Beware the pitfalls of retaining consultants

One of the challenges involved in drafting an agreement to secure consultancy services is how to ensure that it provides maximum protection for the client. Jonathan Silverman explains how he helps clients to avoid the traps.

In this article, Jonathan TR Silverman (jtrs@silvermansherliker.co.uk), a partner at Finura’s preferred law firm Silverman Sherliker LLP, examines some of the pitfalls of retaining consultants and what it could mean for your business.

As often as not, a client has agreed terms in principle with an individual, only to find that when discussions turned to the formalities, the consultant operates through a limited liability company.

This throws up a number of issues for the practitioner who may well be aware of IR 35 (which deals specifically with tax and the managed service company regime) but who may over focus in that respect and then fail adequately to address other aspects which regularly cause problems further down the line.

So what of the key aspects to keep in mind?

Clarify exactly what is actually expected of the consultancy.

On numerous occasions disputes arise over the enforcement consultancies simply because of the mismatch of expectations against performance, especially in the areas of “soft consultancy” such as web marketing or search engine optimisation.

It is essential to ensure the client doesn’t simply get taken in by the consultancy’s sale hype, rather ensure that a detailed specification is annexed to the consultancy agreement setting out exactly what services are to be performed and what “milestones” can be agreed upon to monitor both the performance and quality of the service to be delivered.

Not only the consultant’s obligations need to be addressed in the contract: often disputes arise because the client who has retained the consultant simply fails to provide them with adequate data or other resources to enable them to carry out the services properly, so it is important to discuss that aspect and where appropriate build in a suitable provision.

Also keep in mind the extent to which the consultant is to be permitted to negotiate and conclude contracts on behalf of the client which could otherwise fall foul of the Commercial Agents (Council Directive) Regulations 1993.

Establish who will be providing the service

Is there to be one key individual made available on secondment to address any particular issue and if so who will be giving him or her directions? Take a warranty that the consultancy has adequate resources to make key staff available throughout the period of the contract, otherwise the client must be made aware of the risk of substitution.

Where there is to be any long term secondment of specified personnel or where the contract simply provides for the supply of an individual then care needs to be taken to ensure the client does not find himself having entering into a contract for personal services which could readily give rise to an employment contract with all the implications that follow and recognise that this can occur even though a company is used as a mechanism to deliver consultancy services.

So particular care should be taken in this respect to ensure that all the usual tests to demonstrate that the relationship of an independent contractor are satisfied so that there is no chance of “worker” or “employee” status been created.

What is the agreed fee structure?

Have the parties agreed whether there is to be a fixed fee payable per month or are fees to be linked to hours, performance or targets? If the latter, then is it to be linked back to those milestones?

It is equally importantly to remember to address the issue of expenses, supplemental fees and third-party costs, which are often overlooked.

Protecting the client’s trade secrets and knowhow

There is no implied duty of confidentiality owed by one company to another or by a self-employed individual so always keep in mind that often consultants are given widespread access to a client’s business. Therefore, securing confidential information and trade secrets is essential.

A good agreement should include built-in express warranties from the consultancy to respect confidential information, which should be effectively defined. There may be a need to add undertakings from the consultancy not to take any similar work for competing companies to those of the client.

Consider the appropriate extent of restrictions and consider for how long a period of time after the proposed consultancy company end that any such provisions should remain in place, always keeping in mind the need that any such provisions will have to be regarded as fair, reasonable and proportionate by any court asked to rule on enforceability.

One aspect commonly overlooked is a failure to ensure that the undertakings and covenants are not simply effective against the consultant company but also against the key personnel operating within consultancy.

The client should not rely upon assurances offered by the consultancy that they’ve covered off the issues in their contracts of employment; rather, wherever possible, identify those executives involved and ensure they each enter into side letters to the agreement personally to ensure enforceability.

Termination

And finally don’t forget to address carefully how the client can bring the arrangements to an end without too much dispute. In so many instances disillusionment sets in far quicker than the client imagines will be the case, so appropriate mechanisms should be provided to enable the client to terminate agreements which on the face of it might otherwise run for significant periods of time.