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How to read a contract for consultancy

When you make the jump from employee to consultant, one of the first things you will encounter is a contract. In this post I will give you some tips on what to look out for in a consultancy contract, some red flags to look out for and what to do if you find them.
Steve Green

Project Management Coach/Delivery Lead, Stonivale Ltd

Disclaimer: I am not a legal professional and nothing that follows should be taken as legal advice. If in doubt, always consult a legal professional before signing a contract.

Entering in to a contract as a consultant as very different to entering into one as an employee. As an employee, you are protected (or not, depending on where you are in the world) by employment law. In any case, a contract of employment is pretty much take it or leave it (unless you're at the C-Suite level). 

As a consultant you are a business entering in to a contract with another business and you should approach it as such. I am amazed by the number of professional consultants that I meet that treat signing a contract as a mere administrative hurdle to be overcome. As a consequence they often have only the fuzziest notion of what they have committed to. I hope that if nothing else, this post will encourage you to read your contracts thoroughly, make sure you understand what you're signing up to and if not, get some legal advice.

At heart, a contract is pretty simple. It spells out your responsibilities, the client's responsibilities, when the obligations start and end, and who will end up paying (in effort or in cold hard cash) when things go wrong. It's the last of these areas that you need to pay particular attention to. This is where a consultancy contract varies significantly from a contract of employment: As an employee you have the grievance procedure if you have a problem with your employer and they have the disciplinary procedure if they have a problem with you. With a consultancy contract things are a lot more complex and the stakes are potentially a lot higher.

Four words to look out for: Liable, indemnity, all and any

If you are liable for something that means you are legally responsible for it. Indemnity is a contractual obligation to compensate the other party. You can see how the two are linked: A contract will say that you are liable for the correct functioning of a thing you supply to the client and that you will indemnify the client from losses incurred if the thing you have supplied turns out not to be suitable. In plain English, if you give something to your client (even advice), they use it, something goes wrong and they can claim that it was something to do with the thing that you gave them, then you are on the hook. And you could be on the hook for a lot of money.

This is where the words all and any come in. If you see a clause that says something like: "The supplier will indemnify the client against all (or any) losses arising from..." then this is a red flag and you need to think very carefully about your next steps.

You see, if you were to sign a contract that had these kind of clauses in and something went wrong, you wouldn't just have to spend your money and time fixing the thing that was broken. You might also have to pay for loss of the client's profits, for legal fees, fines and all manner of other wonderful stuff that comes out of the woodwork when things go wrong in business. This is the reason that professional indemnity insurance has claim limits in the millions

What to do if you're asked to sign a contract that has these clauses

If you're in this situation then you've got 3 options:

  1. Sign the contract. I wouldn't advise this. However, I'm the type of person that believes that you shouldn't commit to doing things you really don't want to do. Most people are not like me. They sign this type of contract quite happily and most of the time it works out ok. However, it doesn't always. In 30 years in business I've seen contracts go seriously south maybe 3 or 4 times - a failure rate of somewhere between 5 and 10%. If that happens to you you can wave goodbye to that consultancy business you've put so much love into and say hello to years of legal hell. 
  2. Walk away. Maybe you don't need the gig. There'll always be another client.
  3. Try to get the contract changed. This is my go-to option. What I do when I get a contract that I'm concerned about is run it by my favourite contract lawyer and get them to suggest some alternative wording. If the client accepts it (or a reasonable alternative) then you're good to go. If they don't then you probably don't want to be working with them anyway.

In Conclusion

Here are my take-aways if you've managed to get this far:

  • A business contract is not like a consumer contract or a contract of employment. The contents matter. Read it. Read it all
  • Look for the words liable or liability, indemnify or indemnity and think really carefully about what they mean for you if things were to go wrong
  • If the words above are coupled with all or any, beware
  • If in any doubt, seek legal advice.

I hope the above has been useful for you or at least given you food for thought. I'd love to get your feedback. What experience do you have signing contracts? Do you look for anything different to me?

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