THE CONSULTING AGREEMENT
IVAN HOFFMAN, B.A., J.D.
Definition of the Services. As indicated, this is often the hardest part of the agreement since often the services are general in nature. However, from the standpoint of drafting a meaningful agreement, these services must be set forth in as much detail as possible. Without such definition, there is no way to tell whether or not the consultant has performed his or her obligations under the agreement, no way to tell whether or not any deliverables have been delivered, no way to tell when payments are due and no way to tell whether the client has fulfilled its obligations to the consultant since those client obligations are often tied to the performance of the consultant. If the performance is vaguely described, the correlative obligation on the part of the client is probably also vague. Additionally, are the services of the consultant to be exclusive or non-exclusive and if exclusive, for how long and in what territory or market?. Correspondingly, is the engagement of the consultant on an exclusive basis on the part of the client meaning that the client cannot engage the services of any other party to do the work of the consultant? And if so, for how long and in what territory or market? What is the term of the engagement? Does the client have any option as to the further services of the consultant beyond that term and if so, on what terms?
Payment Schedule. Often payments are tied to deliverables and, as indicated above, if the deliverables are not clearly set forth in terms of what constitutes “delivery” or “satisfactory completion” of the given aspect of the consultant’s work, disputes about payments are quite likely to arise. If the payment is tied to the satisfactory completion, then the agreement ought to define, in some objective manner, what will be deemed satisfactory.
Contingent Payments. Often consultants work on the basis of some form of contingency that determines how much they are to be paid. This can be potentially perilous for the consultant if those contingencies are not set out in a detailed, concrete, well-defined manner. Often these contingencies are based on some concept of “profits” or “income” without further definition. Such terms are essentially useless unless the manner of determining the term is set forth with particularity. What are the components of the “income” side and what are the components of the “expense” side if expenses are allowable deductions? Is it a “gross” or “net” determination?
Obligations of the Consultant. In addition to the definitional issues raised above regarding duties of the consultant, the agreement must define what the consultant cannot do. How is the consultant to reconcile the work consultant is doing for other clients if such other work is competitive to that of the client? After all, consultants usually have expertise in certain defined areas and then go about plying their expertise to many clients in that same area. These issues have to be covered in the agreement.
These issues also lead to issues regarding the definition of confidential information and trade secrets and how those are defined and the respective duties of the consultant with regard to the same are often key issues in these agreement. (see discussion below under “Ownership of the Work Product.”)
Moreover, are the duties of the consultant such that some form of license is required by some governmental agency? If so, does the consultant possess that license? What is the legal impact of not having such a license. In some states, California being one, the failure to be licensed may render the underlying agreement void and thus completely unenforceable by the consultant.
Does the agreement include or disclaim warranties, representations and indemnities on the part of the consultant? If there are disclaimers, do they meet any requirements determining the validity of such disclaimers? Does the client make any warranties, representations and indemnities as to materials the client provides to the consultant? What constitutes a “breach” of the agreement? Contracts almost never define that term, leaving it unclear as to whether or not it is a proven breach, a claim of breach, who determines what constitutes a breach etc. etc. This is important since rights and remedies are tied into the term “breach.” Does one or the other side or both have the right to obtain injunctive relief in an appropriate circumstance?
Ownership of the Work Product. Consultants presumptively have developed a body of knowledge and perhaps written and other materials as to which they claim, rightly or wrongly, proprietary rights. The same may be true of the client. Thus the scope of each party’s claims should be set out in detail. Further, how are these ownership interests to be reconciled when the consultant produces materials for the client using both the consultant’s body of work and the materials provided by the consultant? Which party “owns” that work product and what can that party do, or indeed not do, with those rights of ownership? In this regard, there may be state or federal laws that govern these and related issues and the effect of these laws should be factored into this area of the agreement.
Termination Provisions. The reality is that many agreements do not run a smooth course for their entire duration and disputes often arise (sometimes because the contract itself is so poorly drafted as to make those disputes mostly inevitable…an attempt to “save” money that turns out to be enormously more expense.) What are these provisions and how is an act of “default” defined? See discussion above regarding defining the concept of “breach.”
Keep in mind that since I represent both consultants as well as the clients that retain them (although clearly not in the same transaction), I express no position on these issues in this article. My job is to represent the best interests of my client in a given transaction and thus where I stand on these issues depends at whose table I sit.
My purpose here is to point out some but not all of the issues that are essential in these sorts of agreements and the problems that may arise when such issues are not covered appropriately. Contracts are supposed to solve more problems than they create but a poorly drafted agreement, or worse, one copied from a form book or passed around by colleagues (which may often be the same as a poorly drafted one) often creates more problems than it solves. Without a sufficiently clear definition of all these issues, there may be uncertainty and uncertainty is almost never in either party’s best interest. The parties may find themselves having to spend thousands of dollars in legal fees trying to fix what should have been fixed in the first instance.
Remember that if a contract is a problem for one side, it is also a problem for the other side. If one side is not happy, that side will seek to delay, excuse its performance or, in the worst case, file civil lawsuits to get out, enforce payment etc. etc. And if that happens, the other side has an equal set of problems.
© 2002 Ivan Hoffman