I’ve occasionally worked on transactions involving parties who plan on engaging in discrete projects from time to time. Generally these transactions have been structured so that one contract governs unchanging aspects of the relationship—perhaps payment, delivery, dispute resolution, and plenty of other matters—and a separate contract governs each project and specifies what needs to be done, when, and for how much money. This structure means that the general terms of the relationship aren’t subject to renegotiation every time a new project comes along. I gather that such arrangements are referred to generically as “master agreement” structures.
Seeing as I haven’t worked on master-agreement transactions very often, I’d be interested to hear any information that you think relevant. For example:
- Are there any kinds of transactions that you think are particularly suited to this structure?
- Do you provide that the project-specific agreements are to be attached to the master agreement, or are they free standing?
- What do you call the master agreement and the project-specific agreements?
- Are there any particular advantages (beyond the obvious) or disadvantages to this kind of structure?
I’d be pleased to hear from you.
You often see master agreements used for recurring professional-services engagements, for example:
* software developers, Web designers, and others hired on a project basis
* recruiters (“headhunters”)
* temporary help agencies (“body shops”)
My former company used master software license agreements with our customers, who often bought different product licenses at different times, and neither one of us wanted to renegotiate the license agreement every time.
I generally prefer to specify that each project-specific agreement (which often can be called an “order”) is a stand-alone agreement. If a dispute comes to pass, it can be messy if one party’s lawyers try to make noises about cross-project defaults.
We have also encountered master agreements where an owner/lessee of a number of facilities has a need for a specific type of renovation work in its facilities and wants to negotiate pricing, service levels, etc. even though it has not decided when and where the renovation work will be performed.
My company frequently utilizes master agreements for data licensing and consulting services. By entering into a three year master agreement the client has greater freedom to add services as needed without requiring legal review each time. The master agreement allows for expedited transactions during its term. Each individual deal under a master may be referred to as a Project or as an Exhibit to the Master. To keep things from getting messing in the event of litigation, our master often limits damages to the value of the specific project at issue.
We use the master agreement concept at my current company, where my company is the Customer and the other party is a Vendor of technology related products. We have several master agreement “sizes” if you will: a software agreement; a software and services agreement; and a software, services and equipment agreement.
The project-specific agreements are Orders (for software and equipment) and Statements of Work (for consulting services) and are attached to the Master. Each Order or SOW together with the Master creates a separate agreement, just as the earlier post stated; however, our Master allows us to terminate all Orders and SOWs for convenience upon the occurrence of certain events important to our company.
You have stated the prime advantage – a single negotiation for umbrella terms. I have attempted to persuade vendors reluctant to spend the time negotiating a master agreement that this concept allowed my company to: “Negotiate once, purchase often.”
A few disadvantages to the Master plan:
– A large time commitment up front, especially when coupled with clients anxious to “go-live” with the purchased goods or vendor discounts that “expire” if a certain date passes without a signed contract
– It hardly seems worth the effort to negotiate the full blown Master for a $20K software deal
– If the Master template does not quite fit the deal, arguments inevitably arise about what to do with irrelevant terms (as the Master concept champion, we will urge that even terms inapplicable today remain in the Master – just in case they become applicable in the future)
We have a use a master agreement with a leasing company. The master lease agreement contains the governing provisions along with a maximum that they will provide in the lease facility. Each time we have equipment we want them to lease, a separate Lease Agreement is assembled with the then current lease rates as well as the equipment descriptions. The only negotiations required were relative to the master agreement.
General Contractor use master agreements frequently when sub-contracting with the same companies but on different projects. The construction industry tries to use “standard” agreements as often as possible but often results in vague or ambiguous meanings
IBM has its International Customer Agreement (ICA) on the web at the above link.
I think there’s a distinction between a “master” software license that allows discrete orders from time-to-time and the type of master we’re talking about here. The ICA is a good example of this.
We don’t do it now, but I wish we did. With large vendors, I’d rather just invest the time up front than have to negotiate common provisions three or four times, each time mindful of the effect on the other agreements.
