Business AgreementsService Level Agreement

Negotiation Fundamentals for MSA contract

Negotiating the terms while entering an MSA contract is essential. Read this blog for details about the various aspects that must be included in an MSA contract.

What to Include in an MSA contract?

An MSA of a Master Service Agreement is a document drawn up to specify the relationship between an Exploration and Production (E&P) company and those who provide its services and various goods.  Typically, an MSA will be supplemented with work orders/purchase orders for each project by service contractors, and if the oral terms or written terms of these orders end up changing the terms of the MSA, then a great problem can arise. 

So, one must understand how such agreements are formed, what they should contain, and how an MSA’s provisions work when put to practice.  If the contents of an MSA contract are properly formulated, it will save a lot of trouble in the future. 

Read on to know what must be carefully considered while negotiating an MSA with a subcontractor. 

Indemnifications

It is important to save yourself against loss, damage, hurt, etc.  In this sense, in an MSA, it is indemnification that generally becomes the most heavily negotiated section. For the Prime / Owner, there are several items to take into consideration, such as:

  • What are the project’s key concerns?
  • What needs to be covered under indemnification?

Some of the items that could be covered are:

  • Putting the onus of the indemnification on the subcontractor in case of damage to property and/or personal injury to the subcontractor and/or its personnel
  • Putting the onus of the indemnification on the subcontractor for contract breach or misconduct by the subcontractor
  • Placing the onus of indemnification for any claims of intellectual property basis the deliverables of the subcontractor
  • Placing the onus of the indemnification for any environmental claims that relate to the work of the subcontractor.

An objective of an MSA contract is to defend the Prime is of prime importance to a strong indemnification that right at the start places the obligation on the subcontractor.  It even curbs any out-of-pocket expenses that the Prime / Owner would otherwise have had to make.

It is also possible to look at a mutual indemnification scenario.  If you wish to do it, why would you do it, and under what circumstances would you do it? 

Pass-through Provisions to the subcontractors of the Prime’s subcontractors

If the subcontractor has permission to subcontract the services (allowed through written authorisation before the sub-sub-contracting actually takes place), then it must be specified that the terms that have been fixed with the subcontractor in the MSA will also apply in the same way to the sub-contractor’s sub-contractor.  This is essential since the Prime / Owner will not want the sub-contractor’s sub-contractor (third-party subcontractor) to be subject to lesser standards than those fixed for the Prime / Owner’s subcontractor.

Rights of termination

It is essential to include termination for cause. It is a fact that at any time in a project, it is possible that the permitting, financing, plans, etc., can suddenly change. Due to this, it is essential to consider rights for immediate suspension and termination. In case of stalling of the project, the owner must retain the ability for immediate termination/ suspension of the work of its subcontractors.  

Right up to the date of the termination, the work should be paid up.  It is also essential that such provisions be included to ensure an orderly wind-down of services, ensuring that there is no loss of valuable work product because of the termination.

Terms of payment

In this category, there are several provisions that must be laid down clearly.   Here are some of them:

  • The MSA must put down, after negotiation, when the sub-contractor’s invoices will be cleared and the payments for the same released
  • The right to dispute invoices must be explicitly specified
  • If there are any specific requirements for invoicing, they must be laid down. Further, in the case of invoices that are not submitted properly, it will imply that the period for making the payment will not begin till it is resubmitted properly 
  • In case it is essential to attach specific documents for expense reimbursement, it must be put down in the MSA which documents will be required
  • What falls in reimbursable and not reimbursable must be clearly specified
  • It is always recommended that audit rights be built into the MSA.  Also, build in that in an audit, if it comes out that the subcontractor has overcharged, a penalty will be levied, such as repayment of the overcharged amount along with interest.

Damages

There must be a provision for direct damages.  It is recommended that express right be included for revoking the project from the subcontractor and giving it to a subcontractor who can carry out the task.  The amount must be charged from the defaulting subcontractor.  For the defaulting subcontractor, all pending invoices/payments must be put on hold till the new contractor completes its part of the project.

Warranties

Several things need to be considered about warranties, such as when does the period of warranty commence and for how long will it be valid? The period of warranties begins as soon as the subcontractor accepts the work. In case a warranty is enforced, then the period of the warranty must start over.  

It must have the provisions for replacement/repair of the work that is found to be defective, and it must provide the owner with the ability to get back money that has been paid for the work that turned up defective. A time period must be included for responding to warranties. In case third-party goods are provided by subcontractors, then it must be ensured that all third-party warranties on such goods get assigned to the Owner/General.

Jurisdiction and venue for legal disputes

Where a dispute will be conducted is an essential piece of information that must be specified right at the start.  The law and location need to be laid down. Normally, the choice of law and location need to be the same.  You cannot go in for the jurisdiction of Delhi and want to try the dispute using the law of, for example, Bangladesh. 

Confidentiality

In case no Non-Disclosure Agreement (NDA) has been signed at the RFP stage, it is a good idea to incorporate a confidentiality section in the MSA. Specify what is considered confidential in this case, what will be the period for which confidentiality has to be maintained, and what are the specific rights of enforcement, for example, permanent injunctive relief.

Provision for removing personnel of the subcontractor

Specific contact points need to be created at the outset with the subcontractor’s personnel.   Furthermore, the Owner must have the right to remove/get replaced any personnel of the subcontractor who is performing below requirement. 

Suppose the points mentioned above are taken into consideration, besides incorporating those very specific to the project for which the MSA is being drawn up. In that case, a good air-tight MSA will emerge, and it will be beneficial for all parties concerned.  Robust negotiation around the contract terms enables all concerned parties to relook at risks and exposure and make appropriate shifts. Finally, any MSA considered good must cover all points, clearly lay out all requirements, and be made to the project’s specific requirements/the Owner/General.

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