Key Points to Check When Signing a Consultation Contract Regarding Management and Other Matters

In recent years, due to the rapid changes in the business environment, there has been an increasing need for companies to seek advice from external experts to enhance their management. Recently, there has been a growing trend of companies bringing in professionals who were active on the front lines of business as advisors to contribute to their management. In this article, we will explain about the advisory contract that a company enters into with an expert for management-related advice.

What is a Consulting Contract?

A consulting contract is an agreement aimed at obtaining advice from a professional standpoint on the management and technical aspects of a company. In terms of its legal nature, it is similar to a so-called service contract, where the company entrusts the professional with tasks such as providing advice, and the professional accepts this role. However, while in a general service contract the party accepting the contract is not necessarily a professional, a consulting contract is specifically intended to seek advice from someone with professional expertise.

Traditionally, the counterparts to consulting contracts have often been certified public accountants, tax accountants, and management consultants, with the aim of obtaining management, accounting, and financial consulting. In addition to this, as mentioned at the beginning, there has been an increase in cases where consulting contracts are concluded with individuals who, although they do not hold the title of management consultant, have a long history of working at the forefront of their industry, and advice is sought on the sales side.

The Legal Nature of Advisory Contracts

An advisory contract is legally a type of outsourcing contract. Outsourcing contracts are primarily divided into two types: contract-based, which requires the delivery of certain results as stipulated in the contract for payment to occur, and quasi-mandate, which does not guarantee the realization of results but obliges the contractor to do their best towards achieving them. In advisory contracts, the usual task is to provide advice towards achieving business performance indicators (KPIs). The execution of specific measures to achieve these performance indicators is the responsibility of the management team who received the advice from the advisor, so the advisor is not in a position to guarantee the realization of the performance indicators. Therefore, the legal nature of an advisory contract can be said to be quasi-mandate. In a quasi-mandate advisory contract, the content of the work is defined as follows. Here, Party A refers to the client and Party B refers to the advisor.

Article X (Scope of Work)
Party A entrusts Party B with the task of providing advice in response to consultations regarding Party A’s XX, and Party B accepts this.

Also, regarding the occurrence of remuneration, it is usually in the form of receiving a fixed monthly payment under the name of advisory fees, etc., as the realization of results is not a condition like in contract-based contracts.

Article X (Remuneration)
Party A shall pay Party B a monthly advisory fee of XX thousand yen (excluding consumption tax) by the end of each month.

For more details on outsourcing contracts in general, please refer to the following article.

https://monolith.law/corporate/regulation-of-outsourcing-contract[ja]

Key Points in Advisory Contracts

In the following, we will introduce specific clause proposals for important provisions in advisory contracts, and explain the points to check in each clause. In the clause proposals, “Party A” refers to the client and “Party B” refers to the advisor.

Clause on the Scope of Work

Article X (Scope of Work)
1. Party A entrusts Party B with the tasks agreed upon between Party A and Party B (hereinafter referred to as “the Work”) as an advisor to Party A’s business, and Party B accepts this entrustment.
2. Party B shall consult with Party A once a month in the manner designated by Party A for the performance of the Work.

The most important clause in an advisory contract is the one concerning the scope of work. It is common to define the content of the work abstractly as in the first paragraph of the clause proposal, and to determine the content of the work in individual contracts each time specific work arises. However, if you are seeking advice for a specific project such as applying for a government grant, we recommend defining the scope of work specifically in the main advisory contract rather than in individual contracts.

Individual contracts typically involve the exchange of orders and requests each time a specific task arises, based on a basic contract. However, in advisory contracts, it is common for the contract to be established by the client consulting the advisor by email or other means, and the advisor responding with acceptance or refusal. The second paragraph of the clause proposal is intended for cases where the advisor needs to provide regular advice on the tasks they have been asked to perform.

For example, in management consulting, it is necessary to measure the effects at regular intervals and consider the next measures based on that. Therefore, it is necessary to stipulate in advance in the advisory contract that regular consultations will be held. On the other hand, in advisory contracts of a nature where consultations are held as needed each time work arises, a clause on regular consultations like the second paragraph of the clause proposal is not necessary. Therefore, it is necessary to judge the need for the second paragraph of the clause proposal according to the purpose of the advisory contract.

