- John Deane
- Updated: Mon, 21st Nov 2016
A framework agreement, sub-contract or consulting contract is an established business tool. Done right, they enhance flexibility and increase profitability. However, like any other commercial agreement, one size doesn’t fit all.
Our framework agreement service includes but is not limited to:
Operation of the framework agreement and sub-contract
We help at all levels of activity involved in a framework agreement from:
- The business putting together framework agreement; to
- The main contractor awarded a tender or bid made pursuant to the framework agreement; to
- The sub-contractors awarded a contract under the framework by the main contractor; to
- The consultants the sub-contractor uses to deliver on the sub-contract; to
- Terms and conditions for the range of staff deployed.
There can be many contracts in place in a framework contract situation and to help you understand the headline points we have briefly explained how the contracts typically fit together:
The framework agreement
The framework agreement is often styled as an umbrella agreement under which tenders are issued for the supply of a range of goods and services to the end user. A typical framework agreement permits the issue of a variety of tenders for a variety of supplies to a variety of potential bidders. Consequently, the framework agreement is usually a set of generic boiler plate provisions under which the detail of each tender can be slotted in. The parties to a framework agreement will be the end user and the main contractor.
The sub-contractor’s agreement
The sub-contractors agreement is the agreement entered into between the main contractor under the framework agreement and the sub-contractor. The end user is not a party to the sub-contract. However, the main contractor needs to ensure that all of its liabilities are passed down to the sub-contractor because legally it is the main contractor who is responsible for delivery under the framework agreement and any tender documents.
The consultancy agreement
Often sub-contractors delegate certain aspects of the work to specialist consultants brought in for a specific job on a specific sub-contract. The parties to the consultancy agreement will be the sub-contractor and the consultant.
Every framework agreement, sub-contract and consultancy contract is different. The terms depend on the type of business, the nature of the work, and the consultant. Nevertheless, the function, responsibility and payment terms are always a focus in every commercial agreement.
Typical issues arising under a framework agreement
We will consider:
- Taxation of income paid under the contract.
- Preservation of intellectual property rights and confidential information.
- Payment terms and default provisions.
- Termination provisions.
- Rights to dispute resolution, mediation and timescales.
Payments under the sub-contract
As a rule of thumb, an individual trading as a self-employed consultant will pay less tax than an employee earning a similar gross amount. HMRC have a number of anti-avoidance measures that can be deployed. Where the agreement facilitates payment to a lower tax jurisdiction, then transfer pricing can be in play.
- HMRC has issued many clients with tax assessments, claiming payments to consultants should have been subject to tax and national insurance under PAYE. Besides the tax assessment, HMRC also claims interest and penalties.
- HMRC often targets the end user, rather than the consultant who may be hard to trace or enforce against. HMRC can assess liabilities years after the consultant ceased to provide services.
- Simply contracting via a limited company will not deter HMRC from a challenge if they can find a way to assess additional tax.
We usually draft tax indemnities to help guard against the risks.
Preservation of intellectual property rights and confidential information
Problems arise where consultants create, or modify existing, intellectual property for the end user. Intellectual property spans e.g. software, design rights, trade marks, patents, enhancements, business plans and processes.
End users should protect their confidential information. Otherwise, end users discover the consultant subsequently trades on the IP, the IP that the end-user paid the consultant to develop, and assumed belonged to the end-user.
- Ideally, ensure there is an assignment of intellectual property provision built into the agreement. Restrictions should be placed on the use of confidential information where this could be used to detract from the end user’s business.
- We have acted for businesses who have paid former consultants substantial sums to secure their intellectual property because the assignment clause was inadequate or missing.
- Often these problems only emerge when the end-users business is being sold, during the due-diligence process.
Only when the consultancy does not go to plan does anyone looks at these provisions. One key focus area is how to prevent delays in delivery of work. Timescales do require thought in advance of problems arising so that contract delivery can continue.
- If there has been a breach of the agreement clauses such as non-compete may be unenforceable.
- Every attempt should be made to resolve disputes quickly and efficiently without recourse to litigation. Litigation is usually the worse scenario. A tailored dispute resolution mechanism with reference to independent experts where necessary can be very useful.
- Cash flow is as important to consultants as it is to the end user. You need to think about when the consultancy fees will be payable and back this up against a corresponding receipt of funds if cash flow is to be evenly managed.
- There may be situations where you need to terminate the contract with the consultant. Alternatively, you may wish to retain the power to assign the agreement to third parties. You may find yourself in difficulty if the points have not been addressed.
- Disputes do arise over powers to substitute other contractors and this is an area that in some businesses should be clearly set out in the agreement.
