AMCF - Contract Issues in Management Consulting

18 April, 2002 & 11 July, 2002

Agenda

A. The contracting process
B. Internal protocols
C. Contract Documentation - Proposals, Letter of Engagement and Formal Contracts
D. Substantive Contract Issues
E. Other relevant considerations
F. Summary
G. Disclaimer

A. The contracting process

Why have a contract with your clients for consulting services?

What if the client insists on use of their Master Contract used for all vendors?

Although it is usual for the provider of services to provide the contract, larger clients are insisting on the use of their own standard Master Contracts for vendor services that prevents them having to consider numerous agreements from different vendors.

In this economic climate, to facilitate and expedite the sale of a project, it is recommended that the client's contract be used unless it is largely irrelevant. Unless any of the client's terms are detrimental to your position it may be easier to disregard them rather than complicating the negotiations. However, all of the terms need to be considered in their entirety and if any amendments need to be made to the client's original agreement they should be referred to in an addendum to the client's contract and reference should be made to that addendum in any accompanying proposal/letter of engagement.

It might also be preferable to try to negotiate contracts with the purchasing line manager in the first instance and/or the company's general counsel. Generally speaking it is usually more difficult to negotiate contractors with procurement professionals and they usually also have their own legal departments who may complicate the process and add valuable time to the negotiation process.

B. Internal Protocols

Prior to contracting with any client, a consultancy should have established contracting protocols and policies that are adopted uniformly throughout the business. Whilst every client is different, a consultancy's approach to contracts should not deviate substantially client to client.

Make everyone in your organization (including sales people and line management) aware of your requirements so that the onus is not placed on legal to ensure consistency across the organization. An ounce of preparation is worth a pound of remedy. Further, making business people part of the contract process ensures that contracts are not so burdensome that they negatively impact potential sales. Use of the firm's intranet to share this information and documentation, after consulting with general counsel is highly recommended. To encourage staff participation, ask personnel wanting to deviate from norm whether they are prepared to assume responsibility for the consequences and link any financial repercussions to the responsible employee's compensation if intellectual buy in is not sufficient (this is particularly effective in smaller boutique consulting environments where the impact is more immediate and real).

Anticipate issues in advance and include in them as comprehensively as possible in your consultancy's standard Terms and Conditions of engagement (T&Cs). These T&Cs should appear in your standard contract and/or as an addendum to your proposal/letter of engagement. The trend is toward consultancies using formal contract documents instead of proposals and letters of engagement, which are traditionally considered less formal sales documents - but once agreed to they have the same effect as a formal contract and therefore care should be taken when drafting these documents as they can be read in lieu of or in conjunction with a formal contract. Contracts should be clear about scope, fees, etc. Incomplete terms can be reduced in significance and read strictly if there is not perceived to be a defined procedure/process. Set the stage for an even playing field with clients prior to presentation of the contract documents in initial communications and the sales process. Emphasize that any agreement is part of a partnering relationship, rather than one of imbalance. Ensure client hopes and obligations are included at each stage of the process to ensure that expectations are managed and include a "co-operation clause" that can be referred to in the event that there is a future dispute.

C. Contract Documentation - Proposals, Letter of Engagement and Formal Contracts

Proposals
Proposals are usually part of the sales process and are documents that outline the potential advantages for a client if it purchases a consultancy's services. It is uncommon for legal to see proposals before they are sent to the client and therefore internal contracting protocols should be understood by authors of proposals to ensure that any of the representations made in a proposal do not conflict with the consultancy's T&Cs (which should be annexed to any proposal at the outset to prevent against any misunderstandings and set the tone for any subsequent negotiations).Proposals may be construed as a pretext to a contract and therefore admissible in construing a contract; alternatively, in the absence of a formal contract/letter of engagement, acceptance of a proposal will render the proposal documentation evidencing the nature of the agreement between the parties.

Letters of Engagement
A letter of engagement is correspondence that contains simple outlines of the key terms of an engagement. A letter of engagement should not contain the contract (instead the T&Cs should be attached).

It is generally used:

The benefit of a client accepting a letter of engagement is that he/she will not feel the responsibility associated with agreeing to a formal contract (the terms are usually simplified for business convenience and efficacy) and the attached T&Cs, which protect your interests, are already agreed/standardized so they will not bog down the process.

The distinction between an Engagement Letter and Contract is simply the form of the document - however once accepted it has the same effect as a contract in law. An Engagement Letter without T&Cs is still a contract but the exact nature of the agreement will need to be interpreted in conjunction with any prevailing law. It is a simpler contract that leaves the agreement on a business footing rather than involving counsel at the outset. A formal Contract however is more substantial and is less likely to leave any contingencies to interpretation.

