“Advisory” is a term which primarily evolved in developed countries for imparting consulting services by Certified Public Accountants (CPA) and other financial advisors for businesses entities. Top law firms such as EY, KPMG, PWC imparts advisory services which comprises areas of Corporate treasury, Cyber security, Anti money laundering, Contract management services, Enterprise risk, Internal Audit, Internal controls, Development advisory services, Compliance risk and regulatory services, Capital program advisory, Risk assurance etc.
In India, many times we engage professionals or field experts for providing certain services which is generally known as Consulting or Service Agreement. There is misconception to term Consultant as an Advisory. In fact Consultants are hired for short term purposes, just to rectify or to comply the requirements of known defects whereas Advisors are hired for long term having wider scope of subjects that differs categorically from the scope of a task oriented consultant.
The advisor is usually a long term member of an organisation and understands the organization’s strategy as well as ultimate goal that it aims to achieve. He is the one who has vision to demarcate immediate targets, next target and ultimate target/ goal of an organisation. Therefore an Advisory strives hard to plan and implement action plan to achieve the same. After understanding the difference between Consultant and Advisor now let us understand the essentials of an Advisory Agreement.
* Letter/ Agreement: The advisory services can be availed by exchange of letter or execution of Agreement. Agreement should be preferred over letter as it can detail many important agreed terms and conditions agreed between the parties.
* Parties: Generally there are 2 parties to this agreement, one of which is the expert advisory and another is an individual or body corporate which needs the services of an advisory for specific project or period.
* Preamble: Preamble is the text which comes prior to actual terms of the agreement. Preamble details the business need i.e. purpose for which Advisory agreement is required to be executed. Many a times when there is any ambiguity in the main body of the agreement, the intention of the parties can be interpreted with reference to the preamble of the agreement.
* Definitions: Definitions are required to be provided in the agreement to clarify the term or to include or exclude the scope of the term. Ex. Affiliates, Confidential information, Effective date, IPR, Milestone achievement etc.
* Purpose/ scope of work: One should have in mind a definite purpose for which the expert advisory services are to be availed. Unless one clarifies the definite purpose / ultimate business goal to an expert advisory it would be difficult to get the optimum result of such engagement. The Scope of work of Advisory has to be described explicitly in the main body of the agreement or alternatively it can be described under annexure to the Agreement which shall form an integral part of the agreement. Notably in the scope of work the phase-wise milestones and ultimate goal with estimated timelines are required to be stated.
* Representation and warranties: Almost invariably each agreement has scope for taking some special representations and warranties to protect interest of both the parties. Under this clause one can cover a lot of risk by making Advisory accountable for his advises. An advisor should provide the Services with all due care, skill and ability and use his best endeavours while offering his services.
* Time: Time is the essence of all Agreement. Considering gravity of each task certain definite time slot has to be provided so that important advises can be promptly be made available from an expert whose advises are of vital importance to take imperative business decisions. There can be bifurcation on receipt of advises on cost verses time ratio. Thus for prompt advises the advisory may charge at higher rate (sometimes double) as he has to devote his time for your project by keeping aside other running projects/ assignments. Alternatively it is suggested to state the fees to be charged by an advisory and to explain the rate or basis of the fees in detail and give examples wherever appropriate.
* Consideration (payment): Consideration can be in cash or in kind or both proportionately. Usually Startup companies (as defined in notification number GSR 180(E) dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry’ Government of India) which are not cash-rich companies may issue sweat equity shares in accordance with The Companies (Share Capital and Debentures) Third Amendment Rules, 2016 to advisory who will become employee as well as shareholder of such Startup company.
* Out of pocket expenses: While providing Advisory services your experts might need to incur certain expenses on your behalf in which case you may specify certain cap on monthly expenses which are subject to reimbursement on production of necessary proof of expense. You may also add a provision to make the reimbursement subject to prior written approval for each case so that you can strictly monitor your cash outflow.
* Intellectual Property rights: The rights attached to the work product/ an advice provided by an expert has to follow to the fullest extent permissible by law uninterruptedly to you. It is advisable to obtain irrevocable written and valid assignment of all existing and future Intellectual Property Rights from Advisor to ensure that the title attached to all advises pertaining to your business passes on to you with a legal title.
