This article has been written by Sajinash kp, pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Imagine you are going about your day, enjoying a nice morning walk on the side of a river, and then suddenly you have a eureka moment and get a wonderful business idea. The trouble is that you have no background in business management, finances, and marketing, etc. What do you do? You go to an expert in the field, of course. Such a person is called a consultant because he or she advises us on a particular subject. A consultant sees the world from our point of view, understands our problems, and then provides us with adequate solutions. The person who consults them is called a client.
Once you finally get a client and are ready to get started on a project, it’s tempting to take it further on just a handshake but it’s worthwhile to take out time for putting it down on paper in the form of a written contract. The written contract is not only binding on the parties but it potentially helps to eliminate misunderstandings or confusion. Without a consulting contract or agreement, both parties expose themselves to the risk of financial losses, feelings of resentment, damaged relationships, and sometimes lawsuits. Through this article, the author intends to shed light on consultancy agreements.
What is a consultancy agreement?
A consultancy agreement refers to a contract that defines the terms of service between a consultant and the client. It is drawn up when a consultant is called to provide services to an individual or a business organisation. By clarifying all the agreed-upon demands of both parties to the transaction, it helps in protecting their interests and ensuring that the agreement is complied with.
What are the essential clauses of a consultancy agreement?
The consultancy agency being diverse in nature attracts different clients with different needs and therefore, it is wise to say that every consultancy agreement is designed as per the need of the client, and hence there is no fixed template for such agreement. However, the following clauses can make your consultancy agreement more useful and comprehensive.
Name of the parties
First and foremost, the agreement should clearly specify the parties between whom it is being drawn, i.e. the consultant and the client. This clause would also specify the exact business the two parties are engaged in.
Scope of work
As one of the most important clauses, this part of the agreement defines the nature and scope of the work which is required to be performed under the agreement. It describes the services and the manner in which they have to be provided by the consultant. For eg. Will the consultant help you solve a productivity issue that you’re having, or will he advise you on how to raise money for the business and facilitate fund mobilisation? Thus, the agreement gives a detailed description of the services. This clause helps to ensure that there is no confusion regarding the work before or during its performance. Thus, it brings clarity to the transaction.
This clause specifies the exact duration for which the services will continue. That includes the start date as well as the finish date. It is also desirable to include relevant timelines. Timelines can help you plan and measure progress regularly.
Usually, an agreement is terminated when there is a breach by either party, but some agreements may also allow it to be terminated in other circumstances. This clause specifies certain situations, if any, where either party has the right to terminate the contract. It also explains the procedure to be followed in such a case as well as the notice period, if required.
One of the most important clauses is, of course, the compensation clause, which decides the exact amount of money that the client shall pay to the consultant in advance for his or her services. It also specifies the method of payment as well as the date on which it is to be made.
Relationship of the parties
This clause specifies the business relationship between the consultant and the client. A consultant is typically not an employee of the client organisation, but rather an independent individual or organisation who works on their own discretion. This means that though they have certain powers, they are not entitled to employee benefits of the client company. They also have to pay their own taxes. To determine such factors, it is necessary to determine the relationship between the parties.
Every business has information about its client lists, operation strategies, future plans, etc. that needs to be kept confidential. When two separate organisations work together under a contract, like a consultant and a client, they get access to some sensitive information about the other party. Thus, every agreement has a confidentiality clause, which obligates each party to the agreement towards non-disclosure of the other party’s information without their consent, to protect it from competitors, the general public, etc.
Intellectual property rights
This clause includes all sorts of provisions for the protection of the intellectual property of the parties. It describes which party will have the rights to the work produced through consultation. Usually, such work is considered “work for hire” and its rights belong to the client. Apart from that, the clause also prevents the consultant from improperly using the trademarks of the client organisation.
The indemnification clause defines the responsibilities of each party towards the other in the face of unexpected problems and determines what protection each party will have from the other’s negligence. This means that if any loss, harm, or liability is caused to one party by the other, the former will compensate the latter for it in the manner prescribed. This protects the parties from potential financial burdens.
When a client and a consultant work together, it may create a situation where the results might not come out as expected. For eg., you hire a consultant to help you increase the productivity of your company, but the final productivity has not increased as much as targeted. In this case, you might want to sue the consultant. Similarly, the consultant may want to sue you in certain situations. Each party, though, would want their liability to be as little as possible. Therefore, the best solution is to have a clear and detailed clause which determines the liability of each party towards the other.
Disputes between parties to an agreement are almost inevitable. How should such a dispute be resolved? This is determined by the dispute resolution clause. It explains the mediation process that should be opted by the parties, which is more cost and time-effective than court proceedings – especially in small disputes.
Conflict of interest
This clause prevents conflict of interest for the consultant by restricting them from providing their services to a competitor of the client while they are still working with the client.
As the consultant is working to provide services to the client, any expenses are undertaken by him during the service period which is necessary for the performance of the work that should be paid for by the client. Thus, this clause establishes this principle and describes the procedure by which the consultant will receive reimbursement for the expenses.
This clause states that no modifications can be made to the existing terms of the service unless they have been made officially and in writing. This helps to ensure that no party can take up unscrupulous or unfair means and try to dupe the other party for their own benefit.
Signature of both parties
In the end, both parties must sign the document and write the date on which it was signed. This completes the document and gives it legal value. The signature indicates that the parties have read and understood the terms of service and agree to them. Therefore, once signed, the parties cannot later refuse to abide by any rules given in the agreement.
Points to be considered while signing a consultancy agreement
- Before completing or signing a consultancy agreement, decide what your goals are. This would have a direct bearing on what the agreement includes. Any agreement should at least describe the consultant’s goals or tasks, payment terms and the amount to be paid, deadlines, etc. as well as the client’s rights and expectations.
- Read the entire agreement carefully and understand the meaning of each and every term, as well as the implication of each and every clause.
- Make sure that the contract is correct on all key terms so that both the consultant and the client share the same expectations concerning their commitments and obligations. There should be no room for misunderstandings.
- Revise the document or renegotiate the terms if either party feels it is not in their best interests or that it is too restrictive. It is important to do this beforehand so that there are no disputes or bad blood down the road.
- Sign two copies of the document, one for each party. Preserve the agreement in your business records so that it can be revisited easily whenever required.
- Never sign an agreement before reviewing it in detail, just by relying on the trust you might have in the other party.
- Never assume certain terms are agreed to unless they are explicitly stated in the agreement. No aspect of the service process should be assumed to exist, and therefore each term should be specified in the agreement.
It’s clear that from the perspective of the parties involved, as well as on a project level, those contracts are a smart move. Consultancy agreement gives everyone a clear picture of what’s happening, when, how, and why it is happening, and what to do if a deliverable is not met, or one of the parties breaches a promise. It is advisable when recruiting consultants, to draw up a proper legal contract as it is not merely another waste of paper and tie, and can have a huge impact on the success or failure of the project at hand.
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