Basic Terms that a Letter of Engagement usually covers:

Contracts

The nature of a contract is that it has a dual personality - (a) it is a contemporaneous record that defines expectations, the nature of the relationship and each party's responsibilities in an agreement at the outset and (b) it is a historical record of the to which each party can refer should a disagreement arise.

D. Substantive Contract Issues

Scope of Services

Details of the scope of services and any promised deliverables should be given to the client, in the contract documentation at the outset. Define the scope as succinctly as possible to narrow your obligations. If you specify deliverables in your contract documentation ensure that they are well defined and specific to ensure that you are not held to performing services beyond your original remit.

Scope can also be limited by the amount of fees expended on a time cost basis and then any additional work is subject to new negotiations/criteria/contract. If fixed fee pricing applies to a project managing "scope creep" becomes very important to ensure maximum profit return. Detailing milestones in project management is necessary to manage client expectations. In addition to the contract conditions, projects should be managed so that consultants are regularly assessing whether work is in or out of scope (i.e. project de-briefings) so that any potential problems or interruptions are dealt with as they arise because the longer consultants wait to discuss difficulties with their clients - the lower their chance of recovering associated fees. It is also beneficial to have someone in your firm not involved in the project periodically assess it and give an "independent" opinion.

To ensure creep is managed internally by your consultants, you might consider linking the consultant's compensation with the profitability of the project. In every engagement letter/contract there should be reference to standard change order forms. Internally consultants should be aware that only work done pursuant to formal change orders will be paid by clients. It is important, within your practice, not only to have such forms, but to ensure they are used by consultants - otherwise fees incurred for additional work may not be recoverable.

Another cost prevention method is to specify that when the fee amount quoted is exceeded by 15% additional statements of work will be required to ensure payment i.e. accountability via invoicing. The scope change process must be simple and realistic to ensure that it is practiced.

Representations & Warranties

It is critical to have disclaimers in your contracts, specifically relating to any warranties as to merchantability and fitness for purpose. Be aware that there is a danger in "productizing" services as this may encourage suits usually applicable to products rather than services.

A representation is not a warranty - a misrepresentation is an act of fraud.

Warranties can not represent future events and should be carefully worded. Avoid phrases like "highest standards in the industry" as such "standards" are open to interpretation and may prove onerous. Be careful when referring to yourself as an "engineer"- the definitions of professional classifications when interpreting professional negligencepolicies differ according to the jurisdiction in which they are construed. Incorrect use of such terms may also exclude professional negligence cover. So, ensure that there is consistency in the way your sales and marketing materials describe your professionals (which may be considered in conjunction with the contract). Replace the word "will" for "can"in proposals and brochures (or consider using "will" in conjunction with the words "facilitate/enhance"), otherwise you may be giving guarantees subject only to specific disclaimers. All documentation needs to be consistent, including progress reports given to the client.

Confidentiality/Exclusivity

In consulting, clients will insist on confidentiality and exclusivity in relation to projects. This is reasonable to a degree and should be reciprocal in nature. Ensure that your staff understand and honor those requirements otherwise you will have to live with the consequences.

An effective way of agreeing to comply with client's confidentiality requirements without being overburdened is to limit it to confidential information "of which we have been notified". Some contracts require clients to mark 3rd party information as confidential so that staff can be managed and reasonably expected to comply with confidentiality agreements. The standard exclusions/exceptions are public domain, own invention or from a 3rd party.

The definition of confidential information may make compliance on a practical basis onerous if not contained. Never agree to definitions of confidential information to include "trade secrets". Statute dictates that a court decides what constitutes a trade secret, so you may be inviting a client to make a further claim against you e.g. a claim for breach of contract and a claim for breaching a trade secret (which attracts punitive damages and criminal liability. Suggest to your clients that the term "confidentiality" be used instead as it has a broader definition than trade secrets, however, it is less onerous in effect. Further a client can be assured that there is no need for a contractual provision where there is existing statutory protection.

Ensure that any provisions for confidentiality contain carve outs for auditors and any other people who need to see and use any of the client's information (including court subpoenas - it is suggested that you prepare for the costs of same in advance by agreeing to them in the contract - to argue the point will cost $10,000). You should ensure that any provision allows for compliance with a Subpoena/Discovery request - that is you will comply with your obligations but you will notify the client in adequate time that if they choose to seek a protective order they can do so and they will be responsible for the cost of that order.

Your should agree to maintain a file copy of any relevant documentation and give them a certificate that you will destroy the documentation on demand once the time you need to keep it for legal reasons has expired, in exchange for a release from this provision.

