APPENDIX 4

TERMS OF A CONSULTING CONTRACT

This appendix supplements section 7.6 on consulting contracts. These contracts come in many different forms and degrees of detail. It is useful to be aware of differences in national legislation and practice concerning contracting in general, and contracts for the provision of professional services in particular. In international contracts, the client and the consultant should agree on the applicable law, which is usually the law of the client organization’s home country. In exceptional and justified cases the consultant and the client may agree to apply the law of the consultant’s country or the law of another jurisdiction that is considered neutral by both parties.

The consultant may be requested to accept the client’s standard form and conditions of contract. This is normally the case if the assignment is part of a programme financed by a technical assistance agency or a development bank, and if the work is for public sector clients.

In other cases, the consultant will be able to use his or her own form of contract, or develop a contract in agreement with the client. To support their members, some consultants’ associations have prepared standard contract clauses, or guidelines for contract terms and conditions, reflecting the profession’s experience.

In any event, it is strongly recommended to consult a lawyer on the contract form to be used and on unusual contract clauses suggested either by the client or the consultant. Certain provisions that may look familiar and are sometimes referred to as “boilerplate” (e.g. indemnification and dispute resolution clauses) may prove particularly onerous for one of the parties if they are not properly drafted.

The comments that follow are structured in accordance with the checklist in box 7.6, “What to cover in a contract – checklist” (section 7.6).

1.Contracting parties

It should be made clear not only who signs the contract (and its cancellation, amendments, etc.), but also who will make operational decisions on work progress, changes in the workplan and staffing, and results. In reality, there are several

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categories of “client” in most organizations, as pointed out in section 3.2. Technical assistance contracts are often signed by the funding agency, but the real client is the organization receiving assistance. What will be its roles and rights in preparing and implementing the contract?

2.Scope of the assignment

This section describes the work to be performed, the objectives to be achieved, the timetable and the volume of work. Although it is the core section of the contract, its importance is often underestimated. Many consultants feel that their objective should be to sign the contract even if the scope of work has not been fully clarified and could be viewed differently by the consultant or the client. Their credo is: Why bother with detailed work descriptions and plans when we know well that eventually the client will want something else? While flexibility is the consultant’s major virtue, a lack of detail and precision in outlining what should be done and achieved has made the life of many consultants and clients difficult.

3.Work products and reports

This section describes the so-called “deliverables”, i.e. specific documents and reports that the consultant will be transmitting to the client during and at the end of the assignment. Here, too, a great deal of misunderstanding can be avoided by being as specific as possible in describing what the client will receive. What is “a report”? What do we mean by “complete documentation on a training programme for sales managers”?

Unnecessary written reports should not be requested. They take up both the consultant’s and the client’s time without changing anything in the course of the assignment. Conversely, the need for frequent and short progress review meetings is not fully appreciated in many contracts.

4.Consultant and client inputs

Consultant inputs to the assignment are those that have to be provided within the given contract framework. This may include names (and curricula vitae) of operating consultants, names of partners and other seniors responsible for managing and backstopping the assignment, management systems and other proprietary know-how to be provided, and other inputs. It should be clearly stated which inputs will be provided within the agreed fee and which will only be available against additional payment. Any such additional inputs will require the client’s prior approval.

Furthermore, there should be no ambiguity as regards changes in the agreed inputs – when and under what conditions would the consulting firm be authorized to assign different staff, and when and how would the client be able to ask the consultant to replace the staff assigned to the project. If the client has selected not only a consulting firm, but also particular people within the firm, the client’s view should prevail in any such changes.

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Client inputs, such as time spent on the assignment by managerial and technical personnel, or administrative support, are often taken for granted and vaguely defined. In implementing assignments, many consultants do not insist on timely and full provision of inputs promised by clients. This practice increases the duration and costs of many assignments, and can cause a great deal of disenchantment. The consultant proceeds alone with the work, only to find that the client is not happy with the results and will not accept them.

