CHAPTER 5 HOW MASTER SERVICE AGREEMENTS AND RISK ALLOCATION PROVISIONS WORK
| Jurisdiction | United States |
(Mar 2010)
HOW MASTER SERVICE AGREEMENTS AND RISK ALLOCATION PROVISIONS WORK
Stephen M. Pesce
Flanagan Partners LLP
New Orleans, Louisiana
Harold J. Flanagan's practice includes both contracts and litigation in the areas of insurance coverage/recovery, oil and gas production, construction, casualty, and commercial matters. He has extensive experience in contract drafting for oil and gas producers, including drilling contracts, master services agreements, compressor rental agreements, and oil field construction contracts, with particular emphasis on addressing the pitfalls found within the IADC contracts and other form agreements. Mr. Flanagan's insurance coverage practice is extremely broad, covering transactional matters and litigation in the contexts of oil and gas production, construction, casualty, and products liability. He is frequently called upon to investigate casualties, and advises clients on matters involving well blowouts, explosions, drilling rig accidents, and various other oilfield tort claims. He is frequently associated by other law firms to assist in litigating the insurance aspects of casualty claims. Mr. Flanagan graduated from Loyola University with B.S. in Business Management in 1984, and from the Loyola School of Law in 1995, cum laude. For the past nine years, he has taught insurance law at Tulane Law School. He is a frequent lecturer in the areas of oil and gas law, construction contracts and litigation, and insurance coverage/recovery. Mr. Flanagan enlisted in the U.S. Marine Corps in 1985 and continues to serve today as a colonel in the Marine Corps Reserve.
Stephen M. Pesce practices in the areas of energy, insurance coverage, admiralty, construction, and commercial matters. He handles litigation, as well as contract negotiation and management. He was admitted to practice in Louisiana in 2004, and was an associate with the law firm of Liskow & Lewis, L.L.C. in New Orleans, Louisiana from 2004-2009. He wrote "Survivor's Guide to E-Discovery," co-authored with Don K. Haycraft, and he is a member of the Louisiana State, New Orleans, and Federal Bar Associations. He graduated from Duke University School of Law, Durham, NC in 2004.
Synopsis
§ 5.01 Introduction and Overview
§ 5.02 MSAs in General - What Are They and When Should I Use Them?
[1] What is an MSA?
[2] Is an MSA Appropriate?
[3] An MSA Program Must be Integrated
§ 5.03 Indemnity Basics
[1] Select the Risk Allocation Scheme
[2] Magic Language
[3] The "Pass Through"
[4] Indemnity for Gross Negligence and Punitive Damages
[5] Carve-outs
[6] Third Parties
[7] Pollution
§ 5.04 Exceptions to the Right to Seek Indemnity
[1] Louisiana
[2] Texas
[3] Wyoming
[4] New Mexico
[5] Construction
§ 5.05 Insurance
[1] The "Big Three"
[2] Dovetail With Indemnity
[3] Contractual Liability
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[4] Insurance Certificates
§ 5.06 Particular Provisions
[1] Standard of Performance
[2] Independent Contractor
[3] Louisiana Statutory Employer
[4] Choice of Law
[5] Savings Clauses
[6] Primacy and the Battle of the Forms
[7] Payment
[8] Termination
[9] Consequential Damages Waiver
§ 5.07 Best Practices
[1] Drafting Standards
[2] No "Potpourri" Allowed
[3] Contract Administration
§ 5.08 Conclusion
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§ 5.01 Introduction and Overview1
The relationship between an exploration/production company and its providers of goods and services (typically referred to as "service contractors") is often governed by a single "Master Service Agreement" or "MSA"), which is usually supplemented by written or oral purchase orders for each individual work project. This paper explores the terms commonly used in such agreements, with particular emphasis on risk allocation in insurance matters, which may also play a role in other agreements. The authors also recommend certain other provisions that support good contracts. The authors have placed particular emphasis on some of the more common errors they see in drafting and negotiating MSAs.2 Even if such MSAs are drafted by others within your organization, it is important to understand how these agreements and provisions work.
§ 5.02 MSAs in General - What Are They and When Should I Use Them?
[1] What is an MSA?