Software is the prime example of this. I buy (license) an application under a software license agreement (SLA). I like it so much I want to customize it and change some of my business practices. I buy consulting services from the vendor. One of the deliverables is additional code. Do I own the code under the consulting agreement or am I a licensee under the SLA? The code infringes, which indemnity do I read? I decide later on that I want more changes to the code… do I look at the acceptance criteria under the consulting agreement or the warranty under the SLA?
Imagine what happens when you inadvertently choose different law or forum. Or you have 30 days to accept software and 45 days to accept deliverables. Or different payment terms…
There are lots of vendors like IBM which are “one-stop shops” for software, hardware (equipment purchase agreement) and consulting services. Having one set of common, core terms applicable to all the different types of engagements can be very helpful.
The difficulty is that there are “common” terms that aren’t so common. The indemnification I want for hardware looks very different from what I’d get for services, for example.
“Master Agreements” are common in complex contracts, that is, contracts where a variety of deliverables are provided (divided into a number of SOWs). This approach is also frequently driven by revenue recognition concerns.
To answer your questions:
* Are there any kinds of transactions that you think are particularly suited to this structure?
As others have stated, software licensing, consulting services, temporary staffing agreements and many other types of transactions are well suited for working with Master agreements. In fact, I would say that the bulk of the work that I do on a daily basis is either putting a new Master in place, or working on one of its progeny.
* Do you provide that the project-specific agreements are to be attached to the master agreement, or are they free standing?
Yes, the project-specific agreements contain virtually no terms and conditions other than the “big four”: who, what, when and for how much? Meaning, I don’t include a governing law section in the project-specific agreement, but I make darn sure to say that the project-specific agreement is a child, and subject to the terms, of the Master.
* What do you call the master agreement and the project-specific agreements?
In almost all cases, the master is called the Master. The project-specific agreements can be called any number of things:
1. Amendment – if I want to change the terms of the Master.
2. Amendment to add an Exhibit A-1, A-2, etc – in my Masters, I have template exhibits – so amending the agreement to add these new exhibits allows me some flexibility.
3. Order – I tend to avoid this term, as it’s used on the purchasing side of things more.
4. Statement of Work – for services, the SOW is the key vehicle for explaining a discrete project. Usually quite long and detailed, the SOW needs to contain the “Big 4” and more.
5. Work Order – also used for services, and sometimes for contractors, the Work Order is a shorter version, but still requires the Big 4.
6. Change Order – just like an amendment, but used specifically for SOWs or WOs.
* Are there any particular advantages (beyond the obvious) or disadvantages to this kind of structure?
Others have posted about the conflicts in terms when you have multiple stand-alone agreements that all might touch a single project. This tends to prevent this problem from happening. Additionally, for larger organizations who have the time to negotiate these longer documents up-front, it really does save time in the long run.
The disadvantage is to the smaller vendors or organizations that are put through the wringer for a Master from a large customer. I know I do it to a lot of vendors all the time. But I also know that a lot of this seemingly extraneous language comes in handy later – as my business owners, even when questioned, don’t always know the extent to which they plan to use a particular vendor.
Additionally, there are several software vendors who like to use master agreements for decades – SAS is a great example. In my entire career, I don’t think I’ve ever seen a SAS Master less than 15 years old! If you do the Master properly, it can last a LONG time.
Now… to respond do some other comments. IBM’s ICA I suppose would qualify as a Master of sorts. But it’s not a true master. In fact, IBM has a document structure that has a multiple-master model (one for licenses for certain products, a second for licenses for other products, and a third for services) which actually confuses a lot of things and makes ordering services and licenses from them for the same project pretty difficult. They’re not alone in doing this, though. Microsoft is also guilty of using this skewed structure. I’m sure it works for them… but tracking the different documents is a pain.
There are also several organizations who like to put Statements of Work in place that are essentially master agreements, and then hang Work Orders off them as discrete projects. I think this is a little odd and convoluted.