5.Fees and expenses

Chapter 30 provides comments on desirable and undesirable fee-setting and billing practices. In drafting a contract, the fee formula applied, the estimated or agreed total fee, the conditions under which fees may be adjusted, and any expenses that will be charged separately should be clearly set out.

6.Billing and payment procedure

This procedure is also described in Chapter 30. The contract should set out the conditions to be met in requesting advance, interim and final payments, such as the reports that have to be submitted and accepted, the time records to be provided, and the way of presenting bills.

7.Professional responsibilities and standard of care

As a rule, the consultant will refer to the consulting association’s or his or her firm’s code of ethics and professional conduct (and attach such a code to the contract text). If necessary, the contract may also include special clauses on questions such as conflicts of interest to be avoided or activities from which the consultant agrees to refrain.

8.Representations

Consultants should avoid making false or inaccurate statements during the negotiations or in the contract in describing the firm’s or individual consultants’ capabilities and achievements. By misrepresenting or overstating their education, experience, work methods and results achieved, the consultants who fail to meet their clients’ expectations may, in addition to tarnishing their reputation, expose themselves to liability for breach of contract or fraud.

Before stating, for example, that you employ only “highly qualified and proficient staff” or that your problem-solving or change-management methodology has “saved clients millions of dollars”, you should consider whether you would be in a position to substantiate such statements were you required to do so in judicial proceedings brought by an unhappy client. Obviously, a distinction should be made between such self-laudatory statements which, if not a sign of good taste, are usually not susceptible of attracting liability. For example, a consultant may state that he or she is an “excellent professional”, or “leading authority in his or her

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field”. This may be untrue, but it is not a misrepresentation within the meaning defined above.

9.Confidentiality

During the assignment, the consultant may have access to confidential information of the client. Conversely, the consultant may, in certain cases, disclose confidential information to the client in performing the assignment. Each party agrees to keep confidential the information disclosed by the other party. Confidential information should be clearly identified. The parties will wish to exclude certain categories of information. Information that is publicly available is a common exclusion. Other exclusions may include information that a party is required to disclose by virtue of applicable law, court decision or government action. It is advisable to consider whether the confidentiality obligation should last indefinitely or end after a few years.

10. Protection of intellectual property

Increasingly, consultants use methodologies and training materials covered by copyright, patents or trademarks (see also Appendix 5). The contract will set the conditions under which these materials are available to the client (limited use within the client firm, no reproduction, fee to be paid for use, and similar).

Copyright in the materials produced as part of the assignment can be handled in various ways and is a matter of negotiation. Some clients insist that any copyright to works produced for their money belongs to them. Other clients want to be able to use the materials at their own discretion within the limits of their organizations, but agree that copyright should stay with the consultant (especially if the material is not a joint product of the consultant’s and the client’s work).

In many civil law countries, copyright is not transferable. However, the consultant may grant the client an exclusive or non-exclusive licence to use the work, namely to carry out certain acts that would otherwise infringe the copyright in the work (for example, the consultant may agree that the client will have the exclusive or non-exclusive right to publish, edit and broadcast the work).

11. Liability

As pointed out in section 6.5, legal liability is a relatively new phenomenon in consulting contracts and in many contract texts there is no reference to any liability. Yet liability questions should be given due consideration and the consultant may wish, or be obliged to, take out a liability insurance. This is especially the case if the advice to be provided will have a major impact on the client’s business decisions, or if the consultant is designing and delivering systems that will strongly influence the client’s operations (typically in information technology consulting).