An MSA is a traditional means of retaining a contractor or a subcontractor to perform work on a given project, on either a one time or long-term basis.3 In the pure sense, however, the MSA merely provides the framework for tasks to be performed by a contractor or subcontractor, but which have not yet been identified. A contract between the E&P company, and a contractor is actually not formed upon the execution of the MSA. Rather, the contract for a particular job is formed upon the issuance of the oral or written purchase or work order.4 Thus, the MSA - as supplemented by the purchase order - creates a contract for the work.5 As explained in Section 5.06 of this paper, the terms of such purchase orders can have a significant impact on the parties' obligations; hence, care should be taken to ensure that they reflect the parties' common intent, especially in the context of indemnity and payment terms.
[2] When is an MSA Appropriate?
While many E&P contract personnel might instinctively use MSAs to contract for any sort of work, the better practice is to use MSAs only where there is a common workplace; that is,
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where employees of multiple entities (e.g., owners' representatives, multiple contractors and their subcontractors) are working together in a single location. The basic assumption of the MSA is a common workplace where the various "moving parts" (personnel and their equipment) can come into contact with one another. In such situations, allocating fault for that accident can prove to be difficult, expensive, and time consuming. Consequently, the parties frequently agree to allocate risk - not on the basis of fault - but rather on the basis of "ownership."
Where there is no common workplace, an MSA is usually inappropriate.6 Without a common workplace, "the operator will not likely injure or damage the contractor, but the contractor's products (or the result of its service) could certainly cause loss or damage to the operator."7 Thus, the usual tradeoff between the parties - each party assumes own responsibility for loss or damage to its own people or property - is no longer equitable. Consequently, the absence of a common workplace results in the loss of the basic assumption the parties have in agreeing to a reciprocal indemnity scheme.
Where the contractor is merely providing equipment or tools to be used at a common workplace, a basic assumption of the parties is absent. In a tool rental contract, for example, the operator will provide full indemnity to the tool company for injury or damage to the operators' employees. But that result is arguably unfair - the tool renter obtains the benefit of protection for injuries caused to operators' employees by a defective tool, but the tradeoff - protection to the operator for injury to the tool renter's employees - is illusory, because they are not at the common workplace.8
Construction contracts present the best example of why an MSA is not appropriate for all types of work. In a construction contract, the contractor is typically given full control of the worksite, including the ingress and egress of personnel, and the step-by-step process of the work. In the typical MSA risk allocation scheme, the operator would indemnify the contractor for the operator's "property" and as is typical in a construction contract, title (ownership) of the work (the operator's property) vests in the operator as the work progresses. Why should the owner of structure agree to indemnify the contractor for its loss, when the contractor is in complete control of the methods and means of the work and of the worksite itself? To do so breaches a fundamental basis of allocating risk without regard to fault; that is, that it would be too difficult to figure out responsibility for a loss because of the interaction of the owner's personnel and equipment with that of the contractor. But such is not the case in a construction contract, and an MSA is therefore inappropriate in most cases of construction.9
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[3] An MSA Program Must be Integrated
The most important concept to recognize regarding a risk allocation scheme in any given MSA is that it must not be considered in isolation. An MSA program should be just that - a "program." It is an unwise practice to have a "hodgepodge" of MSAs, each with a different risk allocation scheme. For example, some companies maintain hundreds of MSAs, a third of which may contain broad reciprocal risk allocation schemes, while the balance of the MSAs in the "program" are a mixture of narrow reciprocal MSAs and those instances in which risk allocation is not even addressed. As discussed below in Section 5.03, such an arrangement could place the company in a bad situation where it has agreed to certain protections in one MSA that are not passed on to another contractor on the site.10
§ 5.03 Indemnity Basics
[1] Select the Risk Allocation Scheme
Oil and gas exploration operations can be dangerous to both personnel and property. A proper risk allocation scheme, one that includes indemnity, insurance, and other contractual provisions, can mitigate the effects of casualty risks, foster certainty in the case of an accident, and reduce litigation costs.11
The first step in drafting the MSA is to select the risk allocation "scheme" that is to be applied. There are essentially three models: (1) the broad reciprocal, (2) the narrow reciprocal, and (3) the modified reciprocal. Which of these models to select depends on several factors, including the company's contracting philosophy, its market leverage, and the law likely to be applied to a casualty. For a common understanding of...
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