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Key terms in a consulting contract

Reading time: 9 mins

A consulting contract is an important document for professional services firms. Negotiating terms with a client can be challenging. Clients often have a lot of leverage in the consulting relationship.

However, it is important to avoid the temptation to simply sign the consulting contract without reviewing its terms.

In this article, we explore key terms that you should look out for in a consulting contract.

Key takeaways

  • consultants must carefully review consulting contracts
  • insurance may not respond to contractual risks
  • think of insurance as a business asset that needs to be protected
  • use intellectual property rights to secure payment obligations
  • comply with variation clauses and be aware of time bars
  • make sure you review the scope of the consultancy services
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Indemnity clauses in a consulting contract

An indemnity clause is a clause that requires someone to reimburse someone else for a loss. An indemnity clause may describe:

  • who and what will be reimbursed
  • how someone will be reimbursed
  • whether another party’s fault will be taken into account
  • the events that they will be reimbursed for

Who are you reimbursing?

An indemnity clause in a consulting contract can require a consultant to reimburse more than just their client.

An indemnity clause may require a consultant to reimburse their client. However, it may go further than that. Some indemnity clauses also extend to a client’s related companies, employees, officers, agents, contractors and other consultants.

We consider this to be unfair because those other parties:

  • are not the client
  • are not paying the consultant’s invoices
  • may not otherwise have had rights against the consultant

This would greatly expand the potential risk and exposure for the consultant. An issue could not only harm the client but also affect other parties and increase the consultant’s financial risk.

What are you reimbursing the other party for?

Indemnity clauses are powerful tools. They grant a person the right to be compensated if certain events occur. They are common clauses in a consulting contract.

You need to be careful and understand what you are reimbursing. For example, consequential loss, the cost of rectifying defects or liquidated damages.

Reverse indemnities

Reversionary indemnities are bad for consultants. They indicate that the consultant may need to reimburse the client for things that the client has done wrong.

Things that are outside the control of the consultant

When agreeing to an indemnity clause, a consultant should only be responsible for things they have control over and can avoid.

For example, a consultant can ensure that it does not copy someone else’s design and infringe copyright. However, a consultant may not have control over the ground conditions of a particular site and may not have geotechnical expertise. It would therefore not be wise to agree to an indemnity clause about latent conditions affecting a site.

Insurance obligations in a consulting contract

Insurance for professional consulting firms is expensive. It is for that reason that you should review the insurance requirements in a consulting contract.

Insurance obligations can have unintended consequences and can mean that:

  • the consultant agrees to contract terms that it immediately cannot comply with because the consulting contract requires insurance terms that the consultant does not have and cannot comply with
  • the consultant agrees to provide more insurance than the consultant has
  • the consultant agrees to insurance coverage, but its insurance does not cover those things

If a consultant agrees to insurance requirements that it cannot comply with, it will immediately be in breach of contract. The consultant may be responsible for loss that the party incurs because the correct insurance is not in place.

Any insurance requirements set out in a consulting contract should align with the consultant’s existing insurance policies.

How much insurance do you need?

A client will want reassurance that there is someone of substance standing behind the consultant. This provides comfort that someone with deep pockets can pay out if a claim is made against the consultant.

However, there is no such thing as infinite insurance.

Insurances like public liability insurance, professional indemnity insurance and workers’ compensation have a maximum amount of money that the policy will pay out.

When a consulting contract is being negotiated, the insurance amounts should be a part of those matters that are negotiated.

Can you comply with the insurance obligations?

If you can’t meet the insurance requirements in a consulting contract, negotiate to change them.

For example, if:

  • the contract requires you to hold professional indemnity insurance on a ‘per claim’ basis, but your policy is ‘per claim and in the aggregate’
  • the consulting contract requires you to ensure that the public liability insurance policy contains a waiver of subrogation, when it doesn’t contain such a clause

Consultant contract intellectual property rights

Intellectual property is the cornerstone of every professional service’s consulting business.

Every consultant needs to retain as many intellectual property rights as possible.

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When do intellectual property rights pass to the other party?

From reports, drawings, sketches, models and advice, a consultant’s intellectual property is what it gets paid for.

Copyright (when unique ideas are transformed into a tangible, written format, or spoken words, or a tune or a song, etc) is owned immediately by the person who created it. The author does not need to do anything after the copyright is created.

However, copyright can be given away through contracts. Employees, for example, give away copyright to their employer through their employment agreement.

A consulting contract will often require that when intellectual property is created, the consultant must either:

  • transfer ownership to the client, or
  • grant a broad intellectual property licence to the client

To protect a consultant’s right to payment, intellectual property rights should transfer upon payment, rather than creation.

What intellectual property rights are you giving away?

There is a difference between:

  • background intellectual property rights. This is IP that a consultant created before (or during) the services but that does not relate to the deliverables that the client is paying for, and
  • the intellectual property rights that are contained in the deliverables that the client is paying for.

If a consultant gives up their rights to their ideas in a consulting contract, it could cause problems for their business. For example, a consultant’s brand that is identified through their trade mark, may accidentally be captured by the intellectual property clause.

Variation clauses in a consulting contract

Including variation clauses in a consulting contract is crucial to prevent consultants from performing work without compensation.

The client also needs to ensure they can request extra or different work to be carried out with flexibility.

What do people consider a variation to be?

Not every consulting contract sees variations the same way. For example, here are some examples of how a consulting contract may define what entitles a consultant to claim a variation:

  • A change to the sequence or timing of services or for additional, less or different services; or
  • A substantial change to the services,
  • A change to the services, but only if the client itself receives a variation from its client

Variation clauses and time bars

A time bar is a limit that is placed on the amount of time that a consultant has to claim a variation from the client. Claiming a variation often requires written notice. If the consultant misses the time bar (for example, 5 Business Days), they are prevented from claiming a variation, but must still perform the work.

Sounds unfair, right? That is why it’s important to speak to a commercial contract lawyer.

Valuation of variations

There are many different ways of valuing a variation. Common valuation methods for variations in a consulting contract include by:

  • agreement between the parties
  • using pre-agreed hourly rates
  • the client

If the client and consultant disagree on the value of a change, the consultant may still need to complete the work.

Frequently Asked Questions

What should I do if a dispute arises?

It is important to comply with the contract if a dispute arises concerning a consulting contract. A contract will often set out a process, for example:

  • you must provide written notice
  • the notice must describe the dispute and its impacts
  • you must give notice within a certain period of time

It is also important to notify your insurer of any claims. A policy of insurance will also describe the requirements for notifying an insurer of issues.

You can find consultancy agreement templates on the internet. You must tailor these to suit your business, insurance, and other matters. Our recommendation is to reach out to a commercial contract lawyer to prepare a contract template.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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