A master services agreement is a contract between a service provider and customer, which sets out the terms of engagement for all current and future work. It allows customers, who require or anticipate future work, to make an order from IT service providers without the need to negotiate a new contract each time. This article will explain what a master services agreement is and what you should consider when drafting it.
Statement of Work
A customer can order new services each time by executing an order form or statement of work (SOW). A SOW functions as an order form that creates a legally binding agreement between two parties. It sets out the services to be performed and any deliverables attached to it.
A SOW may also address payment. For example, a customer may wish to pay in installments upon certain deliverable milestones being reached. On the other hand, the service provider may require upfront payment or deposit. If the customer has requested continuous technical support, the service provider may charge a monthly subscription fee. Whatever the payment arrangement, it is essential the order form or SOW documents it.
An executed SOW is a legally binding document. The variation terms will set out the procedures to follow should either party decide to vary the services or SOW. This may include providing minimum notice and submitting a variation form, or a change control notice that sets out the requested changes and its expected impact on the completion of work.
If the customer has requested build or development services, an acceptance testing clause may be present in the master services agreement.
Acceptance testing is where the product is tested for errors and compliance with the agreed specifications. This includes compatibility with the customer’s existing systems. The agreement should also set out the procedure for testing and acceptance of the product to minimise any future disputes.
Intellectual property (IP) clauses should address two classes of materials:
- existing materials; and
- new materials.
Existing materials are materials already owned or licensed by the customer. It is therefore important for service providers to have permission to use any existing materials they require to perform their services.
New materials may be any software the service provider builds or develops for the customer. Whether the provider owns the IP rights in new materials will depend on the agreement between the two parties.
If ownership falls on the service provider, the terms should ensure the customer has a licence to use the new materials, otherwise they will not be able to use what they paid for.
Customers may also have certain responsibilities to ensure the service provider completes the project on time. Some providers require a single point of contact within the organisation – usually an authorised decision maker. Service providers may also want terms that guarantee customers have adequate cybersecurity measures in place to protect from external attack.
Suspension and Termination
What are each party’s rights in relation to suspending or terminating the master services agreement? A service provider will usually reserve the right to suspend any services in the case of overdue payments or if third-party services or products the service provider uses to provide the services are no longer available.
A lot of time may go into negotiating a master services agreement, but it is always good to have a well-drafted suspension or termination clause to minimise any loss on either side.
As with any contract, it is crucial to clarify the limits of each party’s liability. A service provider may wish to exclude their liability for any malfunctions or loss associated with third-party products that the customer has specifically requested. Customers should be across the liability terms of the master services agreement before attempting to fix any issues in the product. Service providers may exclude liability where the customer has tried to fix any problems without informing them.
If future issues do arise, it is always good to have a dispute resolution process in place. Some master services agreements are worth large sums of money. Therefore, the last thing a customer wants is to spend more to ensure their legal rights are protected.
Additionally, the dispute resolution clause may require mandatory mediation or some other form of alternative dispute resolution.
Your master services agreement should be a comprehensive document that covers all of the terms of your engagement. You need to make sure that it has addressed issues like IP, payment, liabilities and the delivery of work. If you need assistance drafting or reviewing a master services agreement, contact LegalVision’s IT lawyers on 1300 544 755 or fill out the form on this page.
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