Key Takeaways
- Start with the contractual arrangement, not the contract.
- Contracts are not one-size-fits-all.
- Choose a structure that works operationally, not just legally.
“We need an MSA.”
Do you?
Maybe you do. But before you open your MSA template and start drafting, there is a more important question to ask: how does this contractual arrangement actually need to work?
When you are new to contracts, it is easy to think that contracting starts with the contract. You are asked for a Master Services Agreement, so you find the MSA template. You are told that the business needs a Statement of Work, so you start drafting the SOW. You are asked to review a contract, so you start reviewing the clauses.
This all makes sense. After all, contracts are our job.
But there is a risk in starting with the document. If you focus too quickly on the contract, you can lose sight of the arrangement it is supposed to support.
The contractual arrangement comes first. The contract comes second.
Before you decide what the contract should look like, you need to understand what the business is actually trying to do and how the relationship will work in practice. Only then can you work out what contract structure makes sense.
Start with the arrangement, not the template
Contract professionals spend a lot of time thinking about what goes into a contract. We think about the rights and obligations of the parties, how risk should be allocated, what happens if something goes wrong and how the relationship can come to an end.
All of these things are important, but contracts do not exist in isolation. Behind every contract is a business trying to buy something, sell something, provide a service, engage a supplier or build an ongoing relationship. The way that business arrangement works should shape the contract that supports it.
This means looking beyond the contract at hand.
- Is the transaction genuinely one-off, or is it part of an ongoing relationship? Will the parties transact repeatedly?
- What will stay the same each time and what will change?
- Are the products or services standardised, or does each arrangement need to be tailored?
- Who will need to use the documents and how will they be managed?
The answers to these questions may tell you the contract you were about to draft is exactly what the business needs.
They may also tell you that it is not.
Contracts are not one-size-fits-all
There are many ways to structure a contractual arrangement, and there’s no structure inherently better or more sophisticated than another.
An MSA and SoW structure is not automatically the right choice because the relationship is important or expected to continue for a long time. A standalone agreement is not unsophisticated because everything is contained in one document. A modular contract is not innovative simply because it has been divided into multiple parts.
The best contract structure is the one that supports the way the business actually needs to operate.
Here are some common structures you might come across:
Standalone agreement
One agreement contains the legal terms and the transaction-specific details, such as scope, deliverables, pricing and timing.
The arrangement is one-off or clearly defined, and there is no real need to separate the ongoing legal terms from the transaction details.
Master Services Agreement (MSA) + SoW
A master agreement contains the overarching legal terms. Separate SoWs set out the scope, deliverables, pricing and timing for each project or piece of work.
The parties expect to work together repeatedly and the core legal terms stay largely the same while the work changes.
Standard terms + order forms
Standard terms govern the relationship. Each order form records what is being purchased and the transaction-specific details.
The business sells relatively standardised products or services across repeat transactions.
Modular Agreement
Basic terms apply to all arrangements, with additional modules applying depending on the products, services or arrangement involved.
Different arrangements share some common terms but need different terms to reflect what the parties are actually doing.
This is not an exhaustive list, and the names used for different contract structures can vary. You may also see elements of these structures combined.
The important point is not what the structure is called. It is whether it works for the arrangement it needs to support.
Putting it into practice
Here are two examples where I have matched the contract structure to the contractual arrangement and the operational context.
Case study 1: Repeated negotiation
The problem: A business was entering into a mix of one-off supplier contracts and repeat arrangements for goods and services. Each contract was being dealt with as it arose, which meant the key legal terms were being negotiated each time.
The solution: I created a master agreement for preferred suppliers, supported by individual SoWs. The key legal terms could be negotiated upfront, while the goods or services, scope, pricing and timing could be agreed for each new transaction.
The result: The business no longer needed to start from scratch for each new engagement. This sped up the transaction process and reduced the amount of time Legal spent on each arrangement.
Case study 2: One contract trying to cover everything
The problem: A business enters into multiple types of arrangements with similar customers but uses one 103-page services agreement to cover them all. The agreement is cumbersome to manage and includes terms that are not relevant to every arrangement.
The solution: I created a modular contract with basic terms that apply to all arrangements and separate modules for the terms that differ.
The result: A contract that is specific to the arrangement, shorter, easier to understand, and easier to manage.
These scenarios called for different solutions because the operational problems were different. In one, the answer was to create an overarching agreement. In the other, it was to break one up.
Final thought
It is easy to deal with contracts one at a time. A request comes in, you find the template and you start drafting.
But every now and then, look up from the contract in front of you.
Is this a one-off arrangement or part of a pattern? Are you negotiating the same terms again and again? Is one contract trying to cover too many different arrangements? Could the structure be making things harder than they need to be?
Sometimes the contract in front of you will be exactly what the business needs.
Sometimes it will not. That’s why the contractual agreement comes first, and the contract comes second.
See you next month on the New to Contracts column, exclusively for Contract Nerds!
