Consultancy Agreements: Why we need them.

Consulting is an integral part of today's business world and there are many important reasons why businesses often prefer to use consultants. One of these is the explicit non-permanence of the association between the hiring business and the consultant.

Consultants (often referred to as independent contractors) offer flexibility and can be retained solely to carry out a specific project, helping a business to obtain specialised expertise for a limited time or longer term if necessary. Furthermore hiring consultants allows you to avoid the considerable tax and administrative costs that are part and parcel of hiring and maintaining permanent staff.

Whether you're contracting your services to others or hiring independent contractors to work for you or your business, it's essential to take the steps to document each new project.

Service contracts, often called consulting agreements are essential business tools. In the absence of clearly defined terms of services, problems can and do arise when the expectations of the service provider and the hiring business are misunderstood. To ensure you get the most out of your consultancy arrangements you need to make sure the needs of the parties are clearly defined and the expectations transparent.

The following are specific reasons for using a consultancy agreement in business:

1. Formally establish consultancy relationship

A consultancy agreement formally establishes the relationship between the Principal (the hirer of the consultant) and the service provider, eliminating ambiguity regarding the scope of the work and the nature of the consultancy relationship; both parties know that the relationship exists and the consultancy agreement formalises the arrangement.

2. Clearly define the consultant's duties and responsibilities

It is possible to get satisfactory results even if you have a verbal agreement, as long as you and the other party remember the contract's terms in the same way and fulfil them as expected. However, it is better to safeguard your interests in case you don't get the results you expect by getting your agreement in writing.

Costly misunderstandings can develop if a consultant performs services without a clear written description of what he or she is supposed to do and what will happen if it isn't done. A consultancy agreement clearly defines the needs of the parties and ensures expectations are transparent. A written agreement gives you legal recourse if the consultant or the principal fails to honour their obligations while under contract and it also serves as a handy guide if either party needs or wants clarifications about what is expected of each other.

3. Define subcontracting responsibilities

While it is true that your control over the consultant you hire mainly lies in the "what" (i.e. the result) and not the "how," you do have some leeway over the consultant's methods of executing his or her duties and responsibilities. Specifically, you have control over whether or not your consultant may subcontract the tasks related to your project and this can be clrealy spelt out in a consultancy Agreement.

If subcontracting is allowed, the consultancy agreement may outline the conditions which must be met before subcontracting permission can be granted. Finally, a consultancy agreement makes it unquestionably clear that the consultant has complete responsibility for ensuring the quality, compliance and timeliness of the deliverables specified in the agreement.

4. Limit and Define Compensation

A consultancy agreement specifies the remuneration the consultant should receive for his or her services. It also outlines which of the consultants' expenses are covered by the consultancy fees.

Thus, the agreement protects the principal against arbitrary claims made by the consultant for his or her operational costs (e.g. telephone bills, office space rental, office equipment purchase/lease, taxes etc). This also provides protection in case the consultant belatedly decides that the fees you have agreed to pay are, after all, not enough compensation for services rendered.

5. Know what to expect and when to expect it

The consultancy agreement typically has a schedule enumerating the consultant's responsibilities. It breaks the output required of the consultant into tangible deliverables with definite deadlines or milestones.

Through a consultancy agreement, therefore, you know exactly what you can expect from the consultant and when to expect it. This gives you the ability to confidently plan other projects that depend on or complement the project on which your consultant is working.

6. Protect your intellectual property rights

A consultancy agreement usually specifies who has intellectual property rights over the contract deliverables and the know-how generated in the course of the consultancy relationship. It may also states that rights to the materials and know-how that your company brings into the relationship remains yours throughout the duration and after the termination of the agreement.

Thus, a consultancy agreement protects your intellectual property rights. This gives you full legal protection in case the consultant infringes on your rights over the materials and know-how generated by the agreement and the project.

7. Protect yourself against conflicts of interest

Your agreement may specify that the consultant confirm that no conflict of interest exist when entering into the agreement. It also outlines the steps to be followed should a conflict of interest arise in the course of the consultant's performance of his or her duties.

This provision protects the principal against actions by the consultant that may be harmful to their business interests. If the consultant enters the agreement with full knowledge that a conflict of interest exists (or if the consultant does nothing to inform the principal of a conflict of interest arising later on when the project is underway), you have legal protection and right to seek legal restitution for the consultant's breach.

8. Ensure confidentiality and non-disclosure

A strong agreement also obligates the consultant not to disclose proprietary or sensitive information which it has access to in the course of the project. The consultancy agreement therefore protects your primary claim to and ownership of proprietary information and materials even when such falls under the unprotected intellectual property category.

The consultancy agreement, moreover, vests in you full ownership and control of sensitive and proprietary information which you have no choice but let the consultant access. As such, a consultancy agreement gives you legal protection in case the consultant fails to keep your intellectual property confidential or is careless enough to disclose proprietary information that has been specifically specified in the non-disclosure clause of the agreement.

9. Indemnity against liability and loss arising from legal action by outside parties

Since you do not have much control over how your consultant accomplishes the specific tasks related to your project, a consultant may conceivably violate the law – even infringe on third-party intellectual property rights – in the course of his or her performance of the duties specified in your contract. For instance, your consultant or his/her subcontractor, in the course of designing proprietary software/systems for your business, may use software to which he or she gained access through another project. In this case, the third party whose intellectual property rights have been violated may file a claim to stop you from using or distributing the output that resulted out of your consultant's infringement of intellectual property rights and may even ask the proper courts to award them damages from the same.

A consultancy agreement gives you protection as it states that the consultant indemnifies you against claims (intellectual property rights violation, loss to life and property, etc) that arise out of the consultant's or his/her subcontractors' illegal actions, omission or negligence.

10. Facilitate dispute resolution and termination of the contract

Most well-crafted contracts will set out a procedure in the unfortunate event that the relationship breaks down. A consultancy agreement will give you guidance as to what constitutes lawful early termination of the contract, default on the consultant's part and how disputes between the parties may be negotiated and resolved.

Since the consultancy agreement provides the parties with legitimate means of dispute resolution and contract termination, you can save on legal costs if the relationship fails.

11. Define the duration of the consultancy

The consultancy agreement has a date of commencement and completion and defines the duration of the consultancy. This grants you all the advantages and protection of the consultancy agreement during the period specified – although some clauses such as non-disclosure and indemnity do outlive this period and protect you after the relationship has ended or has been terminated.

see Consulting Services Agreement

also Incorporated Contractor Services Agreement or Independant Sole Trader Contractors Agreement