Explanation of Master Agreements
Master agreements are a category of contracts that set out a framework of terms and conditions for multiple transactions between parties. They can be thought of as a container that holds all the shared work between the parties. There are various types of master agreements, including supply agreements and service agreements.
Any type of contract can be turned into a master agreement. For an agreement to be considered “master,” it must provide terms that govern the individual transactions between the parties. Master agreements typically include:
- A statement that designates the master agreement and all transaction documents as a single, unified contract.
- A process for how transactions will be conducted (e.g., purchase order procedures).
- How individual transactions relate to the master agreement, including how conflicts between them are resolved.
- Other terms regarding general concepts that apply to each individual transaction and all transactions as a whole.
- The details of each transaction (quantity, specifications, delivery schedule) are specified in separate order documents.
Example
Suppose a manufacturing company and a distribution company decide to collaborate. They can create a master agreement that sets out the general terms of their cooperation, such as pricing, delivery schedules, responsibilities, and other key aspects. For each new order or specific transaction, separate documents would be prepared, referring to the master agreement and detailing the specifics of that particular transaction.
Principles of Contractual Privity
This point concerns the principle of “contractual privity,” which means that a contract is only binding on the parties involved in it.
For reasons that are not entirely clear, many contracts introduce one of the parties as “Company A and its affiliates.” In this way, each affiliate is also considered a party to the contract. However, when you look at the signature page, only Company A signs, and there is no signature section for the affiliates.
How can affiliates be bound by the contract if they don’t sign it or agree to its terms? The short answer is: they cannot.
To do this correctly, you need to consider your needs:
- Do the affiliates need to be parties to the contract? If so, name them and have them sign it. If this is difficult, Company A should represent that it has the authority to sign on their behalf as their agent.
- If the affiliates need to have rights but no obligations, designate them as third-party beneficiaries and clearly define the scope of their rights.
- If the affiliates are to perform obligations but have no rights, list them as subcontractors, specify any limitations on assignment of duties, and state that Company A is responsible for their actions.
But please don’t just introduce the affiliates in the first paragraph of the contract. Doing so creates ambiguity. Contracts should create clarity.
Structure of Multiple Transactions
This point examines fundamental structural issues when parties engage in multiple transactions.
If the seller and buyer plan to carry out just one transaction, the contract won’t be complex. The seller sells the product, the buyer pays the amount, standard clauses are added, and that’s it!
However, when the seller and buyer anticipate multiple transactions, they need to decide whether to conduct these transactions under a single contract or several separate contracts. With either structure, the parties can arrange limitations of liability, document precedence, defaults, licenses, and other terms in any way they see fit.
The biggest impact, which cannot be adjusted, is what happens in the event of bankruptcy. In some countries, bankruptcy laws allow bankrupt debtors to accept or reject individual contracts. If you have a single contract with the other party and they go bankrupt, the other party must accept or reject all the transactions as a whole. But if you have multiple contracts, the debtor can reject some contracts and accept others. There is no right or wrong answer. Take the time to decide which scenario you want for your transactions.
Source: Frederick, L. (2022). Practical Tips on How to Contract: Learn How to Draft and Negotiate from a Former Big Law and Tesla Commercial Contracts Lawyer. How to Contract LLC.