You may also need carve outs relating to information you want to use for marketing and practice development purposes - which raise the issue of proprietary rights in the information you acquire and the services you create as a consequence (see Residual Rights - IP/Work Product section below).

Internally you can implement policies that require the termination of staff that are not discrete with client information and have internal requirements re stock ownership, etc. if staff is exposed to sensitive information. It is not necessary to publicize these internal policies, however, if you have them in place you may be able to cite them to clients who need to be assured of compliance with confidentiality as a "selling point".

It is also advisable to eliminate the word "trust" from confidentiality agreements (it may be construed as conferring a fiduciary duty on you and an unnecessary burden). As consultants you should argue that you stand at an arm's length from the client and that you implement recommendations agreed with management as opposed to giving impartial advice per se.

Do not agree to "all standards of reasonable care" in relation to confidentiality (it is not cost effective to comply). It is not reasonable to agree to this as your employees might breach unconsciously or maliciously and you can not provide against either scenario. Further you can not ask your consultants to individually agree to assume responsibility for liability as they are acting as your servants/agents and you bear the corporate responsibility ultimately. You can take steps to emphasize the significance of each employee's responsibility by including confidentiality agreements in contracts with your employees.

Liability may arise when employees leave the firm, if they take client information and use it to their advantage with another consultancy. The original consulting firm should be able to contract out of liability at that point, however the duty survives the employee going to another firm. In these situations, you should advise your client to go after the consultancy that employs the people responsible for any breach. It may also be impossible for you to agree to your client insisting on searching your employees, etc. (4th Amendment).

You can agree to ask your employees to comply with such a request however you can not agree to waive their individual rights on their behalf. To protect yourself from potential suits from clients of your consultant's ex-employers regarding confidentiality, you might include a clause in your employee agreements asking them to agree not to bring any previous knowledge or proprietary information with them when they come to your firm.

You can try to limit your liability further by agreeing only to indemnify to the extent of the loss actually suffered by the client. What is confidential will be judged by a court as what could reasonably be foreseen as confidential. However bear in mind that in some contracts the duty not to disclose is expanded to include a duty not to use. Be careful that you do not agree to this wording as it may impact your ability to use information from previous engagements for future work.

Residual Rights - IP & Work Product

Ownership in a deliverable does not pass to a client until payment for services rendered is made. Once paid, a client may argue proprietary interest in the product/process created on its behalf. To establish what the client's property is, a distinction needs to be made between "working papers" and "deliverables" ("work for hire"). Professionals own the "working papers" that they prepare to create a deliverable. It is arguable that they need to be able to retain copies of all documentation/products created on file if needed some time in the future for litigious purposes. In order to establish these at the outset, it is important to have clear in ownership and IP provisions in the original contract.

You may be able to argue that you own commoditized/off the shelf offerings and concede that customization confers ownership rights in the customized version. This may be difficult to argue if you are creating a template for a product or service offering initially on the client's dime. You may need to concurrently strip the created product resulting from a specific job to ensure you are not breaching ownership and confidentiality provisions to create a template version that you retain as your own.

When you have a template version of a product/service offering, an inexpensive way to protect that intellectual property and claim it as your own is to apply for either a Patent, Copyright or a Trademark (depending on the manifestation).

In order to patent a business process it must be recognized as a new phenomenon. Patenting a process can be utilized as a marketing tool and used to ward off competitors and thwart competition. The patent office has become more liberal by allowing patenting of methodologies. Due to the newness of these types of patents and the small number of existing applicants it can be easier to obtain a patent for a process than for a product.

To obtain copyright a process must be in a tangible form e.g. diagnostic procedure. To enforce copyright you need to register the process with the US Library of Congress. Registration takes a couple of weeks (cost is around $20). If a breach is determined statutory damages may be awarded.

A trademark is a logo/mark used to identify products and common law rights are conferred by using them in commerce. These rights extend as far as the geography/market in which you sell your products/services. Registration with the US Trademark/Patent office enables you to pre-empt use of your trademark in future markets nationally by filing federally. You may file for similar protection in various countries around the world however your protection will be limited by jurisdiction on a first to file basis. There is not as yet a global registration center for the registration of intellectual property.

If your consultancy has a dedicated knowledge management group, you may want to consider ensuring protection of some of the service offerings/processes you have invested in.

