How to protect yourself when hiring a consultant
PURCHASINGB2B MAGAZINE: MARCH/APRIL 2011
In Canadian business, more and more companies and governments are outsourcing procurement functions to agents. As with all situations where a function formerly done by in-house employees is contracted to outside workers, there are both risks and rewards.
The rewards usually are found in cost savings or in the greater experience and expertise of the outside consultant.
There are several aspects essential to controlling the actions of an outside service provider. These include which consultant an organization chooses, having a robust contract with that consultant, as well as having a knowledgeable and careful contract administrator to manage the work and the contract.
There are several risks that go with hiring any outside consultant to do work for an organization. Besides the obvious risks of consultant breach of contract, there are a variety of potential issues involving how a consultant’s negligence could cause harm to the hirer or the public. Such risks can largely be controlled through effective contracts.
These risks pale in comparison, however, to the risks that arise when the hirer of a consultant also makes that consultant their agent, or authorized representative.
Making an outside agent into an authorized representative to act on your company’s behalf is very risky. The agent can bind their principal in a variety of ways; not just to contracts, but also to courses of action, mistakes and negligence. The principal will then be legally liable for what the agent has done.
As well, it’s unlikely a principal will recover any money lost as a result of an agent’s actions. First, an agent who acted wrongfully must have the financial resources to indemnify (compensate for damages) the principal. Second, that agent must be willing to compensate the principal—without a costly court battle.
Agency is about trust. The principal gives the agent a great deal of power which the agent can then use or abuse. The law recognizes this—and the attendant risks of that relationship—by making the agent a so-called fiduciary of the principal, meaning the agent has been entrusted with property or power.
To hold an agent to the utmost duty of care required from a fiduciary, a principal must create a detailed agency contract. This contract includes a comprehensive scope of work, as well as clauses requiring the agent to act within their authority and to take reasonable care.
The principal must also maintain careful control through powerful contract clauses such as indemnity, suspension of work and withholding of payment clauses. Only through such a robust agency contract can the principal control both what its agent can do and what that agent can be liable for.
It is important to realize, however, that there are two types of agents in law: independent contractor-agents and employee-agents. These are two very different roles.
When a principal appoints an employee as their agent, the principal has a great deal of unilateral power due to the nature of employment law. Employer-principals can give their employee-agents unilateral, daily direction, or they can remove parts of an employee-agent’s authority summarily. They can even remove the employee-agent’s authority altogether, without much legal consequence, because the employment contract is still in existence.