Five Keys to International Consulting Contracts

Our international lawyers have been getting an increasing amount of work involving the provision of services across borders. International service agreements are more complicated than international product sales agreements because they typically involve an ongoing and more amorphous relationship without easily definable deliverables. It is easier to write a contract to buy 1,000 widgets from Thailand with xyz specifications and delivery within 6o days via common carrier than it is to write a contract involving a two year project involving 60 people in four different countries. In many respects, this arrangement is much more closely akin to entering into a joint venture or an employment relationship than an arm’s length transaction.

In the end though, there are certain core aspects of most consulting contracts, be they purely domestic consulting contracts or cross-border consulting contracts, and the five points below immediately spring to mind — note that the following was written for the benefit of a client company hiring a consultant:

1. Limitations on Liability

Most service agreements have a damages provision that caps potential recoverable damages if a claim is made under the contract. Not all such caps are unreasonable. However, we regularly see caps that state the recoverable damages cannot be any greater than the fees our client company will pay under the contract. Because the damages that can be wrought by badly performed services can easily surpass the amount paid for such services, limiting recoverable damages to fees paid is often unacceptable. This type of liability can and should be be dealt with initially through ensuring your consultant has a commercial general liability policy in place that provides coverage for contractual obligations. Pointing this out to your prospective consultant will help ease their uneasiness about agreeing to take all responsibility for their errors under the consulting agreement.

2. Indemnity

Similar to caps on liability, many contracts include “one way” indemnity clauses that provide for the client company to reimburse the consultant for damages the consultant might suffer from the client’s negligence, but these consulting agreements often omit indemnification for damages the client company might suffer from the consultant’s negligence. Any reasonable consultant should at least agree to indemnify you for their gross negligence, but you should push for them to cover their negligence, which is a lower bar than gross negligence and covers your losses arising from the consultant’s errors and omissions, not just their “gross” errors and omissions.

3. Ownership/Use of Work Product

Many consulting contracts state that any documents prepared by the consultant remain the sole property of the consultant. Such language can be broad enough even to include drawings and samples. If you pay for the documents, you should have rights to use the documents, though it is often fair for the consultant to include a disclaimer providing that reusing the documents without their consent is at the client’s sole risk. In the employment context, this is referred to as “work for hire,” and you may see similar language in your consulting agreement. This clarifies that all of the consultant’s work product created for you becomes your property because you engaged the consultant for this particular purpose. You may need to negotiate this in more detail with your consultant, especially if they are providing specialized services (like cybersecurity consulting) of which you have no in-house expertise.

4. Payment

Pay close attention to all of the terms related to payment because it is very common for consultants to quote a price for services and then draft a contract that allows them to exceed the quoted price without prior approval. You should consider identifying benchmark deliverables (timing and quality) in the consulting contract with at least as much rigor as you would in an international manufacturing contract because service-related deliverables are much more nebulous than widgets.

5. Termination

Standard consultant contract language will often try to limit the client’s right to terminate the consultant. Sometimes the language limits a client’s right to terminate only when the consultant has breached the contract and had a lengthy notice and cure period. Generally, the client should have the right to terminate the contract if it is unhappy with the consultant’s performance for any reason. Often we suggest that the consulting agreement last for only a period of 30 days, after which it will automatically renew unless you provide notice to the consultant. You will want to lock the consultant in for as long a period as possible without giving them the option to terminate unless you breach the agreement.

6. Concluding Thoughts

If you do not have a written consulting agreement, then all of these important points are generally left ambiguous or would otherwise need to be identified through scouring emails, WhatsApp, WeChat, and text messages. You do not want to be in this situation because it never turns out well if the relationship starts to sour.

In most circumstances, it will behoove you to put all of the above provisions in any consulting agreement, whether you are the company hiring a the foreign consultant or you are the company providing consulting services to an overseas company. If you are a consulting company doing business with a foreign company, likely the most critical aspect of your deal will be making sure you get paid. For how to accomplish that  check out How to Get Paid from China, which contains tips that apply just about anywhere in the world.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.