* Confidentiality – Usually this clause carves out bi-lateral obligation in which case both the parties are required to maintain the secret information confidential during the term of the agreement. This clause should be provided with the provision for survival benefit of at least 5-7 years post the date of last disclosure of confidential information from either party. Exclusions to confidentiality clause has to be provided properly to not to leave any room for any future ambiguity. Confidentiality plays vital role in the startup company as the advisory is made available with certain innovate idea which comes into the mind of the inventor and misuse of the same before its implementation might cause serious irreparable loss to such startup company. In such case monetary damages cannot compensate for the harm that may be caused by disclosure of confidential information hence in such case an injunctive remedy has to be invoked.
* Term and termination – The term (tenure) of Advisory Agreement is usually longer than normal Consultancy Agreement as it is executed for managing the business risks and achieving the business objectives. Such agreement can be terminated in case of material breach or non-performance.
* Obligation/ consequences on termination – Irrespective of the cause of termination of the agreement, post termination the advisory has to immediately deliver to its client all Confidential data/ property which is in his possession or under his control. Alternatively one may ask Advisory to destroy the confidential data whereas the cost of destruction has to be reimbursed to the Advisory.
* Non competing services – As per Competition Act, 2002 (as may be amended from time to time) one cannot impose anti-competitive terms under any of the agreements. But to safeguard the company interest without jeopardizing the interest of public at large (society), the startup company which has allotted equity shares to advisor may impose non- compete clause for refraining the advisory to provide services for certain definite reasonable period. This might be required to be incorporated under the agreement to ensure that Advisory services provided by Advisory do not cause a breach of any of his obligations under the Advisory agreement.
* Independence – It has to be explicitly specified that the parties are independent so that any act of an advisory during the course of the agreement cannot bind your business. Similarly if an advisory has its own set up with employees, workers, agents, sub-contractors etc. then this clause will protect you to demarcate so that the advisory shall solely be held liable for payment of all statutory levies towards its own stakeholders. Thus the Company can hold itself out of unwanted claims of Advisory’s statutory obligations.
* Governing Law and Jurisdiction – This clause is self explanatory which stipulates that it is necessary to include provision for Governing law under which purview the disputes would be settled and the court which will have jurisdiction to entertain the disputed matter. It is nevertheless advisable to incorporate law of your country as the Governing law and Court in your territorial limits to solicit the matter.
* Arbitration – In case of any dispute or disagreement it is advisable to insist for Arbitration proceedings and limit the proceeding expenses thereof. This can be worked out by appointment of arbitrator having industry expertise and putting cap on the total cost of arbitration proceedings. Also the arbitration proceedings can be faster compared to court proceedings which usually take longer time.
* Insurance and Indemnity – The Advisory has to indemnify its client against any loss, liability, costs (including reasonable legal costs), damages or expenses arising from any breach of the terms of the agreement including any negligent or reckless act, omission or default in the provision of the Services. Therefore during the term of the Agreement the Advisory is required to maintain the comprehensive Insurance Policies. Sometimes an Advisory insists to put cap to the same by insisting for limitation of liability in proportion to the professional fees (receipts) .
* Notices – Communication of notice has to be in writing. It has to be under the signature of the authorised signatory issuing the notice. In case of corporate entity the company stamp had to be affixed on the same. The mode of receipt of notice including deemed receipts has to be explicitly stated under the agreement which can be courier, registered AD, speed post, email etc.
* Entire Agreement – It is important to state that the agreement is the only complete understanding between the parties to make it supersede all prior oral or written understanding/agreements.
* Authorised signatory – The agreement has to be executed by the parties to agreement having authority to execute the agreement. Thus in case of the company the one who executes the agreement on behalf of the company holds authority letter or power of attorney so that his act of executing the agreement binds the company as a whole.
* Other General clauses – Lastly provision for amendment, waiver, no third party rights (Privity of Contract), surviving clauses etc. has to be detailed properly under the Agreement.
After circular dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry’ Government of India the importance of Advisory Services emerged a lot for establishment of Startup Companies, which is going to contribute to the economic growth of the country at large.
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Disclaimer: The views and opinions expressed in this article are those of the authors. The legal information is not advice and should not be treated as such.