Companies enter contracts with entities, individuals and other companies for a multitude of reasons. The structure of a contract depends on the nature of work and the project both parties are undertaking.
One such contract is an advisory agreement which is signed between advisors and companies availing their services.
This article covers what advisory agreements are, why companies enter one, and what they should include in such an agreement.
What is an Advisory Agreement?
An advisory agreement is a business contract signed between a company and an advisor. The latter offers their services as an external third party and does so for any chosen term. The agreement is either signed at the beginning of the project or for the specific duration which the advisor offers their service.
The agreement details the services that the advisor will perform, the timeline for the service, and the compensation plan. Additionally, it can include provisions regarding confidentiality of information, assignment of supporting teams, and any special considerations.
Do I need an Advisory Agreement?
When working with third parties, it is always beneficial to have a written contract. Similarly, a written and signed advisory agreement can prove advantageous for the company.
The agreement details the responsibilities and obligations of either party and serves as written proof in case of non-compliance by any party. A written formal document makes it easier to prove non-performance and seek legal action or remedies if this issue arises. With a verbal contract, it can be harder to prove what was agreed upon at the beginning of the agreement.
A written agreement also helps keep all parties and relevant stakeholders on the same page regarding their working relationship. All employees can use the document as a guideline to refer to when engaging with the advisor, sharing company resources and data.
Are Consulting and Advisory Agreements the same?
‘Advisors’ and ‘consultants’ are terms that are often used interchangeably. While they are quite similar, they are not the same. Consultants often take on short-term, one-off projects for businesses. Advisors, on the other hand, are associated with companies for the longer-term and offer advice on multiple projects and aspects of the business.
Both work in the capacity of third-party counsel and do not count as employees of the organisation. The relationship is also monthly and non-exclusive (i.e., both consultants and advisors can work with multiple clients at one time). Both advisory and consulting agreements have similar terms and components. The major difference between advisory and consulting agreements is the specific services they provide.
What does an Advisory Agreement Include?
A well-drafted and detailed agreement serves as a guide for the working relationship between the two parties. An advisory agreement should contain the following;
1. Scope of Work/Engagement
The advisor’s role for the company needs to be recognized in terms of what services they will be offering. This means having detailed descriptions about the responsibilities the advisor will be taking on to ensure both parties are clear on the advisor’s role. Also, the statement can include details about any team formation that may occur to assist the advisor in their obligations. The team can include members from the company and their positions and roles can be described in the statement as well.
2. Term of Service
The agreement will also outline the timeframe the advisor will be serving the company. A clear start and end date for the agreement can be included. The clauses should contain information about the time of agreement renewal, revision provisions and conditions of termination of the agreement.
3. Compensation
A compensation plan needs to be added to the agreement. This plan will include details of the amount to be paid – along with the schedule of payments. Additionally, accepted methods of payment should be mentioned.
4. Changes to Agreement
Provisions to amend and revise the contracting agreement should be added to allow for any changes to the scope of work and the advisor’s responsibilities. In case of external environment changes, the advisor’s terms of service and compensation may be subject to change as well.
5. Contractual Relationship
These clauses identify the kind of relationship that exists between the company and the advisor. Most advisors work as individual contractors with a non-exclusive relationship between the two parties. Advisors are free to contract with other parties so long as it does not create a conflict of interest or result in the disclosure of sensitive information.
6. Confidentiality
When working with advisors, the company will be sharing important information such as trade secrets, technical information, business strategies and personnel information. When shared with external advisors, there needs to be confidentiality and NDA clauses in place that prevent the disclosure of this information to unauthorised individuals and parties. Clauses should also detail what information the advisor can use and for what purposes.
7. Intellectual Property
With two parties working collaboratively, it is important to identify who holds ownership of assets and intellectual property. Often in the case of advisory agreements, ownership of any data, tools, assets, etc. is held by the company. Any licensing agreements should be discussed and detailed in the advisory agreement so that intellectual property can be protected.
8. Performance of Services
These clauses state that the advisors will offer their services and perform to the best of their efforts. Notably, advisors cannot enter any contracts on behalf of the company until authorised to do so by the company itself.
9. Limitations
Limitation clauses restrict the advisor’s ability to work with certain companies or undertake some projects for a specified time. This is to prevent any conflict of interest from taking place and secure any pioneering advantages the company may have obtained.
Companies can also use non-solicitation clauses that prevent advisors from poaching company talent, clients, and contacts for a specified time.
Key Takeaways
- Advisory agreements are contracts with third-party advisors who sign on as independent contractors.
- Having a written document clarifies the roles and obligations of either party and makes it easier to seek legal action in case of conflict.
- Agreements should include the scope of work, time duration and compensation plans. Additionally, the agreement should include clauses to protect business information, intellectual property and any other assets.
Drafting business contracts and advisory agreements can be tricky if you are not well-versed with the legalities. Seeking legal counsel can help you draft an agreement tailored to your business needs and protect your legal rights.
If you’re in the process of drafting business contracts and agreements, the team of business lawyers at Lazarus Legal can help you draft contracts that serve and protect your corporate and legal interests. Schedule an appointment today to get in touch with our experts on contract law.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.