IT consulting contracts: Distinction with a difference

By Duncan Card, Bennett Jones LLP
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Across most common law jurisdictions, one of the most important and fundamental aspects of every information technology consulting agreement is also one of the most frequent and formidable sources of legal misunderstanding and commercial risk. Luckily, this source of risk is entirely within the ability of IT customers to mitigate, if not entirely avoid.

Duncan Card
Duncan Card

The commercial and legal risks arise directly out of a pervasive, and yet deceptively simple, misunderstanding concerning the differences between an “advisory” consulting service and a “deliverable” consulting service. The failure to appreciate that simple, yet profound, distinction lies at the heart of many of the most serious disputes and liabilities that arise in the course of IT consulting projects.

IT consulting transactions that are structured as advisory services, involve retaining a consultant to provide expert, experienced and professional advice in support of a particular endeavour or to facilitate a particular outcome. Although consulting services may be provided by leading authorities in their fields, such retainers do not guarantee particular results, benefits or outcomes.

All advisory services must adhere to prescribed (and often onerous) standards of diligence, quality and care, whether they arise by contract, statute or the common law. However, advisory service providers do not assume the risk of a failed outcome or result (except if the failure is caused or contributed to by the failure to adhere to prescribed service standards) and the consultant will not be responsible for whether or not the customer’s desired outcomes or business intentions are achieved.

For example, if an IT consultant is retained to help guide the customer through the process of configuring and implementing complex enterprise software, the service provider does not guarantee a particular outcome and does not serve as the customer’s insurance policy for the customer’s poor business decisions or any mistaken judgments that arise during the course of the retainer. Subject to the consultant’s compliance with all applicable duties of care in the performance of the services, the outcomes of IT consulting services that are strictly advisory in nature, will entirely be the customer’s risk.

On the other hand, “deliverable” consulting service agreements have (in many ways) much in common with product purchase agreements. In such transactions, a consultant is retained to provide more than mere hands-on guidance, assistance and advice by guaranteeing that a specific or particular outcome, result or benefit will be delivered to the customer. Successful performance must be measured by direct correspondence to the precise nature, scope and extent of how well the “deliverable” is defined from the outset. Since those transactions focus on the production of the defined IT outcome, the professional quality of the services is less relevant as long as the outcome that is contracted for was delivered in accordance with the contract.

Managing the risks

IT vendors and customers must contractually respect the clear difference in law and commerce between “advisory” and “deliverable” services. This is where IT consulting customers most often fail to properly manage their projects and transaction risks. Any contractual confusion between (or among) those divergent risk contexts can lead to a failure to manage the risks of either type of transaction, leaving both the customer and the consultant exposed to unintended project risks.

To properly manage the risks of “advisory” consulting services, customers should (in part) ensure that the contract: (1) clearly stipulates the nature, scope and quality of the professional standards of care that must be exercised by the consultant; (2) stipulates quality assurance obligations and protocols to promote service excellence; (3) stipulates all applicable personnel/consultant qualifications, experience, security clearance, training, and other relevant attributes; (4) mitigates against personnel transfers to promote service consistency and continuity of project knowledge and experience; (5) provides for frequent reviews of services quality performance, especially concerning project progress; (6) includes provisions that promote consultant-customer communications, including stipulations related to timely customer decisions, determinations and instructions to the consultant; and (7) includes an express disclaimer and denial of any representation, warranty, covenant or guaranteed outcome, result, or that any particular solution will be fit for a particular purpose.

Customers managing the risks of “deliverable” consulting services should (in part) focus on the following golden rule of contracting: the less completely, accurately and clearly the deliverable is defined, the greater the risk of project failure. If the customer is not in a position to define the deliverable thoroughly and clearly, then it is not in the customer’s best interests to enter into a deliverable consulting agreement because the customer’s risks associated with “getting what it has paid for” are going to be beyond each party’s control.

Duncan Card is a partner and co-chair of the technology practice at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Washington DC, Dubai and Doha, and a representative office in Beijing.

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