Overall, though, I’m a huge proponent of the Master/Sub agreement structure. :)
The following from regular commenter Mike:
I’ve seen a number of “master” agreements. They tend to be popular where in consulting services or for software/content licensing situations where there is potential for more than a one-off contracting experience. For example, where services are separated into several different stages or where a licensor has a vast library of content that can be licensed on an as needed basis.
They’re usually identified as “master license agreement” or “master services agreement.” They’re usually proposed by the licensor or the service provider. I have never seen a “customer” propose a master agreement, and, for the reasons discussed below, I don’t think I’d ever advise that they should. I have at least one client that does not accept master agreements without a very specific need UNLESS the service provider is someone like IBM, SAP, Oracle, etc.
Attached to the master agreements are some short form agreements that usually describe only describe the what and how much. These are usually purpose specific documents and are referred to as “SOW” (“statement of work” or “scope of work”) in the services context or “Order” in the license context. The purpose is usually something discrete. The introductory recital or one of the very first clauses always states that the terms of the Master control. There is sometimes negotiation over which terms should control in the event of conflict (see the discussion of amendment v. separate agreements).
Beyond the obvious, there are very few advantages, but incredibly big downsides. Most corporate business teams like master agreements because they see it as a way to move the business negotiation forward without those pesky legal reviews. This means that a tremendous amount of effort needs to be put in up front, and it means a lawyer needs to figure out in what context the business folks may now or in the distant future use the master agreement. This is actually the biggest downside.
Since the master agreements are usually independent, they do not necessarily rely on any valid SOW/Order being currently outstanding. So, the parties execute a “master” agreement and an SOW, but the SOW usually has a considerably smaller scope and duration than the master. So, without some other affirmative act or clause to the contrary, the master may continue on without any license or services actually be performed. This sounds good until you realize how business people can use that fact to the detriment of the legal review process: “oh look, we have a master agreement with you guys from 1986!”
Understanding what sort of liability/indemnity to ask for in a master agreement that may be repurposed for a plethora of different services makes negotiations incredibly painful sometimes. This adds a lot of costs up front. It also means that the lawyer needs to ask the questions: “do we really need this?”, “what other purpose do we really expect to have for this agreement and service provider” and “can we get away just using a regular agreement that we negotiate as a starting point for any future purpose?” I’m usually left thinking that both the parties would be better off just having separately negotiated agreements, but I understand the convenience.
A side effect of the difficulty addressing some legal issues is that companies will end up moving the negotiation to the SOW. This happens, for example, for things like ownership of intellectual property, confidentiality (sometimes), payment terms, warranties, etc.
Another side effect is that you end up leaving a lot on the table in a service by service comparison since you necessarily have to negotiate to a more reasonable overall position. This may cut both directions, but I always feel like the service provider makes out better.
Another disadvantage is that there is some wacky analysis that’s required when parties introduce legal terms into the SOWs. Since they are executed by the parties, they can often times look like an amendment to the agreement as required by the amendment procedure. This problem can come up if a SOW introduces legal terms in what looks like an amendment. Then the question is does it alter the agreement only for this particular SOW or all of them? What about for subsequent services?
This issue might also crop up in the conflict analysis. For example, it’s not uncommon to set out default terms in Master agreement. This is good since it at least provides something. However, what happens if the parties don’t carefully override those clauses because the business people were sloppy? What if there isn’t exactly a conflict. A real life example (with some things changed for clarity):
From the master: “Acceptance testing. Upon delivery of the Work Product, Customer will have fifteen (15) days to test the Work Product in a live production environment. *** If the Work Product fails to meet the specifications, then Service Provider will refund the amounts paid for the non-conforming Work Product.”
From the SOW: “In the event of conflict between the terms of the Master Agreement and this SOW, the terms of this SOW will control. *** Testing. At each Stage [ed: defined only in the SOW, but doesn’t mention delivery which addressed later], Customer will test the Work Product in Customer’s development and test environments. ***”
They’re close, but they don’t exactly conflict. So does customer get both?
So, the moral of the story: unless there’s a really clear scope for your Master agreement, they’re an incredible pain and asking for real trouble unless they’re carefully reviewed (at each step), carefully managed, and created with limits on duration and scope.
