Your MSA Could be Costing You Millions

Your MSA Could be Costing You Millions

If you own your own business, chances are, you’re providing a service to someone or, at some point in your business, receiving services from someone else. We previously discussed client services agreements with a broad brush, but how about MSAs? Similar concept, slightly different structure, with a bit more detail/nuance. Whether it’s an IT service provider, marketing company, website developer, or business consultant, these relationships are often governed by a Master Service Agreement (“MSA”). Generally speaking, an MSA will contain the foundational legal terms for the overall engagement, and incorporates a Statement of Work (“SOW”) that narrows down terms that are specific to a discrete project (i.e., scope, pay, and timing).  

Whether you’re preparing or reviewing an MSA, like with any contract, you’ll need to make sure that it (M)inimizes (S)urprises (A)lways. Let’s narrow down the issues (which are largely similar to those that come up in client services agreements generally), and talk about what some of these “surprises” may look like. 

The MSA Trinity: Scope, Pay, and Risk

When engaging someone else for a service, or being engaged by a client, these are the three things everyone wants to know: (1) what services will you provide (or not provide); (2) how much will it cost; and (3) what will I potentially be liable for? After all, all contracts are about defining the relationship and shifting risk.

Pay should be easy, right? Your MSA should say “this is how much you’ll pay me” (either within the MSA itself or referencing the project-by-project SOW if fees are handled differently), “this is when payment is due,” and, potentially, “don’t pull a fast one on me, here are situations where you can’t withhold payment no matter what.” We sometimes find that the main pitfall here is organization – what needs to be in the MSA, and what needs to be in the SOW? If you find that your payment structure is the same no matter what, then it’s easier to keep that language in the MSA (saves you the headache of updating the SOW every single time). If you find that the payment structure will change depending on the scope, then the MSA should be a bit more general, and the SOW’s payment language is updated per project.

With respect to scope: be specific. We’re not talking about having a 20-page SOW for each project or a 50-page MSA intended to somehow cover every single type of service you provide. However, if you already know that a client will expect re-works, and you don’t want to spend so much time addressing arbitrary re-works that your rate becomes inconsequential, guess what I’ll say there? Put. It. In. Writing. While the MSA can have pretty general language on scope that would cover the majority of scenarios, and the SOW is an opportunity to narrow that scope, if there are recurring concerns and you don’t flag it up front, don’t expect sympathy later when that same concern inevitably comes up.

Now, moving on to risk. Risk takes on various forms, but what we’ll focus on for purposes of this blog is: indemnity. Stay with us!

Legal Finger Pointing (Risk)

We have a whole blog on indemnity and limitation of liability, so we’ll keep this brief for now. An MSA is different from a general client services agreement because it should cover “issues” a bit more broadly, particularly since the services could take on various forms vis-à-vis the SOW. Generally speaking, your MSA needs to anticipate and allocate risk for things like ownership of intellectual property and licensing of your background data, third-party claims, data breaches (what happens when a hacker gets access to millions of user passwords), and professional liability, regardless of how the specific project is scoped in the SOW. That way, you’re not renegotiating legal exposure every time a new project kicks off, or worse, being stuck paying thousands, hundreds of thousands, or millions of dollars in damages because the indemnity clause itself was a legal landmine. It also helps ensure consistency across all engagements, so that the MSA becomes the guiding light on risk and liability, while the SOW is focused on the big-ticket items (i.e., scope and pay).

Your Legal Escape Hatch

One of the major pitfalls of an MSA is termination. While a client services agreement is expected to have language on termination, and will either provide for an indefinite term with flexibility for termination or a set term with an opportunity for renewal, an MSA may be slightly different. For instance, what happens if one SOW project is terminated, but you want to continue working on others? The MSA should make clear whether termination of a single SOW affects the master agreement or other active SOWs. Without that clarity, you risk unintentionally ending the entire relationship, or being stuck in limbo on an active SOW.

One last point here – if you are engaging an individual as an independent contractor and sign their MSA, be sure that this person is truly an independent contractor, and not an employee. If this issue is news to you, well . . . our firm’s employment blog on that is right here.

Make your MSA work for you so you can focus on the actual work, and as always, if you’ve got questions, you know we’ve got answers!

~ The W + K Team