any problems arising from the contracts that are poorly written. 
  • A master service agreement helps the companies in reducing their risk of litigation and avoiding contractual conflicts by providing a passage for them to make amendments because technology, operating environments, and markets are always changing, hence, a company must keep an eye on their MSAs.
  • When a company makes a deal, one party does not want to be held accountable for the other’s mistakes. A master service agreement guarantees that if one party makes a mistake, then that party will only be liable to cover all financial losses and the other party is free of financial obligations. There are instances when the single party assumes the complete financial responsibility for any mistakes, even if they are made by the other party, hence, they will sign an MSA and pledge not to sue their business associate for any financial loss.
  • A master service agreement will protect the parties by pointing out the risks that each company assumes and determining who will be responsible for each team during the project’s lifetime. This makes dispute resolution easier as the parties are already familiar with the terms of the agreement and can swiftly decide who is at fault.
  • Drafting a contract between two corporations is a time-consuming and costly process and the party has to pay money not only for the time invested but also for the legal fees. Hence, it is in the best interest of everyone to get a deal done faster by crafting a master service agreement in which two parties agree on the major aspects of the contract. This speeds up the negotiation process because when a new project is taken up by the parties, they have to focus only on the minor aspects of the project such as the time and cost required to complete the project, as the main points have already been outlined by an MSA.

What are the essential elements of a master service agreement?

Since the project managers rely on the master service agreement to provide clear guidance about how the work should be performed, therefore, it is important to draft it carefully and include the following elements:

  1. Scope of work 

It helps to determine what type of work is expected to be performed by the parties.

  1. Payment terms

This clause of a master service agreement allows both parties to settle on a concrete price, mode of payment, and payment schedule.

  1. Scope of amendments or changes

There should be a provision in which the parties are allowed to make changes to the agreement when there is any adjustment for additional work or schedule changes.

  1. Product and project management

This clause enlists the party who will be responsible for the delivery and installation of a product or service and spells out who will take the charge when anything goes wrong.

  1. Insurance coverage

In this, the parties agree on how they will handle the insurance acquisition and what consequences will be imposed if the person in charge fails to obtain and maintain the agreed-upon insurance coverage?

  1. Escrow and security

This provision in a master service agreement will help to determine who will fund the project and provide backup funding for the protection of the project or product.

  1. Dispute resolution

If an issue emerges during the engagement, this clause specifies how the parties will handle it. This helps in reducing litigation expenses and determining how to resolve problems during the contractual relationship. For example, appointing a mediator, an independent individual who fosters a resolution between the parties or parties can also choose to settle their disagreements through arbitration, which is a less expensive option than going to court.

  1. Termination

A master service agreement should specify a clear end date for the project, as well as any ongoing duties, such as warranties. Early termination is one of the most disputed scenarios in which one of the parties has either failed to perform or has failed to make regular payments. Hence, it is common for the parties to end up in litigation as a result of their failure to act under the agreement’s early-stage conflict resolution requirements.

Many master service agreements are written in such a way that the only option left with the party is the termination of the agreement when the other party does not perform its duties and in this situation, one party owes a large sum of money and the other is left with a partially built project that is worthless.

  1. Indemnification provisions

This clause releases one party from liability for damages and is often known as hold harmless provisions, which specifies what actions one party (the seller) agree to be responsible for if a third party sues the other party (buyer).

  1. Tax responsibilities

A master service agreement should also include the provision which specifies who will bear the tax responsibility and at what rate?

  1. Human resources

This clause enables the development and operation of new applications or the provision of additional services by providing human resources.

  1. Risk allocation

This clause in a master service agreement identifies the risks that each party will bear, particularly since the new contract may influence existing agreements.

Conclusion

One of the most prevalent lawsuit scenarios that can be avoided with a well-drafted master service agreement is when one party falls behind on payments, but the performing party continues to perform until there is a considerable deficit. To stall projects or shift blame, the non-paying party would frequently complain about the quality of the services or continue to refuse deliverables.

On the other hand, the performing party may be unable to fulfill some aspects of the project, either on time or within budget. A well-written master service agreement will not only anticipate these problems and offer a solution, but also provide clear guidance to project managers on how to deal with them.  If you want to know more about the master service agreement, contact eSahayak.

About Author

Shaily is a law student, pursuing B.Com LLb. (Hons) from University Institute of Legal Studies, Panjab University.

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