All types of business from startups to multinational conglomerates regularly enter into service agreements for the procurement and delivery of products or services. Depending upon the size and complexity of the agreement, the negotiations may go something like this: the supplier sends its form Master Services Agreement ("MSA") and an initial Statement of Work ("SOW") completed by a person on the service provider's sales team to the customer for review.
The customer might skim the documents for pricing, quantity, term and other general business points of the agreement and execute the agreement with little attention paid to the fine print and "legalese" that add to the overall page count.
Years later, the parties may add on additional SOWs for products or services that weren't contemplated when the original MSA was signed. Or, the parties might have become friendly in the interim and spurn formal SOWs in favor of the convenience of a simple verbal agreement and handshake. This post will consider some of the problems associated with this approach.
Agreements between service providers and customers are oftentimes multi-part agreements consisting of a base MSA which contains legal terms and conditions (like representations, warranties or indemnification), as well as various purchase orders or SOWs that contain mainly commercial terms and conditions (like pricing, delivery and shipment terms) as a customer's needs for services arise. In general, the SOWs reference the MSA's legal terms and conditions tying the new document back to the old one.
Since SOWs are often negotiated weeks, months, or even years after the original MSA is signed, both service providers and customers may overlook the importance of negotiating SOWs within the broader context of the scope and effect of the existing MSA.
Although most companies' procurement, sales, or engineering professionals draft and negotiate commercial terms without attorney input, legal review may be practical in transactions that could have a large impact on the business by helping to minimize the likelihood of significant, long-term liability.
For example, where the transaction is important to the company's business, the company may want an attorney to review the SOW to avoid some common problems. We have seen a SOW:
- Undermine the master agreement's beneficial protections by including language that either contradicts or overrides language set forth in the MSA.
- Cause ambiguity and disagreement through imprecise drafting that may lead one party to believe that one type of service would be provided while leaving the other party to believe that another standard of service was all that was needed.
- Impose unforeseen or unrealistic obligations that enhance the risk of breach through broadly worded language such as "the service will be available at all time" or "all products will fully conform to specifications."
All of these items could lead to litigation or to financial losses. The following are some common mistakes to avoid when negotiating SOWs:
- Failing to consider the impact of the master agreement's legal terms. When drafting and negotiating a SOW's commercial terms, parties might fail to consider the impact of the terms and conditions found in the MSA. This is especially true where the SOW transaction is of a type not envisioned by the parties when they signed the MSA. When negotiating a SOW, the parties should ensure that the legal terms in the MSA and commercial terms in the SOW work together to give full effect to the agreement intended by the parties.
- Including additional or conflicting legal terms. The MSA should contain most, if not all, of the transaction's legal terms and conditions, however, some SOWs contain legal terms that supplement or supersede the MSA's terms and conditions. Including legal terms and conditions in the SOW may be appropriate in light of the parties' project-specific needs, changing circumstances or bargaining power. If the parties include legal terms and conditions in the SOW, the parties should take care to ensure that the SOW's legal terms and conditions:
It is also worth noting that legal terms and conditions included in one SOW may not apply to work done under other SOWs issued in connection with the same MSA, so the parties should take care to note the scope of any terms and conditions set forth in a SOW.
- are appropriate to include in the SOW and not in the MSA;
- do not conflict with the MSA and;
- achieve the intended goals.
- Inadequately defining the commercial terms. Since SOWs are often prepared by procurement, sales, or engineering professionals rather than by attorneys, the commercial terms included in a SOW may not be clearly identified, defined, or adequately described. Most commonly, persons preparing SOWs may not adequately describe the service provider's deliverables (for example, goods, services, data, reports, or software) and dependencies (for example, receipt of the customer's designs) as clearly and accurately as possible. Or the parties might not identify all project assumptions and constraints. Or the parties may inadvertently use terms such as "best efforts" or "commercially reasonable efforts" that have particular legal meanings. Legal review of a SOW may decrease the likelihood of ambiguous or unclear drafting.
Companies that are concerned about potential SOW-related liabilities should consider having an attorney review and revise (if appropriate) a specific SOW and master sales agreement to avoid or mitigate pitfalls or provide SOW drafting and negotiating guidance that procurement, sales, or engineering personnel can rely on when drafting and negotiating SOWs.