Basics of a consultancy agreement

This article is written by Prateek Giri Goswami pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. The article has been edited by Priyanka Mangaraj (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Table of Contents

Introduction

The quote of Tony Clark “Never assume you know it all. Ask and seek help, most people will fall over themselves to share their skills” explains the importance of seeking the help of advisors. Every human being is surrounded by advisors from birth be it your parents, a teacher, a spiritual advisor, or a friend. It is in human nature to look up to someone before making decisions, so why not seek the help of advisors in your professional or business endeavors? The best part of it is that, unlike other advisers’ relationships, you can create legal enforceability with the advisors. This article will aim to explain the rudimentary principles of a Consultancy Agreement and the various obligations on the Consultant that can be legally enforced.

Who is a consultant?

In the context of professional life, a consultant is a person or firm who provides the services of advising/ consultation for making decisions related to the financial or professional aspect of your life. Consultancy is provided on various complex subjects such as strategy, management, business, finance, HR, IT, or legal consultancy.

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What is a consultancy agreement?

A Consultancy Agreement can be defined as an agreement between the consultant and the client which specifies the scope of services that is to be rendered by the Consultant among other obligations for a certain payment to be delivered by the Client.

Benefits of having a consultant and a consultancy agreement

Nobody is proficient in every area of knowledge, it is better to hire the services of experts having astute knowledge before making decisions that can have a huge impact on your personal or professional life. For example, when you are looking to invest you seek a financial advisor, or while doing business you consult a legal advisor, etc.
These consultancy services are professional in nature, so it’s better to create legal enforceability upon the same by the virtue of entering into a contract for the consultancy agreement.
The Consultancy Business is quite lucrative and prominent in the current corporate world, the individual or company availing such services needs to be protected in the event there is a deficiency or fraud in the services of the Consultants, therefore, with the help of an agreement, several ways to of remedy can be incorporated under the Agreement.

Various important clauses of the consultancy agreement

Scope of Services: This is perhaps the most important aspect of the Agreement, as the implication of this clause will define the contours of every other clause of this agreement, this clause must contain what will be included as services of the Consultant under the agreement and what shall not be construed as services, and if the Services involves multifarious areas than its is appropriate to attach an Annexure (explaining the services in details) with the Agreement.

A basic example for better understanding is reproduced herein:

“During the term of this Agreement, you will render consulting services to FM Services and the other Freeport Entities, upon request, with respect to international relations, energy industry matters, commercial matters, and other matters in which you have expertise. You will personally perform all of the consulting services required under this Agreement, and you will not delegate to others the performance of such consulting services without FM Services’ prior written consent. The executive officers of any Freeport Entity seeking your advice will, insofar as reasonably practicable, consider your convenience in the timing of their requests, and your failure or inability, by reason of temporary illness or other cause beyond your control or because of your absence for reasonable periods, to respond to such requests during any such temporary period shall not be deemed to constitute a default on your part in the performance of your consulting services under this Agreement.”

Defining the Relation: It is advisable to explicitly define the relationship between the Client and the Consultant, for that a clause shall be drafted stating that the relationship between the parties is not akin to Principal-Agent relationship or Master-Servant (these relationships create liability on the Former for the actions of the Latter), and therefore the Consultant is an independent service provider and is solely liable for its actions.
Governing Laws and Jurisdiction: With the massive outreach of the Consultancy Firms through virtual mediums, clients avail services of service providers from different states or perhaps even different Country, therefore, it is imperative to succinctly state that upon dispute what will be the course of action to be followed by the Parties, for example, a. 15 days notice to rectify, b. Mediation, c. Arbitration (Seat and Venue), d. Applicable Laws and Jurisdiction.
Point of Contact/Authorized Representative: For the sake of clarity, a clause can be inserted stating that the name and designation of the authorized person by the Client Company to whom the Consultant shall render advice and correspond accordingly.
Payment: This clause must contain the procedure for payment, whether it is one-time payment or payment in parts on basis of invoice raised by the Consultant from time to time, usually every Client prefers the latter, some conditions under this clause are:

The Consultant to raise invoices along with other particulars;
The Client will have a certain time for example 30 days to make payment;
Any amount accidentally paid in access to the Consultant shall be returned;
The details of the Account of Consultant to make payment.
Surviving Clauses: Since the Consultant deals with a lot of sensitive information about the Client’s Company, it is pivotal to include surviving Clauses which will remain effective even upon the termination of the Agreement to protect the interest of the Client Company such as:

Confidentiality: – This clause shall include that the Consultant shall not divulge any proprietary information of the Client that is confidentiality in nature, along with various exceptions as to when the Confidentiality will not apply to the Consultant.
Non-Solicitation: This Clause shall include that the Consultant shall not solicit any Clients of the Client or the Employees of the Client.
Obligations of the Consultants: Some common obligations of a consultant are:

The Consultant shall render services with utmost Professional Standard techniques and Practices and shall not indulge in corrupt, coercive, or prohibited practices.
The Consultant to provide deliverables in accordance with the scope of service in the Agreement.
Besides the Payment in accordance with the Agreement, no additional Commission is to be accepted or demanded by the Consultant or its employees.
To maintain accurate and systematic accounts and records in respect of the Services provided under this Agreement, in accordance with internationally accepted accounting principles and standards such as Indian Accounting Standards, GAAP, etc.
To provide access to the Client representative to verify and inspect the services of the Consultant.
Obligations of Clients: Some common obligations of a consultant are:

Clearance: The Client ensures prompt access to various relevant details (depending upon the types of consultancy service) or access to premises of the company to the consultant or its personnel for the purpose of scrutiny so that the Consultant can provide the most educated and viable advice.
Payment: To make prompt payment in accordance with the payment schedule under the agreement.

Ownership: The Consultant while providing consultancy creates a lot of data, Reports, or documents (deliverables) so that the Client can make an informed decision based on the deliverable provided by the Consultant, it is necessary to mention that everything created by the Consultant for the purpose of rendering services under the agreement is the sole property of the Client and upon the termination of the Agreement, all such deliverables created by the Consultant shall be handed over to the Client by the Consultant, and the shall no be exploited in any manner by the Client during or post period of the agreement.
Operation of the Agreement: This clause can be used in other agreements also depending upon the complexity of the agreement, although an agreement needs to be as comprehensive as possible sometimes the services can be of nature that not every contingency can be contemplated or envisaged while drafting the agreement, so in order to address the possibility of any grey area, this clause is included to address the possibility of anything unforeseeable and the parties undertake to operate fairly to resolve such occurrence.

“The Parties recognize that it is impractical in this Agreement to provide for every contingency which may arise during the life of the Agreement, and the Parties hereby agree that it is their intention that this Agreement shall operate fairly as between them, and without detriment to the interest of either of them, and that, if during the term of this Agreement either Party believes that this Agreement is operating unfairly, the Parties will use their best efforts to agree on such activities as may be necessary to remove the cause or causes of such unfairness, but failure to agree on any action pursuant to this Clause 8.2 shall not give rise to a dispute subject to arbitration in accordance with Clause 9 hereof.”

Remedy for breach of agreement by the consultant

Liquidated Damages and Penalties: The parties can insert a Clause to quantify the liability to pay damages to the Client, in the event the Consultant causes any material breach of the terms and condition incorporated under the agreement which caused any sort of financial loss to the Client, this clause also benefits the Consultant if the liability is expressly limited for example the liability shall not exceed the total value of payment as mentioned under the agreement, for instance, if the Client was supposed to pay INR 500000/- to the Consultant under the agreement, then the liability of the Consultant will not exceed more than INR 500000/- even if the Client suffered a loss bigger than that. Several common ways to enforce penalty are-

Every time the Consultant raises an Invoice, the Client can withhold 5% of the payment as a security, and the accumulation of this security will be released upon the termination of the agreement without any breach by the Consultant. If any the Consultant causes any breach then the Client can refuse to deliver the security amount withheld.
In the event there is any delay in providing deliverables by the Consultant, the Consultant can be fined 0.001% of the Agreement value every day for such delay.

Suspension of Agreement: When there is a scope of rectification of the breach caused by the Consultant, the Client can issue a notice of suspension to the Client, explicitly stating the breach and the time within which it shall be rectified by the Consultant.
Termination of Agreement: This Clause will define the condition under which the Client will be entitled to terminate the agreement and the instance under which the Consultant will be entitled to terminate the agreement and the implications of termination accordingly.

Conclusion

A Consultancy Agreement is like any agreement of services which means all the common boilerplate clauses must be included in it, however, the nature and scope of service will determine the terms and conditions for example if time is of the essence regarding the services, there can be hefty penalties in the event of a delay. For a better understanding of the services, the Client can visit the websites of the service provider, it will help in drafting the contours of the scope of services under the agreement and it will also provide a better understanding of representation and warranties by the service provider.

References

https://blog.ipleaders.in/include-consultancy-agreement/
https://www.consulting.com/consulting-agreement-template
https://www.wonder.legal/in/modele/consultancy-agreement?msclkid=84c3c32bd8ab163c3e6ba39c0ff59d7f

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