Companies in the energy industry that enter long-term relationships with one another may create master service agreements to provide a basic framework for those relationships. Master service agreements offer many benefits, including streamlining the contract negotiation process for specific projects and providing predictability and stability in the parties’ relationship.
Understanding Master Service Agreements
A master service agreement (MSA) is a contract that serves as the foundational agreement for an ongoing business relationship between two parties. When parties expect an ongoing relationship involving a series of projects, they may negotiate an MSA to streamline their relationship by eliminating the need to negotiate core contractual provisions for each project they embark on. Instead, the MSA supplies the basic framework of the parties’ contractual relationship; for each project, the parties may negotiate a “statement of work” agreement to address the contractual terms specific to that project, such as the scope of the project or the contract price.
In the energy industry, companies that expect to have long-standing relationships with one another may execute an MSA to define that relationship. Examples of situations where companies in the energy industry might use an MSA include an energy company creating an MSA with the contractor that operates its oil and gas wells, or an MSA between an energy supplier and a company that operates pipelines or electricity transmission lines.
Key Components of MSAs in the Energy Industry
Parties may incorporate various terms into their MSA when they expect those terms to remain constant from project to project. That way, the parties do not need to renegotiate those terms for each project; instead, the project-specific agreement can simply reference the MSA and incorporate its terms into that agreement. Contractual provisions commonly included in MSAs include:
- Payment Terms – MSAs can incorporate terms governing invoicing and payment for projects.
- Liability and Risk Allocation – An MSA can allocate liability risks from projects between the parties, including liability from civil lawsuits or regulatory enforcement actions.
- Health, Safety, and Environmental Compliance – MSAs for the energy industry should address how the parties plan to meet their health, safety, or environmental regulatory compliance obligations.
- Creation of Subagreements – An MSA can include a defined process by which the parties must negotiate and create project-specific agreements.
- Amendment, Renewal, and Termination – MSAs can include provisions governing the amendment of the agreement, renewal of the contract (if the MSA has a definite term), or termination of the parties’ relationship.
- Dispute Resolution – Companies frequently incorporate dispute resolution provisions into their MSAs to facilitate swift, cost-efficient resolution of disputes through mediation or arbitration.
Benefits of MSAs in the Energy Sector
Some of the benefits of MSAs for companies in the energy sector include:
- Reducing contract negotiation time for future projects
- Minimizing legal risks by clarifying responsibilities, as the MSA’s terms remain constant from project to project
- Enhancing operational efficiency by giving the parties expectations about how their relationship will work for each project
Common Challenges of MSAs in the Energy Industry
Some of the most frequent challenges that may arise from MSAs in the energy industry include:
- Negotiating allocation of liability and indemnification rights, as each project may involve different risks for the parties
- Incorporating a degree of flexibility in MSA for the parties’ changing needs while maintaining the benefits of stability and predictability in the overall business relationship
- Avoiding ambiguities or unresolved terms that could lead to disputes
- Addressing multijurisdictional legal or regulatory requirements, as the parties’ relationship may later lead to projects in unanticipated locations
Contact a Contracts Attorney Today
When you expect to have a long-standing business relationship with another company in the energy sector, your business might benefit from negotiating a master service agreement. Contact Hubbs Law today for a confidential consultation with a business attorney for help negotiating and drafting your company’s MSA.