Definition of Management Service Agreement
Management Service Agreements (also referred to as MSAs) are common in business – but what are they? In a nutshell, a management service agreement is a contract between at least two parties where the management and delivery of particular services is outsourced to one.
A management service agreement can be used in many different circumstances, including the management of an investment fund, the management of the facts of a legal case and the management of shortlisted house designs for a real estate development.
One example of where a management service agreement might be used is a typical investment fund structure, where the MSA would be between the fund manager and the fund. Another example, would be a house and land package development, where the developer of the housing estate outsources the management and supervision of construction works to a construction and project management service provider.
So what differentiates a management service agreement from other , similar contracts organisations make on a day to day basis? A management service agreement is a contractual arrangement where the managed entity delegates the management, delivery, administration and organisation of goods and services to another entity, however the managed entity retains the practical ability to exercise that function, generally in conjunction with the managed entity’s management rights.
The key difference between a management service agreement and other similar contracts, is the ability for the managed entity to oversee the management of those goods or services as well, which is not always the case where the implementation of that good or service is specifically contracted out.
Examples of management service agreements may include:
It’s import to remember that most management service agreements are more likely to be executed by corporate entities as opposed to individuals and will be put in place where a more permanent arrangement is required over less importance detail.
Core Components of a Management Service Agreement
The precise form of any management service agreement will vary from one engagement to the next, but there are certain key components that should be included in every such agreement. These components include:
- Scope of services – This component is crucial because it defines the specific duties that will eventually fall to the management company. A clearly defined scope of services helps ensure the management company and the client are on the same page about the agreement and what is expected of the company. Courts often construe service agreements to be specific to the named parties, so general or vague language can be problematic. This component should not be overlooked when drafting a management service agreement.
- Payment terms – A thorough explanation of payment terms will help improve the likelihood of smooth financial transactions between the client and management company. Payment terms will address when payments are due (in advance, in arrears or when services are rendered), whether interest on payments is charged, whether deposits are required and whether late fees apply to overdue payments.
- Duration – While not always necessary, most management service agreements will outline a certain duration during which the agreement is in effect. The exact length may be negotiable, depending on the nature of the relationship, but if no expiration date is given, the agreement may run indefinitely. This period may be terminated either by completion of the services or by agreement of the parties (always subject to any penalties that might be negotiated outside of this timeline).
Advantages of Management Service Agreements
Some of the key advantages of entering into a management service agreement for both the service provider and the client are:
Risk management
Management service agreements allow the contracting parties to allocate risk. In particular, this can include the finances, liabilities or regulatory compliance obligations arising as a result of the operation of the business. An example is a franchise business where a franchisor sets out in the management service agreement that the franchisee will operate its business (and its employees) in accordance with the franchise agreement and if it does not, the franchisor will be under no obligation to continue to provide certain support services.
Cost
Instead of a principal engaging staff to perform certain functions in-house, the principal can use a management service agreement to engage the service provider to perform those functions. This can reduce fixed costs and provide the principal with more flexibility to respond to changing business conditions. Furthermore, a principal may prefer to engage a service provider or a number of service providers, rather than employ staff directly, and a management service agreement allows the principal to do so.
Common sense
Entering into a management service agreement can avoid any disputes between the parties and can provide for an orderly and efficient exit from the arrangement or wind-down of the business. A management service agreement can provide for a mechanism for one party to terminate the agreement without triggering any ‘change of control’ or other restrictions contained in contracts the principal has with suppliers or customers. Instead of a ‘cliff edge’, a management service agreement may provide a staggered exit process which will enable the principal to deliver services to its customers and realise value from its suppliers in an orderly manner, while at the same time avoiding a change of control dispute.
