Master service agreements are commonly used in contracting for goods and services in the oil field. They provide a broad framework of responsibility and risk allocation between a company and a contractor. This update discusses the common provisions of master service agreements and their importance in a company's overall risk management scheme.
Before contracting for products or services, an oil and gas company will commonly negotiate a master service agreement with the contractor. On its own, the master service agreement does not require a contractor to provide any particular work – or any work at all – to the company, nor does it oblige the company to accept any particular service from the contractor. A contract for the performance of services or provision of goods is created only upon execution of a separate work order. The work order provides the details of the specific service required. The work order is made subject to the terms of the previously negotiated master service agreement, and the work order and agreement, in combination, set out the contractual obligations of the parties.
An agreement will commonly include provisions related to:
- the standard of performance;
- the responsibilities of each party under the contract;
- inspection, acceptance of the goods/services, transfer of title and of care, custody and control;
- worksite clean-up, remediation of spills and storage of equipment and chemicals;
- payment terms;
- maintenance of payment records and audit rights;
- default and termination; and
- dispute resolution.
While the agreement addresses the parties' obligations to each other on a relatively broad level, the work order addresses the specifics of a particular job. A typical work order would include:
- a description of the products and/or services to be supplied;
- the location where the products and/or services are to be provided;
- the term of the work order;
- termination provisions;
- rates for products and/or services;
- specifics of the performance; and
- any applicable additional terms.
The work order should state that in the event of any conflict between the terms of the master service agreement and the work order, the terms of the agreement take precedence. If there are any specific, negotiated provisions in the work order that are designed to supplant the agreement's standard terms, those standard terms must be specifically excepted.
A company should create a form master service agreement that addresses the company's specific needs and contracting philosophy. The goal of creating the agreement is to manage the risks and liabilities that the company will assume contractually. While the indemnities and insurance provisions are the linchpins of the protection provided by an agreement, warranties, clean-up obligations, acceptance and termination terms are important provisions that can also affect the company's bottom line.
To manage risks adequately and negotiate a master service agreement effectively, it is important to have an understanding of the contractor's business and the potential goods and services it provides. Some contractors will provide only goods or services. Among the services provided, some will involve far less risk of injury than others. Where only goods are provided, business terms – such as warranty, acceptance, termination and delivery terms – frequently become the focus of the negotiations. Where a company provides services at a well location, the focus will be on risk terms – the indemnity and insurance provisions – due to the risk of personal injury and property damage. Certain types of technical or engineering service could implicate warranty terms, liability for defective performance and the risks inherent in being on a job site.
Although in certain circumstances it may be desirable to tailor the master service agreement to the goods or services provided, deviations from the standard form, company-wide agreement can create unwanted liability. An agreement with a contractor will apply to all goods and services provided by that contractor under work orders, now and in the future. In negotiating the agreement, the company must focus not simply on the services or goods desired under the current work order, but on all services or goods that the contractor could potentially provide under the agreement. It is crucial that the terms of the agreement negotiated for a particular service or product from a contractor provide adequate protection for a completely different type of service or product on another occasion from the same contractor.
The provisions of a company's standard-form master service agreement will be determined by both business and risk considerations. Although, during the negotiation process, the standard-form master service agreement can be modified to address the specific goods or services to be provided under it, in so doing the company must ensure that the protections provided to the company under the agreement remain adequately robust to cover all potential services that the contractor might render, rather than just the existing need.
For further information on this topic please contact Allison Woolston at Fulbright & Jaworski LLP by telephone (+1 303 801 2700), fax (+1 303 801 2777) or email (firstname.lastname@example.org). The Fulbright & Jaworski LLP website can be accessed at www.nortonrosefulbright.com.