Continuing our drafting advice series, we now describe the considerations and best practices for MSAs.
Before we dive into the details, let’s first understand the purpose of an MSA. MSAs are usually found in agreements for the provision of services, such as an agreement to provide information technology (IT) consulting services.
An MSA is a contractual agreement made between two or more parties in which both parties agree to certain terms and conditions that will govern future transactions. The MSA also serves as an anchor document that will guide the creation of additional documents, such as a Work Order o Statement of Work (SOW). These subsequent documents will usually describe in more detail the specific services to be performed.
Project managers rely on MSAs to provide clear guidance in performing the work in the contract. So it’s important that MSAs be drafted carefully. Here are some key terms that should be included in an MSA.
1. Scope of work: allows both parties to understand what type of work is expected to be performed.
2. Price and Payment terms: allows both parties to come to an agreement on price, method of payment, and payment schedule.
3. Change orders: a description of the procedure each party must follow to make changes to the agreement. Typically, changes are made as written adjustments either for additional work or for schedule changes.
4. Dispute Resolution: describes how the parties will conduct themselves if a problem arises during the engagement. This helps parties mitigate litigation costs and decide how they will solve disputes during the contractual relationship. For example, disputes may be resolved by appointing a mediator, an independent individual who facilitates a resolution between the parties. Or parties may choose to resolve disputes through arbitration, which is a cheaper alternative to going to court.
5. Termination: details the procedures through which a party may end the contractual relationship. This clause is particularly important in deciding which party has to pay damages for breaking a contract.
There are two popular termination types. Termination for convenience occurs when a party wants to exit the contractual relationship for no specific reason. Termination for cause occurs when one party does not perform the obligations or duties agreed to in the contract.
6. Term: defines the length of time of the contract. This clause typically includes renewal conditions and procedures.
7. Legal Venue: defines the location of arbitration or court jurisdiction.
8. Representations and Warranties: states the facts as they are presented in the contract. Representations are the facts that caused a party to enter into the contract. Warranties govern the facts in the future.
For example, product warranties often guarantee that the product will include all the promised features (representations) and will work as described. If not, the warranty will cover the cost of a replacement. In essence, a warranty obligates a seller to comply with the representations in the purchase agreement.
9. Indemnification Provisions: relieves one party from being held liable for damages. Also known as a hold harmless provision, indemnification provisions lay out what actions one party (seller) agrees to take responsibility for if a third party sues the other party (buyer).
10. Insurance Coverage: states the required amount of insurance coverage that the parties must maintain.
11. Security Requirements: states the minimum level of security the parties must maintain.
12. Human Resources: provides for the human resources necessary to develop and operate new applications or provide additional services.
13. Confidentiality terms: the parties agree not to share information with third parties.
14. Risk Allocation: outlines the risks that each party will assume, especially since the new contract may impact existing contracts.
15. Intellectual property rights: allocates the ownership and regulation of intellectual property, such as patents and copyrights.
Once both parties sign the MSA, you have an effective contract. As you can see, a well drafted MSA can anticipate future disputes and provide a way to resolve them, saving both parties a considerable amount of time and money.