Examining the Agreement

The Pressure Points and Pitfalls of Consulting Contracts

By Gretta Spendlove

May 8, 2014

“This Agreement may only be enforced through the tribal courts of the Chippewa Tribe of Wisconsin.” “Consultant makes no representations or warranties as to the quality of its services.” “This Agreement may be terminated at any time and for any reason by Company, and following termination no further sums will be due and owing to Consultant.”

Lawyers wince at outrageous clauses in consulting contracts, such as those above. However, as established companies outsource more of their work and as startup companies use contract workers rather than employees, the challenge of drafting and negotiating reasonable consulting contracts increases.

“It’s our standard agreement,” consultants and companies say, as if agreements that are often used need not be examined or changed. In fact, consulting agreements should be carefully reviewed and the conflicting needs of consultants and companies evaluated. Here are some of the pressure points:

Scope of work. What is the consultant being paid to do? Some companies use consultants for clearly defined projects, such as delivering a series of training seminars or doing soils analysis for a particular building. Other consultants handle tasks that merge into one another and extend over long periods of time—like the tasks of employees. Consulting contracts can either describe a particular task or provide the general terms for any work that is assigned to the consultant. The less specific the scope of work description, the more likely that there will be a dispute over whether what was done was authorized, and the more likely that the consultant will be considered an employee, rather than an independent contractor.

Independent contractor status. Is the consultant really an employee? A consultant who handles work for several companies at a time, provides her own equipment and provides a finished product, with little company feedback, is likely an independent contractor. The IRS may consider other consultants to be employees, such as a collections “consultant” who spends most of the workday at a desk in the accounting department, uses a company computer, and whose work is closely supervised by the CFO.

To the IRS, an independent contractor relationship exists if the company “has the right to control or direct only the result of the work and not what will be done and how it will be done.” Consulting contracts should state that the consultant is an independent contractor, but the actual relationship must also match IRS guidelines.

Work for hire. When a graphic artist designs the firm logo or a software developer creates code for company products, who owns the logo or the code? If the creator is an employee, the legal presumption is that the work product belongs to the company. If the creator is a consultant/independent contractor, the legal presumption is that the product belongs to its creator. It is critical that consultant contracts include “work for hire” provisions, specifying that any product created for the company under the contract becomes company property.

Standard of care; warranties. How can the consultant’s work be evaluated? Contracts drafted by consultants often leave out any standard of care and disclaim all warranties. Many consultants prefer not to obligate themselves to comply with the standards of their industry or warrant that their products are created in accordance with applicable laws and regulations. The company can’t claim it was damaged by inferior products or services if the contract includes no standards to which to compare the consultant’s work.

Another strategy for limiting a con-sultant’s liability is to set a very short period for acceptance of the product or service. By contrast, a company’s contract may impose standards which could create liability for the consultant out of all proportion to the amount he or she was paid.

Remedies. What happens if a business strategy recommended by a management consultant is based on faulty statistical analysis and results in the company going bankrupt? If the consultant drafted the contract, it would include a disclaimer of warranties and an exclusion of indirect, special or punitive damages, as well as a cap on total damages. It would provide for any lawsuit to be brought in the consultant’s home state or nation, no matter how remote from the company (Iceland, maybe). By contrast, contracts drafted by companies include broad damage and indemnity provisions. American Indian tribes can and do require contracts for their consultants to be enforced by tribal courts.

Termination provisions. When can a contract be terminated? Does there have to be a reason for the termination, such as poor work product, or can the contract be terminated for no reason at all? After a termination, what is the consultant paid? Does the company’s payment obligation stop as of the date of termination, or does the consultant receive reimbursement for all work product created, whether or not it has yet been delivered to the company? Do any of the payments change if the termination was “for cause” rather than for no legitimate reason? There are many ways of drafting termination provisions, and they greatly affect the finances of each party. 

Gretta Spendlove is a lawyer at Durham Jones and Pinegar.


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