- Where we are acting for consultants who have been promised resources to help them perform the contract within the price agreed, we examine the contractual obligations on the end user to deliver as promised.
Besides drafting and reviewing contractual terms, we manage disputes. We’ll tell you how to resolve the dispute and achieve the best outcome, given the circumstances. We:
- Review the framework, sub-contract and or consultancy agreements. What’s more we provide an honest view as to where the liability falls.
- Inspect your evidence, then advise whether you’ll prove your claim.
- Attend mediation meetings alongside you. We’ll present your case, and elevate your position.
- Bring or defend claims, if mediation or negotiation doesn’t resolve the dispute. Our team comprises specialist commercial litigation solicitors.
A Case study: Sub-contractor’s framework agreement
Our client’s business was to secure government framework agreements, then sub-contract the work to specialist providers under consultancy contracts. Our client took a mark-up on the goods and services supplied by the sub-contractors.
Our instructions were to draft a commercial consultancy contracts which passes all liability for the goods and services provided by the sub-contractor to the sub-contractor.
The stakes were high, the potential liability considerable. Sub-contracts could be worth £ millions, and last for up to five years.
The issues comprised:
In practice the customer does not always follow the strict procurement process set out in the framework agreement. The sub-contractor does not wish to accept a potentially open-ended liability in a process where the customer departed from its own procedures. We drafted a concept of co-operation and good faith which did not previously exist under the framework agreement.
Work supplied outside the subcontract
The sub-contractor may win work which falls outside the perimeters of the orders to which the sub-contract refers. We ensured our client did not miss out on revenues from this additional business. Afterall, the business arose because our client had introduced the sub-contractor to the client. We devised terms and conditions so that if the subcontractor won additional work, the subcontractor would pay a fee to our client.
The customer usually supplies property such as hardware, software, confidential information and facilities to the sub-contractor for use:
- under the sub-contract;
- to enable a bid or tender to be made.
Technically, because our client is the party to the main framework agreement, our client is exposed. Hence our sub-contractors agreement clearly passed all responsibility for the return of property to the customer upon the customer’s insistence.
Warranties of the sub-contractor
If the sub-contractor is selected following the tendering or bidding process, our client wished to ensure the sub-contractor did not act in a manner which jeopardised our client’s reputation. Our sub-contract agreement detailed the warranties expected from the sub-contractor. These ensured our client met their contractual obligations under the framework agreement. We also:
- Prevented the sub-contractor accepting the order and then pulling out, without extremely good reasons.
- Required the sub-contractor to obtain our client’s approval if they sub-contracted the work.
Our client had the primary reporting obligations to the customer under the framework agreement. In practice our client has limited ability to provide the information the customer required. This is because the sub-contractors generated the information. Reporting is of vital importance in government frameworks, given the functions of some highly sensitive departments. We drafted clauses into the sub-contractor consultancy contract, so the liabilities, for full and accurate reporting in the framework agreement, flowed down to the sub-contractors.
We tied up the timing of invoices. These include invoices our client issues to the customer, and invoices the sub-contractor issues to our client. Our client does not want to be liable to pay a sub-contractor’s invoice before it has been paid.
Life often becomes fraught without clear rules. The customer may be late in making payment or query the goods and/or services provided by the sub-contractor. We designed a contractual system that fitted the practicalities, and built this contractual system into the sub-contract.
We created a system for escalating and resolving disputes outside the court system. We adapted the framework provisions, and added a layer that dealt with how the sub-contractor and our client could resolve disputes between themselves. Our client did not wish to become involved in processes over which it had little involvement. In recognition of the need for business efficiency we developed a procedure where the sub-contractor could deal directly with the customer providing our client agreed.
Our modus operandi
We worked with sub-contractors’ commercial managers and in-house legal teams to agree the terms. We then finalised sub-contracts with selected sub-contractors. Each subcontractor’s commercial managers and in-house legal teams raised different concerns over different clauses.
Our experience managing these negotiations enabled us to find solutions that worked for both our client and sub-contractor.
Framework agreement track record
Our expertise is in complex, higher value, potentially risky framework agreements, sub-contract and consulting contracts. Recent instructions include:
- Negotiated a sub-contractor’s terms and conditions. We limited their obligations under a framework agreement.
- Reviewed a consulting agreement for software development and the associated intellectual property. Our client was a media agency.
- Negotiated the termination of an agreement under which an annuity-type income-stream was payable for several years after termination.
- Consultancy contract/framework agreement which operated in conjunction with a newly created joint venture for the supply of professional support services.
- Health check of existing consultancy agreements to ensure the tax indemnities were as enforceable as possible. The client feared that HM Revenue and Customs might determine an employment relationship had been created. This included a review of any employment law rights that may have been inadvertently created.