How to limit legal risk in your consultancy business

By On Your Terms co-founder Claire Bodle
July 2024

Protect your business from loss of revenue

• Risk: Scope creep and revenue loss. If you don’t agree T&Cs with your clients, or your T&Cs don’t cover all the key areas, you could end up in a dispute over the scope of work you’re delivering, and when your client is required to pay.
• Mitigation: Your contract for consulting services needs to include a clear description of the work you will do, with as much detail as possible - for example, number of site visits or meetings or what aspects of the product or service you’ll advise on (and what you won’t). Your payment terms also need to clearly outline when the client must pay any due amount (i.e., applicable dates or milestones you must achieve to qualify for payment).

Keep intellectual property in the right hands

• Risk: Inadvertently transferring IP rights to your clients. Consultants often create valuable copyright in their deliverables, whether it's an original marketing strategy, software solution, or unique business model. Certain default rules will apply to IP ownership if you don’t have a written agreement (such as the commissioning rule, which states that with certain types of work, copyright will automatically transfer to a customer who has agreed to pay for that work). If you don’t stipulate that these rules don’t apply, you could lose important value for your consultancy business.
• Mitigation: Who owns what rights in materials created during an engagement needs to be clearly set out in a written agreement between you and your client. This includes if you intend to keep certain use rights, such as a right to use the work in your portfolio. If you are in the early stages of a project, you may need to use a Confidentiality Agreement (aka NDA) or Term Sheet for Project (aka MOU or HoA) to be clear on how any sensitive information is to be treated. Once you start on the full project, you need to have a Consultancy Services Agreement which clearly sets out ownership and use rights in any existing or created intellectual property.

Protect your consultancy service against customer claims

• Risk: Financial loss resulting from a customer claim. If you make a mistake with your advice or a client misinterprets your work or relies on it in the wrong situation, they may look to recover their resulting loss from you. If you haven’t clarified your responsibilities, you may be exposed to a higher level of legal risk than necessary. 
• Mitigations:
  • Disclaimer Clauses: Include disclaimers in your contracts that limit your liability. This should include statements disclaiming your responsibility for your clients’ actions taken as a result of your advice, and might also include specifically calling out a part of their business you are NOT advising on.
  • Liability ‘caps’: You may also want to include a dollar value in your agreement representing the maximum amount you can be required to pay out if there is a claim against you, or certain types of loss that you will never be liable for.
  • Get the appropriate insurance in place. Professional indemnity insurance can protect against claims relating to professional misconduct. In terms of the value of insurance you require, talking to a mortgage broker is usually free, and they have the experience to recommend appropriate cover for your business.

Protect your business against fines or reputational damage

• Risks
  • Non-compliance with your privacy obligations. You’re likely to collect personal information from your clients (ie, any information that can be used to identify a person, including names, email addresses, payment details) during your consulting work. Collecting, using and storing this information gives rise to responsibilities under the New Zealand's Privacy Act 2020 in relation to how you collect, use, share, and store it. Failure to comply with these obligations can lead to fines and damage to your business’ reputation.
  • Acting as an employee rather than a consultant. There are certain situations in which a consultant or contractor can be legally viewed as an employee (rather than an independent contractor, depending on the nature of their relationship with the client. Various factors are considered in accessing the true nature of the relationship between the businesses (such as regularity of work, payment structure etc For further details see our blog Employee vs Contractor – what’s the difference?.

• Mitigations:
  • Stay Informed - Regularly update yourself on the relevant laws and regulations in your industry. There are many podcasts, blogs and videos explaining changes to laws and regulations. You can also follow On Your Terms or your legal advisor on social media to stay informed.
  • Get advice – from a lawyer or compliance expert to ensure your business practices are up to date.
  • Documentation – tell your clients up front how you will collect, use and store their personal information by creating a privacy policy and posting it on your website. Agree the necessary terms and conditions with your clients in writing, using a Consultancy Services Agreement or Independent Contractor Agreement to help clarify that you are independent of the business.
  • Practices – have adequate practices in place to ensure compliance. For example, obtain clear consent from your clients to the terms set out in your privacy policy and have contact details available for your clients to use if they want to contact you to change their personal information you hold. You’ll also need internal procedures to make sure their request is followed through.

Key takeaways

As a consultant in New Zealand, you must be proactive to understand any relevant legal risks for your business, put the right documents and practices in place, and understand when you should seek advice.  Keeping informed and establish the proper protections will help ensure your consultancy business remains both legally compliant and successful.