A contract between client and consultant is a relationship contract, a relationship of trust.

Negotiating consultant contracts is all about trust and the relationship between the two parties. Tony Horan offers 10 tips for the rules of engagement.

Contracts to purchase a business, sell a property, buy shares or borrow money are all transactional. Once the deal is done the parties move on. In some cases, an aggressive ‘take it or leave it’ approach to negotiation may benefit your interests. Some clients (including government) and their lawyers seem to think this is the right approach when engaging consultants.

Consultant contracts are fundamentally different. A contract between client and consultant is a relationship contract. By its nature, the client must trust the consultant is exercising care and skill in providing specialist services over the period of the consultancy. At the heart of a successful engagement, there must therefore be a healthy, commercial relationship between the parties; a relationship of trust.

It is common practice in Australia for clients to produce, via their lawyers, long, complicated consultant contracts containing a range of broad, oppressive clauses. These clauses reflect an imbalance of risk allocation away from the client and towards the consultant. They send one message to the consultant: we don’t trust you.

There is a Japanese proverb: if all you have is a hammer, everything looks like a nail. In fact onerous, aggressive contracts tend not to protect the client. Disputes are more likely to happen, not only about the services provided by the consultant, but also the legal meaning and effect of various contract clauses. Clients lose the opportunity to remedy mistakes or problems early (and cost-effectively) because the consultant is more reluctant to disclose problems for fear of contractual retribution.

A negotiating environment of defensiveness, self-interest and self-preservation is less likely to lead to a successful outcome. Here are 10 tips in negotiating an effective consultant contract.

1. Scope – Most disputes between clients and consultants are about the scope of services and how they are delivered, rather than the terms and conditions of the contract.

The more time the parties can spend learning about each other by negotiating and carefully articulating the scope of services, the less likely misunderstandings will happen during the project about what services were agreed, by when, to what standard and for what price.

A client must also understand the limits of the services the consultant will provide, and the risks for which they are not responsible (particularly when advising on soil and contamination).

Disputes over variation claims are less likely when the parties have agreed to a clear, comprehensive scope of services.

2. Payment – Ensure payment provisions are simple, clear and easy to calculate. Include a right to contractual interest for late payment.

Consultants should avoid set off clauses that permit the client to defer payment of fees until resolution of any counterclaim by the client. Payment of fees can be significantly delayed while the consultant’s insurers and the client are litigating the negligence claim.

3. Contracting parties – Ensure each party is accurately named; it may become a critical issue if you need to enforce your rights under the contract.

Check corporations are correctly described (including applicable ACN or equivalent) and remain a registered corporation. Do not enter contracts with business names; find out who owns the business name and decide whether to contract with them. Check any agency issues: are you contracting with the person with whom you are dealing, or are they an agent for someone else?

4. Insurance – Why should consultants put their business at risk by agreeing to contractual obligations not covered by professional indemnity insurance, such as under strict liability guarantees and indemnities? When encouraging consultants to accept these clauses, clients and the lawyers commonly state:

‘No one else has complained about these clauses’. But would the client prefer to engage someone who protects their business interests, or a consultant who will put their business at risk over one project?

‘The additional risk of liability under these clauses is marginal’. Risk has two elements: probability and consequence. While the probability may be low, the impact to a consultant of a claim not insured may be severe.

‘The client has no interest in the consultant’s insurance position’. Given the limited assets of most consultancies, insurance may be the only avenue for a client to recover its loss.

In NSW, Tasmania and WA, consultants are permitted to contract out of proportionate liability. Consultants should never do so. Under the law, a consultant who is sued for negligent conduct typically is entitled to have its liability to the client limited by reference to the comparative responsibility of others for the client’s loss. By contracting out of proportionate liability, the consultant agrees to be liable for 100 per cent of the client’s loss – and that additional liability is probably not insured.

5. Documents – Blaise Pascal famously said: “I would have written a shorter letter, but I did not have the time”. The test of a strong, effective contract clause is that it is brief, concise and uses plain language.

If you don’t understand what a clause means, don’t assume it makes sense to anyone else. Ask the lawyer who drafted it. That can lead to constructive discussion on what the clause is trying to achieve, and how it may be redrafted in plain language.

A valuable question for consultants to ask a client is: have you had difficulty in the past with the issue addressed by this clause? This invites the client to explain any recent bad experience and can lead to constructive discussions.

Aim to execute a single, cohesive contract document (or set of documents) that contains all the terms of the agreement.

6. Preliminary arrangements – When buying a newspaper, a contract is created without executing any formal document. It sometimes happens that a party argues the contract was reached prior to the formal execution of the contract documents, and on different terms. To avoid this, when entering a memorandum of understanding or making some other preliminary arrangement, make it very clear (better in writing) that you do not intend to enter a contract at that time.

7. Copyright – Unless there is very good reason (such as the client is constructing a prison), the consultant should retain copyright over the work. In the absence of express agreement, the client receives an implied licence to use a consultant’s work, but only for the purpose that was the subject of the agreement.

If the contract requires the consultant to transfer copyright to the client, ask the client whether it intends to use that design on other projects. If not, then the licence to use the material for the current project should be sufficient. If yes, the consultant may ask to be paid a licence fee for the multiple use of the design, and also can address any liability issues in the work being used at other times and in other places.

8. Termination rights – Contracts should provide each party with rights to terminate the agreement, including a right to terminate at the convenience of one of the parties (after giving a period of notice). The contract should allow the consultant reasonable compensation when the client terminates for convenience.

9. Dispute resolution – Where possible, contracts should encourage early identification and resolution of disputes. For example, the parties may be required to notify claims within a period of time after becoming aware of their rights, or lose those rights. In larger projects, the parties may agree to appoint a Dispute Resolution Board who attends site regularly to hear and make recommendations on resolving disputes during the project.

To avoid delay in recovery, consultants may prefer to exclude claims for payment of professional fees from the dispute resolution process, which typically involves notices of dispute, settlement conferences, mediation and the like.

10. Sniff test – At some stage, consultants and clients alike achieve a level of maturity and confidence where they no longer indiscriminately take on every client or every project that walks through the door. They are willing to walk away from a bad risk.

This is the most important risk management tool of all. It applies to consultants and clients alike. The process of negotiating the contract, particularly the scope of services, is a vehicle for the parties in assessing each other and deciding whether to proceed and on what terms. That is why clients and consultants need to be involved personally in that process.

Tony Horan is a member of the Victorian Bar, a Senior Fellow at the University of Melbourne and a nationally accredited mediator. Over the past two years he has presented Consult Australia’s ‘Contracts for Consultants’ course nationally.