ITIC warns on pitfalls of Master Service Agreements
A Master Service Agreement (MSA) is frequently used when two companies engage in a long-term relationship involving a number of projects. The MSA will usually provide general terms covering the contractual relationship between the parties. There may also be separate agreements and negotiating provisions covering individual projects involving the same clients and, in the event of there being a clash between such agreements and the MSA, it is usual for the MSA to take precedence unless specifically agreed otherwise.
ITIC cites a recent case where a US subsidiary of a UK company, as a contractor, signed an MSA with a US-based client which bound the contractor, including all its ‘subsidiary and affiliated companies’. This meant that all the contractor’s offices worldwide, including the UK head office and all subsidiary and affiliated companies, were bound by the terms agreed in the MSA. These included provision for US jurisdiction and unlimited liability, and stipulated that the terms of the MSA would take precedence over any subsequent verbal or written work orders.
The claim involved an overseas affiliated company of the contractor entering into a specific transaction with the client. The overseas affiliate had no knowledge of the MSA and provided a quotation which, it thought, was subject to its own standard trading conditions. These trading conditions limited its liability to $1 million and provided that any dispute would be subject to English law. However, when a dispute arose, the MSA’s existence was revealed, whereupon the overseas affiliate found itself named as a defendant in US proceedings in which the client was claiming more than $45 million.
The overseas affiliate had never seen the MSA and did not know of its existence. In fact, the MSA had been put in place before the affiliate had even been incorporated. Furthermore, the US subsidiary which signed the MSA was also surprised to be named in the claim, as this was the first it knew about the job that was undertaken for the client by the overseas affiliate. The final claim was settled well below the claimed amount, but for a sum well in excess of the $1 million limit of liability which the company had originally thought was in place.
ITIC has warned its clients that MSAs must be read carefully prior to signing, and a full understanding established of which companies in the group are potentially bound by its terms and conditions. It points out that such agreements do not have to be signed by the parent company or head office in order for them to be binding on all offices, subsidiaries and affiliated companies within a group, and adds that signing them without first carefully studying their terms and conditions may unwittingly bind an entire organisation to the MSA.
Noting that other companies will probably be unfamiliar with its clients’ corporate structure and therefore entitled to rely on the apparent authority of the office or company which has signed the agreement, ITIC emphasises, “Once you have signed such an agreement it is imperative that all those bound by it are notified and made aware of its terms so that they can act accordingly”.
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