"Work for hire" is documentation prepared/work produced during a consultant's course of employment with a firm. "Work for hire" is owned by the firm not the property of say the individual consultant who may have produced it. When using independent consulting contractors, you need to have an agreement with the contractor/s at the outset describing work produced as "work for hire" and they must agree to assign right, title and interest in the work from themselves to the company (this is bootstrap protection over and above the "work for hire" requirement between you and your staff and you and your client). If you do not have a contract with an independent contractor, they will retain ownership in the rights and you will have an implied license to use.You will want to own the fruit of your staff/contract labor and the deliverables you sell your client (so that you can sell them to other potential clients). With clients, you should try to convince them that there is no need to own the process; rather they can have an unlimited license to use (same benefits conferred). Tell your clients that you will use the processes developed internally, but you will not use the exact same process externally with other clients (no two projects are ever the same). If you can apply the same principals without betraying your client's confidence or competitive advantage, they should be amenable to this (e.g. client owns deliverables produced, except building blocks and processes of general application). It is important to ensure that you are entitlement to use these processes so that any liability that may attach in a breach of confidentiality claim is not passed on to your next client.

To an extent there must be some acknowledgement that you will derive a benefit from the residuals as you can not "unlearn" what you have learned from a project. If you meet any resistance, you can ask for un-exclusive worldwide license (re the building blocks). If you are successful in persuading the client that ownership is not reasonable or necessary, you can offer in lieu thereof a royalty free benefit to the process/service offering, but not the methodology or intellectual creative process because that is the essence of your livelihood (argue industry standard & pre-existing knowledge). You could also warn your client of the anti-trust problems of preventing use of idea everywhere. You can also assure them that there will not be a conflict of interest due to internal Chinese walls. Clients should also be made aware of the cost issues and premium they would have to pay for exclusivity of knowledge. You may also make them aware that they will derive a benefit from the pre-existing knowledge you have gained from previous client engagements. If you are unable to get out of a condition of exclusivity with the client limit the term of that condition to, say 2 years, arguing that this is the maximum amount of time that they can hope to gain a competitive advantage as a result of your recommendations.

Non-compete Agreements

The legality of such clauses is questionable, depending on the client's market share, anti-trust laws and prevailing free market attitudes. Any concerns about losing advantage to competitors should be covered by the confidentiality clause referred to above. If it is used, it should be defined as specifically as possible and insist on reciprocity.

With non-solicitation/non-compete hiring agreements relative to staff, specify the remedy in the clause to serve as a deterrent and to eliminate needless legal fees. To sell this condition to a client emphasize that it is proof of the value of your staff. The reality is that if an employee goes to work for a client, the business development potential is probably greater than any loss of an individual employee, so before you jump for the remedy, think about the long term pros and cons of doing so.

Limitation of Liability

Liability in professional services contracts is usually limited in quantum to the amount of fees charged (although this provision is not allowed in all states if it runs contrary to public policy and/or is unconscionable - especially if you are associated with an accounting firm). Otherwise, the quantum attaching to liability may be agreed upon a multiple of the fees paid (e.g. 2x/3x fees, etc.), depending on the type of engagement. However, it might be best to have a dollar amount rather than a multiple if the multiple payable is open to dispute. Also, when deciding on the quantum limit, be aware of the costs involved in determining this part of the agreement. Large firms, due to their size and perceived wealth, may find it difficult to limit their liability to the fees paid.

A cap related to fees doesn't necessarily have a direct relationship to the loss suffered (e.g. loss isn't equated to fees); rather it is used as a yardstick for agreement and dispute resolution purposes. Courts agree with limiting losses as this motivates people to settle rather than proceeding with litigation.

If a client wants indemnity over and above any quantum you offer in the contract, you may offer to purchase additional insurance on their behalf to cover the shortfall between your payment and the loss sustained. Otherwise you might limit liability to the amount covered by your insurance policy. However, this option may not be attractive if your deductible is the same amount as your client's claim; it may also clean out your insurance and put you out of business. The best case scenario is to limit your client to fees paid/to the available monies under the insurance contract.

To guard against liability and to diminish any loss arising from a claim, anticipated measures should be in place to mitigate the quantum (e.g. steering committees set up to deal with problems as and when they arise). Such steps also provide a defense in litigation (e.g. arguing that each party to the contract has mutual obligations and is equally responsible to guard against loss). Or you can have internal dispute resolution process in place with the outcome negotiated and decided at executive level between your firm and the client's.

Be sure to carve out any liability attributable to 3rd Party Claims/Gross Negligence/ Willful Misconduct as these are onerous responsibilities to assume and may result in substantial loss. Specifying gross negligence, rather than negligence, might expose you to a greater liability by definition. Bear in mind however that jurisdictional legislation may supersede any agreed contractual clauses. However, Include at the outset any attempt to limit liability, despite prevailing law as it may deter litigation and the costs of arguing the toss. Include a comparative fault clause using words like "to the extent of" and "direct or proximate damages". Never accept liability for damages "arising out of contract" (consequential loss). Ask for indemnity back and argue mutuality to encourage reason from your clients.

