Sometimes contracting parties decide that they want to enter into a long term arrangement where the vendor will provide the customer with services supporting a wide range of projects over a long period of time. The customer may not be in a position to predict each and every project that might come up, but is reasonably sure that the services will be often needed. As a result, it might make a lot of sense for the parties to enter into a master service agreement.
What exactly is a master service agreement? Well, this kind of contract sets forth all of the general mechanics of how the parties plan on doing business with each other, as well as the general legal provisions, but doesn't say anything about the exact services, deadlines, and fees in any given instance. The parties instead execute a smaller contract that operates underneath the overall master service agreement and contains these kinds of provisions. This smaller contract is called a "statement of work" and gives the parties the flexibility to quickly enter into a deal for a new matter without needing to negotiate the overall mechanics and legal terms.
In the master service agreement, the parties usually cover the following issues:
Confidentiality. This section typically requires the vendor to keep all information, data and materials of the customer discovered during the performance of the services to keep that information confidential, regardless of whether or not it is marked as such, and to not share it with third parties. The requirement usually mandates that if a court demands that the vendor reveal the confidential information, the vendor will tell the customer first and give the customer a chance to obtain a protective order from the court. The requirement does not normally apply to information that is already in the public domain, is rightfully received from a third party, or is developed independently without reference to the customer's confidential information.
Invoicing. The master service agreement usually makes clear when the customer's payment obligation starts. Normally the seller wants the obligation to begin upon the date indicated in an invoice, while the customer wants the obligation to not materialize until after it actually receives the invoice.
Payment Terms. Parties negotiate over payment terms all the time. The length of time the customer can exhaust before making a timely payment usually depends on how much bargaining power one party or the other possesses. A critical customer for a vendor who can easily jump to a competitor might press for very long payment terms. Some customers even insist on not having to pay an invoice until 6 months have elapsed. Powerful vendors compress the payment terms time frame, sometimes demanding that the customer must immediately pay as of the date of the invoice.
Term. The master service agreement usually indicates a term during which the parties can execute statements of work. One common error the parties make is to sign a master service agreement and then forget about it, only focusing on the statements of work. As a result, it's easy to let the master service agreement expire, and continue to execute statements of work under that expired agreement, which puts the parties in a murky situation where it's unclear whether or not the master service agreement still applies.
Limitation of Liability. Vendors often insist on a limitation of liability provision, which restricts the ability of the customer to obtain huge damages amounts from the vendor if it wins a judgment in litigation. Understandably, customers push back on including this sort of a provision.
Indemnification. Customers typically want to be protected from third party lawsuits caused by the vendor's goods or services. For instance, a software customer might be afraid that the vendor stole some of its source code from a competitor. Once the customer starts using that software, the last thing the customer would want would be a lawsuit for copyright infringement. As a result, the customer might insist on including an indemnification clause in the contract, which would normally require the vendor to step in and defend this kind of lawsuit, as well as pay any settlement amounts or damages. This would normally also require the vendor to pay the cost of any lawyer fees.
By understanding the confidentiality, invoicing, payment terms, term, limitation of liability and indemnification issues, hopefully you can craft an outstanding master service agreement that will meet your needs.
Jason Mark Anderman is President of WhichDraft.com, where a Q and A wizard allows users to create, collaborate, and customize legal documents simply and easily.
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