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4 details to look out for in a consulting contract

A consulting contract is an important document for professional services firms. When you are supplying services to a client, it can be difficult to negotiate terms because the client has so much leverage.

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

In this article, we explore 4 details that you should look out for in a consulting contract.

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Author: Farrah Motley, Director of Prosper Law.

Indemnity clauses in a consulting contract

An indemnity clause is essentially a clause that requires one or more parties to reimburse someone for a loss that is incurred due to certain events.

Who are you indemnifying?

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 not only the other contracting party but their related companies, employees, officers, agents, contractors and other consultants.

This would greatly expand the potential risk and exposure for the consultant. Not only could an issue cause the client to suffer loss, but it could trigger multiple parties to suffer loss and thereby increase the financial exposure of the consultant.

What are you indemnifying the other party for?

Indemnity clauses are powerful tools because the right to compensation is triggered upon certain events happening. They are common clauses in a consulting contract.

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Photo by Christina Morillo on Pexels.com

Reversionary indemnities

This is very important because, just upon the occurrence of an event happening, the consultant may be obliged to reimburse the other contracting party for things that the consultant had nothing to do with. These kinds of indemnity clauses (compensating someone for loss they have caused) are called ‘reversionary indemnities’.

Things that are outside the control of the consultant

If a consultant is going to agree to an indemnity clause, it should be in relation to things for which the consultant has reasonable control and power to avoid.

For example, a consultant is able to 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 in relation to 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 is requiring 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 and would be liable to the other party for loss that 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 is required?

The business that is buying the consulting services 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 obligations described in a consulting contract, you need to negotiate and have them changed.

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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

Intellectual property clauses in a consulting contract

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

It is important for every consultant to – where possible – retain as many intellectual property rights as possible.

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.

And guess what?

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 a piece of copyright is created.

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

Similarly, a consulting contract will often require that the consultant either transfer ownership or grant a broad intellectual property licence to the client when the copyright is created.

But to protect a consultant and their right to payment, it is better that intellectual property rights transfer on payment, not creation.

What intellectual property rights are you giving away?

There is a difference between:

  • background intellectual property rights that a professional consultant created before (or during) the services but that do 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 away background intellectual property rights via a consulting contract, the consultant’s business may face unintended consequences. 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

Variation clauses in a consulting contract are important to ensure that a consultant does not end up doing work for free.

Similarly, a client needs to ensure they have the flexibility to ask for extra or different work to be carried out.

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What is considered to be a variation

Not every consulting contract sees variations the same way. For example, the list below provides some examples of the way in which 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

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. If the time bar is missed (for example, 5 Business Days), then the consultant is absolutely barred (i.e. 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

A variation can be valued in many different ways. Common valuation methods for variations in a consulting contract include by:

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

It is important to keep in mind that, if the client and the consultant don’t agree to the value of a variation, the consultant is often still required to do the work.

How can Prosper Law help?

Prosper Law’s legal services are provided by Farrah Motley, an Australian lawyer that provides legal advice to professional consulting firms, including consultant contract reviews.

Contact the team at Prosper Law today to discuss how we can provide you with commercial contract and legal advice for a fixed fee or at affordable hourly rates.

Farrah Motley | Director

PROSPER LAW – A Commercial Law Firm for Businesses

M: 1300 003 077

E: farrah@prosperlaw.com.au

W: www.prosperlaw.com.au

A: Suite No. 99, Level 18, 324 Queen Street, Brisbane, Queensland Australia 4000

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