Indemnification

Take care not to expose yourself unnecessarily by absorbing liability when someone else may be at fault. Limit indemnity to infringement of intellectual property rights, personal injuries and property damage. Ask for reciprocity from the client to ensure that obligations are mutual and to ensure reasonableness. When determining a claim, ensure you are responsible to refund only the relevant amount of the claim for which you have indemnified and ensure that any amount claimed can be offset with any benefit derived. Agree that if you are responsible you will indemnify, but do not give warranties in advance, otherwise you are creating an extraneous and unnecessary risk.

In the event that you do find yourself indemnifying your client, be aware that the cost of dealing with a claim is on your nickel and ensure that there are requirements that the client gives prompt notice of the claim; hands over control of defense timeously; and co-operates with defending the action.

Limit indemnification "to the best of your knowledge" and make sure that there are geographical limitations. If a court of competent jurisdiction is required to determine that a claim is a triable action before allowing it to be heard, you should ask your client to absorb all legal costs until such time as it is deemed a "triable action" (to prevent paying legal costs for fatuous claims and ensure that the client has a vested interest in preventing same. Always reserve the right to defend these claims though because sometimes the proceedings to determine if a claim is a triable action will be influential on the eventual outcome of the case.

Indemnification involves third parties, so it is important to check insurance policies to ensure coverage (e.g. your insurance may exclude willful breaches).

Conditions on Client

A client has duties and obligations under the contract that run concurrently with those of the consulting firm. These conditions on the client usually relate to performance responsibilities, timing, providing accurate information and not holding you responsible for third party products/services. You are not responsible to your client to comment on, modify or review decisions independent of your services. Further, your client will have obligations to act honorably in relation to use of your deliverables generally and will not be able to hold you responsible for the consequences of using them except for the purpose that they were created and then not prior to acceptance of services and/or payment.

Acceptance of products/services

A client is deemed to have accepted products/services from you on receipt unless there is a formal acceptance procedure detailed in the contract. As a general rule acceptance is as of the date of invoicing and then after that time they usually have 5 - 10 days, pursuant to the contract, to dispute receipt of same. Acceptance should never be linked to client satisfaction and it should be deemed if any of your deliverables are used at all, even if not for the specific purpose they were originally intended.

Termination Clause

Either party has a right to terminate the agreement when there has been a breach of contract. If fees are outstanding under the contract the contract may be terminated within a stipulated period of time after service of a Notice for Non-Payment of Fees (time limit can vary from 24 hours to 3 days, but should be reasonable). A client can terminate a contract once payment for all services rendered is made and when all commitments under the contract have been fulfilled. A subcontractor's agreement can be terminated immediately. Transition issues should be covered in the contract to ensure a smooth transition to a new vendor. Sometimes there may be confidentiality concerns if a project is transferred part way between your firm and the new consultant which you may need to consider beforehand to protect any intellectual property you have invested in the project. Ensure that there is provision in the contract for you to be paid for transition work on a time and expense basis; and it is clear that your client does not own any deliverables until you are paid (e.g. deliverables are subject to an express license from time produced to use until time paid - but no transfer in ownership).

Personnel/HR Issues

When staffing projects on behalf of clients, do not agree to warranties about providing the highest qualified people in the profession. This is a subjective condition and could hold up a project if a consensus is not agreed upon with the client at the outset. It may not be reasonably practical as you can not assure a client that certain members of staff will be in your employ and/or available for the duration of a project. As such, you should limit naming people on the contract to a few key senior people (per the sales process). Tell your clients that the practical reality is that they are buying your advice not only on the project, but your ability to determine the right people for the job and those decisions are within your discretion as a trusted advisor to your client. Do not let clients approve staff because, if their requirements are not reasonable (e.g. Dubai client required all women on the project to wear traditional Muslim dress), it can delay the project and cause unanticipated expense. The delay to the project may also expose you to a claim for failure to perform in the requisite contract period.

Be aware that if clients require that staff have criminal/background checks and drug testing, your staff will need to be notified beforehand. You can not agree on behalf of your staff that they will agree to such demands, only that you will request them too. You should factor in the cost of such requirements into the price of the project.

Consulting firms should be au fait with the legislative requirements protecting employees in the workplace when sending employees abroad and to unusual work locations (like ports, oil rigs, military bases, etc.). Take care when agreeing to comply with a client's work place requirements as they may be onerous and unnecessary for your employees (e.g. training in workplace health and safety required by certain unions for specific trades).