Many clients will expect the contract to contain a clause whereby the consultant agrees to indemnify the client (and possibly the client’s employees, directors and officers) with respect to any and all damages, claims, costs, expenses and losses that

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may be suffered or incurred by the client in connection with a breach of contract by the consultant and/or wilful misconduct or negligent acts of the consultant. Such an undertaking may cover a number of situations, including personal injuries suffered by the client’s employees during a training session organized by the consultant, as well as losses caused to the client by the consultant’s failure to deliver on time. The consultant should have his or her lawyer review the indemnification clause to ensure that it is fair and that it does not require the consultant to indemnify the client beyond what is usual. The consultant may sometimes also obtain a reciprocal indemnification undertaking from the client, though its scope will usually be more limited. Before agreeing to provide indemnification, the consultant should confirm that this will not negatively affect the coverage of his or her liability insurance.

The contract may attempt to limit liability and provide, for example, that the total amount of indemnification that may be owed by the consultant shall in no event exceed the total amount of fees paid by the client. However, in certain jurisdictions, a limitation of liability may not be validly agreed, or may be agreed only under certain conditions; you should therefore check whether the proposed limitation is valid under the contract’s governing law.

12. Use of subcontractors

The use of subcontractors by the consulting firm may be authorized in some contracts and the client may choose to set the conditions for such use. As a rule, reliance on a subcontractor does not excuse a breach of contract since it is the consultant rather than the subcontractor who is party to the consulting contract.

13. Termination or revision

The contract should describe the steps to be taken upon completion of the assignment, including the settlement of all commitments by both parties and the submission and acceptance of all reports and documentation.

In addition, the contract may provide for the right of the client to terminate the contract without any reason or if specified external conditions occur. Such external conditions may include, for example, a change in business environment rendering the advice useless for the client. There may, however, be a mandatory notice period (say, one week in a simple management advisory assignment, or 30–60 days in a major engineering consultancy), and/or the client may have to pay the consultant an indemnity (e.g. fees for one month of work or 20 per cent of the remaining fees). If the client wishes to terminate the contract owing to poor performance of the consultant, a precise procedure should be followed (giving the reasons in writing, asking for a reply and immediate action, etc.) and the notice period may be shorter.

The consultant must also have the possibility to withdraw from the contract in certain circumstances, e.g. if the client is not paying or has suspended operations for a defined period of time. The contract would stipulate the procedure to be observed by the consultant. If the client has been declared bankrupt, the consultant can normally terminate the contract without notice.

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Turning to revisions, the contract may determine the dates and conditions for periodic revisions to reflect changed circumstances and client needs, and the procedure for unplanned revisions suggested by either party.

14. Arbitration

The contract may provide for the resolution of disputes in court or through an alternative dispute resolution (ADR) mechanism, such as mediation or arbitration (a single arbitrator or board of arbitrators). As a rule, consulting contracts use arbitration for settling disputes that cannot be handled amicably. The contracting parties agree on the rules of arbitration and the body to which the case would be referred. The laws of the country in which the arbitration takes places will generally govern the possible means and grounds of appeal against the arbitration award. Therefore, the arbitration forum should be selected carefully.

15. Signatures and dates

It should be made clear which representatives of the client and consultant are authorized to sign the contract and its amendments, bills, formal correspondence, and legally binding commitments related to the approval and execution of the contract.

* * *

Further guidelines on contracting are available in:

●World Bank: Guidelines: Selection and employment of consultants by World Bank borrowers

( www.worldbank.org/html/opr/guidetxt/, visited on 4 Apr. 2002).

●European Union: DIS Manual (Brussels, 1999).

See europa.eu.int/comm/enlargement/pas/phare/index.html.

●International Federation of Consulting Engineers (FIDIC): Client–consultant agreement

(White Book) (Lausanne, 3rd ed., 1998). See www.fidic.org./bookshop, visited on 4 Apr. 2002.

●E. Bleach and L. Byars Swindling: The consultant’s legal guide (San Francisco, CA, JosseyBass/Pfeiffer, 1999).

●Institute of Management Consultancy (United Kingdom): Standard terms and conditions of engagement (www.imc.co.uk/index3.html, visited on 3 Apr. 2002).

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