For those who have spent any time working in the oil and gas industry, whether as a representative of an E&P company or a service provider, odds are that you have heard of MSAs. MSAs (short for Master Service Agreements) are pervasive in the industry and it is rare that any service provider will be approved for work by an operator without first having an MSA in place.
An MSA is a legal agreement between two parties that lays out the legal terms and conditions that will apply to all work that is thereafter ordered by an operator and accepted by a contractor. MSAs are purposefully drafted to be broad enough to cover any type of work that might be ordered (whether goods, services or rentals) and to potentially last forever with auto-renewal terms in place. MSAs are therefore super efficient because parties potentially only have to negotiate once on the front end (less reliance on lawyers!) and thereafter the parties can simply agree to work on a per job basis – typically through the issuance of work orders – knowing that the legal terms are already in place.
The flip-side to this is that it puts a bigger premium on getting a fair and balanced MSA in place from the start – you may only get one bite at the apple. Operators typically insist on using their form of MSA which are usually drafted with their own interests in mind. Accordingly, although they might come out and say it, operators expect that they will have to negotiate “to the middle” with their contractors and are accustomed to doing so.
It is therefore crucial that anyone being asked to sign an MSA review its terms carefully and negotiate to protect its interests. Liabilities around oil and gas exploration can be enormous and agreeing to something you haven’t read or don’t understand can be the nail in the coffin of a business.
Having experienced legal counsel on your side who knows the industry and how to negotiate for the “must-haves” without overreaching to the point of frustrating the deal can be an invaluable asset for a business. Because oilfield MSAs are unlike run-of-the-mill commercial contracts and have their own set of norms, businesses are best served utilizing an attorney who negotiates MSAs as a core part of his or her practice and who is up to speed on the current industry contracting standards.
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A well-drafted MSA clearly defines the rights, obligations and allocation of risk between the parties. Understanding risk upfront allows stakeholders to better quantify their exposure and, in turn, make more informed business decisions such as the amount and types of insurance to buy and how to price for their work in order to make their margins. Additionally, MSAs give the parties some certainty as to how certain fact-patterns are likely to be resolved between them, should they later arise, which itself should decrease the likelihood that those situations escalate into litigation.
Although MSAs can take on varying forms depending on the party supplying the initial draft of the document, there is an industry standard framework that most oilfield MSAs adhere to. Most of them address the following material terms: (i) how work is ordered, (ii) warranties provided and remedies available, (iii) payment terms, (iv) lien rights, (v) indemnity structure, (vi) insurance requirements, (vii) consequential damages, (viii) termination rights and (ix) choice of law.
Indemnities, in particular, get a lot of attention in the oilfield. Typically, parties agree to either a “knock for knock” or “negligence based” indemnity scheme. A “Knock for knock” indemnity scheme means that the parties are generally responsible for their own people and property (and for those parties falling within its group), regardless of fault. In a “negligence based” indemnity structure, on the other hand, fault is central to determining who is responsible for what.
MSAs will also typically “carve out” from the general indemnity scheme and address separately certain high-dollar exposure issues such as: pollution, contamination, blowouts, wild wells, damage to wellbore or reservoir, loss of minerals and seismic events. Regardless of the indemnity scheme used in an MSA, it is crucial to understand that what can be agreed to in contract may be limited by what is allowable by law; for instance, if something agreed to in contract is “against public policy”. Knowledge of these matters is another reason why having counsel experienced in negotiating oilfield MSAs is of critical importance.