Employee poaching is often an issue when consultants go to work on site and a client realizes that a permanent employee is often more cost effective than a contracted consultant. Non-solicitation clauses in relation to employees can be difficult to administer because any dispute might jeopardize the existing client relationship and future business. As with most restrictions in the contract, it is suggested that this clause be reciprocal to ensure reasonableness and create the feeling of a level playing field. Sometimes losing an employee to a candidate is not a bad thing - particularly if the cost of the employee vs. the potential new business to be developed through the existing relationship with the employee is not as high.

Further it can be difficult to enforce these agreements worldwide between large companies as these clauses are usually strictly construed so as to not deprive an employee of his or her livelihood. Rather than sue on such a breach, an agreed penalty should be factored into the contract which can be enforced as a consolation if an employee goes to join a client to cover the immediate loss and replacement of that employee. Some contracts stipulate a financial penalty of say 50k or a percentage of salary (depending on the seniority and perceived value of the employee). Further you should non-compete clauses in your employee contracts preventing them from working for a competitor/client in such a way that would jeopardize your interests for a period of 6 months to 2yrs.

Whilst you will never be able to guard against employees leaving to join clients/competitors, you can make the best of these situations on a practical level by ensuring that the culture and morale within your firms is conducive to these transitions taking place as smoothly and as positively as possible so that you don't lose any potential future relationship as a potential client contact or return employee. Clever firms during the dot.com boom developed alumni and "friends of the firm" associations to ensure that those relationships were not lost or negatively impacted.

Fees

Fees are usually negotiated on a contract by contract basis. It is a matter of choice as to whether you quote hourly rates, fixed fees or volume discounts are offered to clients. Ensure that when fixed fees/volume discounts are quoted all contingencies are factored in to ensure that profit is achieved. Further, stipulate that fees are exclusive of all taxes payable so that you are indemnified by the client in relation to taxes on services rendered and this does not eat into your profit margin.

Do not give clients audit rights or agreed fees on a worldwide basis as there are too many contingencies that vary in each jurisdiction and in any event, such an agreement is usually impractical to enforce.

Payment/Default Provisions

Insure that you have suitable remedies built into the contract (e.g. jurisdiction, timing, right to stop work, etc.) Sever payment terms from conditions relating to acceptance and deliverables (i.e. do not link payment to client satisfaction). You should also insure that you are not going to be financially penalized for the client's default, so the client's obligations should be detailed in the contract.

Dispute Resolution

The method of dispute resolution provided for in a contract will usually depend on the size of the project/dispute and the negotiating power of the respective parties. It is always practical to remember the "golden party rule" - the party with the gold makes the rule.

If you can not agree with your client on the method of dispute resolution to include in a contract, ask your clients how they contract with their clients. Usually you will want to include the terms they have with their clients rather than those that they have negotiated with other vendors/suppliers.

Always include in your contract a prevailing party attorney provision, so you can incorporate a claim for cost of recovery.

To resolve disputes, mediation/arbitration is often preferred to litigation. Most parties will try to avoid a jury trial at all cost as lay jurors may not fully understand issues and tend to decide that each party share responsibility in the outcome of the action. When there are technical issues to decide, parties usually prefer an experienced arbitrator with relevant expertise as he/she is usually more focused on key issues and less preoccupied than a judge who may have a wider remit of cases to decide on.

Mediation should be encouraged where possible (there is always a value in having a 3rd party involved in a dispute), if for no other reason than to have an independent witness to the dispute. Hopefully the intervention of a 3rd party will influence the parties in the dispute to see reason.

Although arbitration can end up being as expensive and prolonged as litigation (in most cases it is more expedient) most parties feel that they have more control over the process when the matter is heard by a qualified adjudicator who understands the issues and the commercial impact of the dispute. Further ADR affords parties privacy, whereas litigation renders a case part of the public record.

However, if you have an adversarial case and you want a definitive decision, rather than negotiating a compromise and "splitting the baby", you may want to go to trial for a win/lose decision. You would only insist on trial if you were confident of winning the case.

Beware of venue shopping when agreeing to the jurisdiction in which any disputes will be decided (e.g. the jurisdiction can be contractually agreed upon by the parties to be in the jurisdiction where the project took place). Don't agree to a provision that prevents recourse to the Federal Court if all other dispute resolution forums fail and do not agree to a diversity jurisdiction due to incorporation if it will not lead you to a favorable outcome.

Statute of Limitations

A claim in contract must be brought within 12 months under the Statute of Limitations.

