Consulting arrangements come in different shapes and sizes, from the simplest one-person engagement to the multi-year enterprise-wide assignment. The former is not likely to be formalised other than through a letter of engagement. More substantial consulting projects for significant amounts of money are usually reflected in formal contracts, although it is not uncommon to see engagements almost to completion before the comprehensive contract is finalized and executed.
If you are inclined to do your own contract with a consultant here is a non-exhaustive list of legal issues to keep in mind.
The Copyright Act takes care of ownership of copyright in employment situations; it directs that all works created by an employee in the course of his or her normal duties belongs to the employer. This, however, is only true of formal employment relationships. If you see no other reason for having a written agreement with your prospective consultant, this is it. Make sure that you have a written record of assignment of all copyright in written materials, including software, produced for you in the course of the engagement.
Most consulting relationships will expose your consultant to information that you consider to be a trade secret. Trust law may help you in situations where confidentiality is threatened or breached, but only in the most obvious cases. It is best to have explicit written provisions for the definition of the scope of information to be handled in confidence. Once you open the subject of confidentiality, you can expect a discussion of exceptions to any covenants of confidentiality and rights to use “work product” for services to others.
A single-person consulting firm may operate as a sole proprietor, but that is likely to be the exception. Most single practitioners find it advantageous, from a tax and liability point of view, to operate in a corporate form. When your contract is with a corporation, whether it is a large organization or a small firm, it is usually a specific individual that you are after to do the work. If your contract is not specific in this regard, you may end up with second-string players, with no recourse. So if you’re expecting certain individuals to do the work, put it in the contract.
Some assignments are for advice and reports only, while others involve the consultant taking an active role in a larger project. Be clear with the consultant and your other participants about the scope of authority that you are willing to delegate, and then stick to it.
LIABILITY AND OWNERSHIP
Two of the toughest issues to resolve in formal consulting agreements involve limits on liability and the ownership of the “work product” produced.
If your consultant does not come from an IT background, limits of liability may not be an issue. Except in the case of carriers of goods, other industries do not get away with limiting their ordinary contract liability (more on the history and rationale of this practice in upcoming issues). In setting limits of liability, you should explore filling the liability gaps through the consultant’s E&O insurance coverage. This may lead you quickly to discussions with respect to the additional premium costs.
Most clients will insist on owning the “work product” they pay for, but a consultant’s effectiveness for subsequent clients could be severely limited by this simplistic approach. Be prepared for long discussions on such matters, and be willing to compromise on practical alternatives that will help you avoid a contract that only your lawyer will understand. For example, deal with reuse of significant portions of the “work product” you receive through a limited royalty arrangement. Or restrict your consultant from working for your competitors generally, or at least through individuals who performed your contract.
With a little common sense, imagination, and an appreciation for your consulting partner’s business concerns and priorities, many potential trouble spots in consulting arrangements can be eliminated at the outset.
Gabe Takach is a partner at the Toronto law firm of Tory Tory DesLauriers & Binnington, where he heads up the firm’s technology contracting practice. He can be reached at gabor.takach@torytory.ca.
Consulting arrangements come in different shapes and sizes, from the simplest one-person engagement to the multi-year enterprise-wide assignment. The former is not likely to be formalised other than through a letter of engagement. More substantial consulting projects for significant amounts of money are usually reflected in formal contracts, although it is not uncommon to see engagements almost to completion before the comprehensive contract is finalized and executed.
If you are inclined to do your own contract with a consultant here is a non-exhaustive list of legal issues to keep in mind.
The Copyright Act takes care of ownership of copyright in employment situations; it directs that all works created by an employee in the course of his or her normal duties belongs to the employer. This, however, is only true of formal employment relationships. If you see no other reason for having a written agreement with your prospective consultant, this is it. Make sure that you have a written record of assignment of all copyright in written materials, including software, produced for you in the course of the engagement.
Most consulting relationships will expose your consultant to information that you consider to be a trade secret. Trust law may help you in situations where confidentiality is threatened or breached, but only in the most obvious cases. It is best to have explicit written provisions for the definition of the scope of information to be handled in confidence. Once you open the subject of confidentiality, you can expect a discussion of exceptions to any covenants of confidentiality and rights to use “work product” for services to others.
A single-person consulting firm may operate as a sole proprietor, but that is likely to be the exception. Most single practitioners find it advantageous, from a tax and liability point of view, to operate in a corporate form. When your contract is with a corporation, whether it is a large organization or a small firm, it is usually a specific individual that you are after to do the work. If your contract is not specific in this regard, you may end up with second-string players, with no recourse. So if you’re expecting certain individuals to do the work, put it in the contract.
Some assignments are for advice and reports only, while others involve the consultant taking an active role in a larger project. Be clear with the consultant and your other participants about the scope of authority that you are willing to delegate, and then stick to it.
LIABILITY AND OWNERSHIP
Two of the toughest issues to resolve in formal consulting agreements involve limits on liability and the ownership of the “work product” produced.
If your consultant does not come from an IT background, limits of liability may not be an issue. Except in the case of carriers of goods, other industries do not get away with limiting their ordinary contract liability (more on the history and rationale of this practice in upcoming issues). In setting limits of liability, you should explore filling the liability gaps through the consultant’s E&O insurance coverage. This may lead you quickly to discussions with respect to the additional premium costs.
Most clients will insist on owning the “work product” they pay for, but a consultant’s effectiveness for subsequent clients could be severely limited by this simplistic approach. Be prepared for long discussions on such matters, and be willing to compromise on practical alternatives that will help you avoid a contract that only your lawyer will understand. For example, deal with reuse of significant portions of the “work product” you receive through a limited royalty arrangement. Or restrict your consultant from working for your competitors generally, or at least through individuals who performed your contract.
With a little common sense, imagination, and an appreciation for your consulting partner’s business concerns and priorities, many potential trouble spots in consulting arrangements can be eliminated at the outset.
Gabe Takach is a partner at the Toronto law firm of Tory Tory DesLauriers & Binnington, where he heads up the firm’s technology contracting practice. He can be reached at gabor.takach@torytory.ca.