Responding to Mike’s comments posted by Ken:
When I was in-house, my business people knew (in part because I trained them thus) to check with Legal about significant new business, so we could see whether we wanted to change anything in the old master agreement. They were very good about doing this.
On multiple occasions, we renegotiated old master agreements at our initiative, both when we were the vendor and when we were the customer. But I would guess that more often, we decided the old master agreement was “good enough” and got on with the deal.
When I was in-house, we did a lot of deals on old master agreements that pre-dated me. There were times we made sales on old T&Cs concerning which I would have pushed back hard in a negotiation ab initio. I think it helped that I’d been a litigator, and so had what I think was a reasonable sense of which customer relationships were or were not likely to devolve into litigation — and if they did, which “problem” clauses would really bite us and which ones could probably be dealt with on a business basis. At bottom, it always ended up being a judgment call by management, with my advice, about risks and benefits.
Speaking from my year of experience as in-house counsel for a company in the oil and gas industry, “master agreements” are very common indeed. Particularly in relation to services. In fact, as a service provider we prefer using master agreements as neither party has the time to negotiate conditions in the event of a break-down.
But I have also seen masters used where the aim is a specific purchase (single delivery). Why some companies prefer this I cannot say, but the industry is used to complicated contracts and long negotiations, so I guess there is hardly any extra effort in negotiating a master compared to a “normal” contract.
For vendors with whom we have a master, all matters except specifications, payment details and project specific conditions (warranty period, rate for liquidated damages and similar conditons required by end client) are covered by the master. I can imagine that for other industries this could leave too many “loose ends” for the orders, but for oil and gas the vendors know that we must go back to back with our clients and the clients will not yield, so the only item left for discussion is how much we have to pay for them to withdraw their qualifications.
I think most of the ups and downs are listed above, but I’d like to point out that as a vendor for oil and gas related services I’d never accept the orders to be attached to the master, rather than be stand-alone. There are two reasons for this: (1) The conditions vary greatly from project to project. Failure to perform in one project is likely be due to the difficult conditions of that field and should not be a reason for termination of other, less challenging, projects. (2) For oil and gas contracts, liability for the vendor or contractor is limited to a given percentage of the compensation. If all the order were attached to the master and considered as one, this amount could rapidly become quite large, leaving the vendor without any real protection.
Below are my preliminary thoughts on Adams’ questions regarding the master agreement:
Q1-Are there any kinds of transactions that you think are particularly suited to this structure?
Yes. I prefer to a master agreement in a project involving multiple parties with intervening relationship or an M&A transaction that involves 2 or more steps, e.g. in a transaction where a foreign investor will first subscribe certain new shares in a target company, and then the existing shareholder(s) will use the paid fund to purchase certain business of an affiliate of the target company. In such a case there should be at least a share subscription agreement, a shareholders’ agreement, an asset/equity purchase agreement, and a master agreement.
Q2-Do you provide that the project-specific agreements are to be attached to the master agreement, or are they free standing?
What I usually do is something between the two approaches. I will have an article in the master agreement providing that “the parties shall enter into [project specific agreements] in the form substantially the same as [appendix [] under [circumstance]]”.
Q3-What do you call the master agreement and the project-specific agreements?
I use “Master Agreement” or “Framework Agreement” to term master agreement and name project-specific agreements by their purpose, e.g. “Share Purchase Agreement”, “Technology Licensing Agreement”, “Warehouse Lease Agreement”, etc.
Q4-Are there any particular advantages (beyond the obvious) or disadvantages to this kind of structure?
Documenting the transactions under a master agreement structure is particularly advisable for some foreign-invested projects in China where government approval is required. For example, real estate development requires land authority’s approval and the parties’ intention is to build factory facilities containing 30 production lines in 5 years. However, the maximum real estate development timeframe permissible under Chinese law is 2 years. Under this situation, the most pragmatic approach is that the parties enter into a master agreement to address the 5 years plan and submit for approval a definitive agreement stipulating how to make the investment within 2 years.
FYI, I’m fortunate enough to have Aji as one of my students at Penn Law this semester. Ken