Compliance with rules & regulations

Before agreeing to comply with rules and regulations stipulated by the client, find out what they are. Some of them may appear simply because they have been duplicated from a different type of vendor contract. Such regulations may not be relevant and may cause onerous duties and expense, whilst they are not necessary to the performance of the contract (e.g. compliance Coal Miner regulations for a mining company even though consultants were never going to be present on a mine, etc.). If you don't have time to verify all of the rules and regulations before the contract is signed, for any reason, add the words "that are applicable to consultants" so that erroneous and irrelevant requirements can be avoided.

Once you have established that the rules/regulations are reasonable, only agree to comply with those rules of which you are specifically notified, so that you can reasonably ensure compliance.

E. Other relevant considerations

Closing Contracts

You should always close a contract before starting any work for a client. Unless the deal is done before work is performed, you lessen your chance of consolidating your negotiating position and recovering fees. Educate your clients that you will only perform your duties under the contract when there is a formal understanding in writing between the parties.

If there is a competitive advantage in starting a project before a formal contract is signed, consultants should give the client a letter of engagement and have the client agree to an interim fee agreement on a time and materials basis until the substantive agreement is finalized. An interim agreement can be an acceptable compromise when there is a delay in getting the formal contract signed. However, it may also not be practical if the client is large and bureaucratic and will not allow its line managers to contract with vendors direct. The best approach is to provide a short and simple letter in general terms that acknowledges payment for your time and a limitation of liability for services rendered (include a time limit clause so that you are entitled to stop work if the main contract is not signed and/or your fees are not paid); you should also be paid for time and materials only and not on the production of deliverables (too easy for the client to dispute and argue payment of fees). If your client insists on the main contract only you may need to take a stand and not perform work until that is signed - the position of a "volunteer" makes you vulnerable and a client may be able to take advantage of you performing services without payment in the absence of an agreement.

Government Contracts

Although consulting to government is now popular, due to the state of the economy and the investment being made into public projects, there are some specific issues you should be aware of before deciding to do government work.

Although the government is entitled to sovereign immunity, vendors providing services to them are not indemnified. Government departments are notorious for not paying on time and contracting out to the lowest bidder. Government departments also hire union labor and therefore you will unions to deal with when working with their staff on projects.Be aware that you may have to comply with these requirements if you are working with a government contractor. In contracts with government contractors, you should ensure that you word your agreement to say that you will apply, but only to the extent that it is applicable. Some specific governmental quirks: in San Francisco government employees are entitled to benefits for domestic partners; different states have different policies for jury duty, child support, etc.; some government departments have exclusions re trading with Northern Ireland & South Africa; there are government requirements in relation to minorities and women in business, etc. A safe catch all when agreeing to conform to government requirements in contracts is to include the words "to the extent required by law".

Sub-contracts

Ensure that you have this right under contract before subcontracting services on behalf of your client. You should also make sure that sub-contractors are included in your insurance policies or require sub-contractors to have their own insurance to cover their obligations under the subcontract.

Insurance

Insurers want you to have contracts so there is an agreement between the parties to help limit the terms of any potential dispute. By the same token, insurers include exclusions for liability in policies, as if there were not contractual terms in relation to liability. Be sure to be familiar with your various insurance policies coverage and exclusions to ensure consistency in your client contract.

When a client asks for proof of cover, do not hand over original policy documentation; give the client a certificate of insurance instead.

If you use independent contractors for projects, it will be common that they are not eligible or unable to afford professional indemnity insurance, therefore you may wish to consider naming them on your insurance policy as a co- insured to protect yourself against any claims you may be vicariously liable for as a result of their acts/omissions.

However, be aware that if a subcontractor is included on your insurance policy, that one named party on an insurance contract can not sue another so there will be no recourse to recover monies paid out under your insurance policy from that co-insured.

Collections

The usual terms of payment by clients for consulting fees are 30 days, although consultants can negotiate up to 90 days for payment of vendor/supplier invoices.

A uniform and regular collection system ensures continuous cash flow and may also act as a key performance indicator when managing projects. It may be used as a sales tool to clients as an additional management aid whereby regular cost checking and management helps indicate whether the work is being done cost effectively.

When considering whether to take legal action in relation to outstanding fees consider (a) the repercussions on the business relationship and (b) be aware that any claim for outstanding fees may be met with a malpractice suit by way of counterclaim to stall payment of fees and use the potential cost of defending such a suit as a deterrent to pursuing the fee claim.

The best way to insure against a malpractice suit is to have procedures in place so that the management of the project is well documented and that each step of the project is agreed to with the client (e.g. ensure milestones/deliverables are signed off for by the client's representative and it is recorded that works have been completed to the client's satisfaction). Good project management requires monitoring and control of costs so that the client is not afforded the excuse of delaying payment of fees because the project is over budget.