Dangers and Disadvantages
While management service agreements can confer a host of benefits, they can also lead to undesirable consequences if not properly drafted and carefully monitored. In some cases, those who enter into such agreements quickly find themselves in hot water. Some of the most common problems we see arise from:
1. The ambivalence of the professional licensure board
The boards that regulate professional service entities tend to be frustratingly ambivalent toward MSAs. On the one hand, boards are often aware of the practical need for their licensees to enter into such agreements in order to operate a business. This is especially true in health care where corporations are not permitted to engage in practice unless they have properly credentialed professionals under the supervision of duly licensed individuals. As a result, boards often grudgingly issue opinions that condone these arrangements but refuse to formally adopt a bright line test for the profession. This effectively leaves the interpretation of the board’s opinions in the hands of private litigants forcing them to play a game of "pin the tail on the latest board’s opinion." They simply don’t know what will be permitted and what will not. This creates a fair amount of tension and uncertainty.
2. Unfounded assumptions about implicit board approval
Because of the ambiguity surrounding most boards’ opinions concerning MSAs, many parties assume that any such agreement will be approved by the board. This is a trap. As mentioned above, by the time an MSA is brought before a board, it usually involves an existing business relationship that has already begun generating revenue. For this reason, the board is likely to view the issue as moot or simply decline to act at all. But that, of course, does not offer any guarantee of approval or a waiver of future challenge. If an MSA is ever challenged , the entity that relied on the board’s tacit consent may suddenly find itself without a shield to defend itself.
3. Overdeferential reliance on board opinions
Some parties take the opposite approach and decide that taking the issue to the board will somehow ensure the validity of the arrangement. They fail to consider the business realities of their industry or that of their particular situation. Instead, they overthink the issue and fail to recognize that the board’s opinion is merely advisory. The business must still withstand scrutiny if challenged. At best, the board’s opinion has only limited value as evidence of a party’s good faith. It should be viewed in the context of all other legal principles and business factors.
4. Failure to consider all applicable regulatory schemes
In many instances we have seen professional service entities mistakenly conclude that an MSA is a panacea for all of their legal issues. What they fail to appreciate is that the concept of a management services organization is merely an overarching term that describes a specific type of contractual relationship. Actual compliance with the law requires a more in-depth investigation. Depending on the state, there may be any number of relevant statutes or regulations that must be considered. For example, while the Medicare antikickback statute is generally unrelated to patient referrals, the state versions of that law may apply with equal force to such transactions. Similarly, while the anti-fee splitter statute may only apply to owners of a single practice, it is not uncommon for states to apply its underlying principles to all professional service entities. Some states have their own professional service entity licensing and corporate practice of profession laws that may even be more stringent than the traditional fare. Moreover, whether or not the arrangement is structured as a joint venture may also affect which laws apply.
Best Drafting Practices for Management Service Agreements
A comprehensive management service agreement will contain certain standard elements such as the term, scope of services, management fee, and termination. However, the most successful management service agreements have well-defined scope of services and detailed fee arrangements. Outlining clear benchmarks for performance, development milestones, and key performance indicators (KPIs) ensures that all parties have a common understanding of goals and objectives. Installing a proper incentive system with material economic benefit, linked to those performance benchmarks and KPIs, also provides better assurance that alignment of interests will be achieved. Drafting a clear and understandable management service agreement which bears consideration of the local market and market practice is essential to ensuring that the document actually reflects the market. A poorly drafted management service agreement with vague or poorly defined obligations is likely to cause unnecessary disputes and costs. A good management service agreement will leave little room for ambiguity as to the roles, responsibilities, and remuneration of the manager.
Examples and Case Studies
Many of our clients, old and new, use MSAs in some form. They are a practical and a mutually beneficial approach in the management of the financial, operational and administrative components of healthcare organizations. In 2011, the following country club and golf club management transactions were analyzed for purposes of this article: 3B Management Group, LLC v. Sunnyvale-Lawson Country Club, Inc., 2011 WL 6426307 (N.D. Cal. Dec. 21, 2011) (finding of breach of contract under MSA); Centrotherm Solar USA Corporation v . Soccer West, Inc., 2013 WL 1736534 (N.D. Cal. Apr. 22, 2013) (finding of breach of contract under MSA). The plaintiffs in both cases operated various country clubs and golf courses in California. Both clubs had entered into management service agreements with the plaintiffs by which the plaintiffs would provide manager services for a fixed fee, a portion of which would be directly passed through to the members. In both cases, the clubs disputed the annual fee obligations as set forth in the MSAs.
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