This article is written by Hannah Boban, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

If you are a consultant or a company looking to appoint a consultant, you’ll require a contract. A consultancy agreement is an important legal document that will help you to achieve your goals, shows the work to be done, and gives the terms of an agreement between two parties. Read this article to learn what a consultancy agreement is, to find out the importance of a compensation clause in a consulting agreement, and to see an example of drafting a compensation clause in a consultancy agreement. When an external consultant is appointed, the company requires a consultancy agreement. It’s always good to enter into an agreement with the consultant.

What are consultancy agreements?

A consulting agreement is a contractual document that outlines a working relationship between a business and a consultant providing the company with its services. The consulting agreement makes clear the terms of professional relationship as a technique for keeping both parties liable when it comes to the type of work and compensation expected. Having a consulting agreement when availing the services of an outside advisor or specialist is a necessary part of running a business and helps protect a company from possible or various disputes. It should be kept in mind that a consultancy agreement governs the appointment of a consultant. A consultant should be an expert or who has a wide range of knowledge in a particular field which can be provided in the form of services to a client or company. The consultancy terms will always depend on the type of services or on the nature of the consultancy provided.

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A consultancy agreement is important to be drafted by a company in order to clearly set out the extent of the consultancy work to be taken up by the consultant after identifying the expectations of the client. Whenever you are appointing a consultant to work for your business, always draft a consultancy agreement. Having a written record of such an agreement keeps both parties liable. It also ensures that an unworthy person does not get the payment without providing their services.

A consulting contract must offer a detailed description of the duties you will perform and the deliverables you promise the client. The agreement may also explain how much work you will perform at the client’s office and how often you will work remotely.

Major elements of the consultancy agreement 

  • Scope of work: The consultancy agreement clearly states the responsibilities and duties, obligations/liabilities, and services to be done by the consultant. The methods of work are not defined generally. The consultant can use their own discretion in performing such works.
  • Term: The time period for which the services of the consultant are required by the company should be properly mentioned in the contract.
  • Payment/compensation terms: The payment terms must include the payment mode, the amount of compensation that should be paid to the consultant when the compensation should be paid (monthly, quarterly, etc.). If any out-of-pocket expenses are given to them, they should be mentioned in the agreement.
  • Confidentiality: The consultant should keep company information confidential except that information is already available to the general public.
  • Termination: The notice period and rights of either of the parties to terminate the agreement should be stated in this clause. 

Consultancy agreement is beneficial to the company as well as the consultant. It covers all the aspects related to all the pieces of works to be performed within the said time. The agreement helps to avoid any misconstructions on the part of the consultant as well as the company. It also acts as a legal document in the event of any controversy between the consultant and the company.

Whether consultancy agreements are legally binding?

Consulting agreements are contracts that have legal consequences and are binding contracts. The consulting agreement has clauses that mention what should be done if a dispute arises and what actions can be taken by the offended party in case of such disputes. If the consultant did not deliver the services for which you paid him, you can use the consulting agreements (contract) as evidence in courts to recover the loss incurred to the company because of the failure of the consultant. 

Significance of compensation clause in a consultancy agreement

The compensation clause is relatively important for both the parties i.e. the consultant and the client. This clause states the amount to be paid by the client for hiring the services of a consultant. It is advisable to pay the compensation in tranches in other words on the basis of completion of particular tasks or deadlines, this assures the effective completion of the work.

The procedure of drafting compensation clause

  • Including compensation terms in your consulting agreement. It is important to showcase the exact terms for payment.
  • If payment terms are left idle, you are risking a scene where you are constantly bothering the client for payment, which is the last resort.
  • Detail out full compensation and payment terms in an exhaustive manner within your contract.

Example:

Compensation and payment

  1. Set up Fee: For the Services described in Clause 3, Client will pay Rs———— in setup fees. Set up, as outlined in Clause 3, can take different lengths of time, but will take around 30 days usually.
  2. Ongoing management: For the services described in Clause 4, Clients will pay the Company Rs———per month for ongoing management. The Rs——– will be due every 15 days and will be deducted from your payment method on file each month.
  3. The Consultant without the prior written approval of the Client shall not be entitled to vary the Fees at any time during the time period of the Contract.
  4. The Client shall compensate the Consultant for all the out-of-pocket expenses, incurred by it in connection with the Services for the Client.
  5. The Consultant is not required to provide Services unless all Fees and disbursements due to it in relation to the provision of the Services are received as provided in this Agreement.
  6. The Fees and any additional sums payable shall be paid in full by the Client into such account given by the Consultant which will be instructed from time to time.

OR

“For the foregoing Agreement to consult with the corporation, the Corporation agrees to pay the Consultant the sum of Rs ————–, upon execution of this Agreement”.

OR

 “In consideration of his obligations hereunder, for the term of this agreement consultant shall be paid as follows: The Corporation hereby covenants and agrees that Upon execution of this agreement, the consultant will receive 100,000 shares of the Company‘s common stock and additional compensation as directed by the Board of Directors and/or the President. For capital raised on any introductions provided by the consultant, a consultant will receive compensation in the amount of 10% of initial and any subsequent amount up to $1,000,000 (1st closing). All transactions exceeding $1,000,000 (1st closing) will be compensated based upon the Lehman Formula. The consultant will be compensated based on the Lehman Formula for any merger, acquisitions, or contracts that he may introduce to the company. Payment to be delivered in a manner mutually agreed upon by both parties”.

OR

“COMPENSATION: The compensation to be paid to Consultant for the performance of the Services described above will be based on actual hours worked on the project. The billing rate is $175 per hour for regular working time and 50% thereof for travel time (including air, rail, and auto travel to and from any place not the Consultant’s regular place of work). Consultant shall be reimbursed upon receipt of an invoice for all reasonable travel, lodging, and meal expenses, and all reasonable expenses incidental to travel and other expenses specific to the Services provided. Consultant shall receive prior approval from Company prior to incurring incidental expenses exceeding $500; the Company reserves the right not to reimburse costs exceeding $500 if prior approval has not been granted. Invoices will be provided to Company on a monthly basis and will identify work performed for the invoice month according to Company’s standard hour tracking. Payment will be due within 30 days of the invoice date. The consultant will charge a late payment fee of 1  1/2% per month, or the maximum amount permitted by law if less than 1  1/2% per month, for any payment not received within 30 days from invoice date. If a portion of an invoice is in dispute, then Company shall pay the undisputed amounts as set forth in the preceding sentence and the parties shall use good faith efforts to reconcile the disputed amount within (60) days invoice date.”

Conclusion

The consultancy agreement is between the company and the consultant. In this agreement, the extent of work to be performed by them and any other terms and conditions connected to their appointment in the company is mentioned. Consultancy agreement gives all a clear picture of everything i.e. what is happening when it has happened, how it happened 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, drafting up a proper legal agreement is very important, and it has a huge impact on the success or failure of the project.

References

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