As a general rule, it is probably not cost effective to pursue fees of $10,000 or less, due to the legal costs involved. If legal action is to be taken, ensure that you initially issue an in-house counsel letter of demand. If payment is not forthcoming in response, hire local counsel in that jurisdiction to ensure that fees are kept to a minimum. Collection should be pursued as a last resort and only when all other avenues have been exhausted. By the time a fee dispute gets to this stage it is likely that your client does not have the money to pay your fees and/or your firm may be walking into a potential malpractice claim. Prevention is the best cure - educate your business people to only pursue business with solvent reputable clients and to ensure that there is client buy-in on projects every step of the way to guard against any potential counterclaims.

Taxation

Examples of criteria that dictate nexus for state taxation purposes include situation of contract, place of property/payroll/employees, etc.

In Connecticut sales tax is payable on services, not only if you have sales, property and payroll in the jurisdiction to establish nexus, but also if it can be shown that you derive an economic benefit in the State. Further there is no statute of limitations in relation to collecting state taxes - and therefore you will remain liable for same although it may not be reasonably or commercially viable to recover them from your client after a reasonable period of time.

Consulting firms should ensure that all contracts generically state that all state and local taxes are payable by the client exclusive of fees. You should know your tax obligations and bill them up front - clients don't like surprises and will be less inclined to feel responsible for taxes charged subsequent to the close of a project/contract.

If firms are doing business in more that one state they should be aware of the powers bestowed on the Multi-State Tax Commission (based in Chicago). The Commission is a collective effort by approximately 30 states to enforce tax laws.

States that adopt aggressive tax collection practices include West Virginia, North Dakota, South Dakota, Connecticut & California.

If consulting firms work for government clients they should be aware that government departments will not indemnify them for taxes.

Immigration

Before agreeing to provide international consulting services, there may be practical considerations to bringing together the necessary international expertise. Know the immigration issues before agreeing to provide talent on an international project that is being conducted elsewhere. The easiest consultants to import are from Canada who may enter on a TN visa and/or transfer to an H1-B visa for the purpose of obtaining a green card. The fastest way to get a visa to work in the US is the interoffice L1 visa that takes approximately 3 weeks to process. H1-B visas are taking longer to process with the heightened security restrictions and some government clients are refusing to have consultants on site who do not have at least a green card. It can be easier to bring in talent from the 3rd world (due to the comparatively cheap labor and consequential brain drain) however, due to the protective immigration practices of other countries; it can be difficult to get quick authorization for American consultants to work abroad.

International Issues

When sending consultants overseas, be aware that they may require additional information/protection to ensure that you are providing them with a safe work environment. Workers compensation requirements differ from country to country and there is specific legislation which may apply if they are also working with clients on a mine/military base, oil rigs and docks, etc.

You should also be au fait with the political stability/instability in countries in which you work from an employee safety and risk assessment perspective (particularly regarding fee recovery). There may also be cultural implications and you will need to consider racial stereotyping and profiling, especially when sending consultants into the Middle East.In politically sensitive areas some consultants, due to their ethnic background may be placed at risk.]

Health risks and security concerns may also impact your ability to carry out projects (e.g. in Africa the death rate due to AIDS may mean that long term projects may not have the required intellectual capital if in the short to medium term a high percentage of your client's staff on that continent face shorter life expectancy).In some Latin American countries your consultants may be required to undergo drug testing on client sites. You should also be aware of the tax implications of working abroad in advance to ensure that projects are appropriately priced. Different countries will also have their own EEO, privacy and record keeping requirements.

F. Summary

Most salespeople are preoccupied with closing deals and they may not always consider the legal issues at the outset. Only when a contract is passed to a consulting firm's general counsel are potential contractual issues considered in the absence of a pro forma agreement. However any contract (no matter how well drafted) will be as successful as the reasonableness of the parties involved. Legal ramifications always need to be balanced with business considerations (e.g. financial realities, client relationship issues, etc). Knowing how potential contractual issues arise, however, will empower your firm to draft fair and reasonable contracts arising from effective and professional negotiations.

G. Disclaimer

This document provides information about the contractual issues consultants may face and it is designed to promote discussion about these issues and provide insight as to how they are practically dealt with in the industry. However the information in this document is not the same as/a substitute for legal advice. Legal advice is the application of law to the specific circumstances of an individual/corporation. Although we have tried to ensure that all of the information in this document is accurate and useful, we recommend that you consult your lawyers if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.
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