Provisions Regarding Remuneration

Article X (Remuneration)
1. Party A shall pay Party B a monthly consulting fee of ● ten thousand yen (excluding consumption tax) by the end of each month, by transferring the amount to a bank account designated by Party B. The transfer fee shall be borne by Party A.
2. The consulting fee in the preceding paragraph is the consideration for work up to ● hours per month.
3. If it is expected that the time required to perform the work will exceed the hours stated in the preceding paragraph, Party B must notify Party A in advance. If the working hours for the month exceed the hours stated in the preceding paragraph, the remuneration for the excess part will be ● ten thousand yen per hour, provided that Party B has notified Party A in advance.
4. The costs normally required to perform the work shall be borne by Party B. If Party B incurs special expenses, Party B may request payment from Party A, but only if Party A has given prior consent.

For consulting services, it is common to have a contract that pays a fixed monthly fee, as in the first paragraph of the proposed clause. This is because a consulting contract assumes that advice will be given on an ongoing basis. However, if the workload for a particular month becomes excessive, the balance between the work content and the remuneration may not be maintained within the monthly remuneration. Therefore, to prepare for such a sudden increase in workload, a clause may be included to charge an excess fee if the assumed working hours for a month are exceeded, as in the second and third paragraphs of the proposed clause. It is important for the consultant to note that in order to charge an excess fee when the assumed working hours are exceeded, it is necessary to keep track of the time spent on work on a regular basis.

Therefore, if the consultant finds it difficult to anticipate a sudden increase in workload and considers time management to be a hassle, one option is to set a monthly fee that allows for some leeway in the assumed working hours, instead of having a clause for excess fees. Also, it is important to understand that charging for excess fees can easily lead to disputes with clients, as it can be difficult for clients to see the validity of time tracking. Therefore, if there is a possibility of charging an excess fee for a specific task, it may be necessary to consider consulting with the client in advance. The third paragraph of the proposed clause requires prior notification to the client in order to charge an excess fee.

On the other hand, if the client wants to avoid an increase in fees due to time charges, one option is to ask the consultant to estimate the time required for the requested work in advance and present a maximum budget amount. The fourth paragraph of the proposed clause is a provision regarding the burden of costs such as transportation and communication expenses necessary for the performance of the work. In a consulting contract, it is not common to require a large amount of expenses to perform the work, so it is not common to charge the client separately from the monthly fee. However, if special expenses are expected to be incurred in order to perform the requested work, such as introducing a special system, it may be necessary to charge the client. The fourth paragraph of the proposed clause stipulates that the client will bear the cost of special expenses, provided that the client has given prior consent. In practice, if such special expenses are incurred, the details of the expenses will be shared with the client in advance and it will be explicitly stipulated in the consulting contract that the client will bear the cost, or a separate agreement will be created.

Clause on Non-Competition Obligation

Article X (Non-Competition Obligation)
The Party B may, during the effective period of this contract, only with prior notice to the Party A, serve as a consultant to a third party of the same or competing type, and may also perform work similar to or competing with the work of this contract, either by themselves or through a third party.

Especially in the case of consultants related to management or sales, as a client, you would not want your consultant to give the same advice to competing companies. If this were allowed, it could lead to a loss of competitive advantage gained by hiring the consultant and a fear of leakage of trade secrets. While it would be better for the client to include a non-competition clause, the consultant may often refuse unless a commensurate compensation is offered, as this would significantly restrict their sources of income.
Therefore, the extent of the restrictions imposed as a non-competition obligation should be determined by both parties considering economic rationality.

A compromise between the two parties could be, as in the clause proposal, to require the consultant to notify the client in advance if they receive a request from a competing company. Since it’s a notification, it’s not necessary to get consent from the client, so the consultant can accept requests from competing companies regardless of the client’s intentions. On the other hand, as a client, you can be aware of the fact that your consultant is also advising competing companies.

Regarding the leakage of trade secrets, although not covered in this article, it is generally prohibited in the confidentiality obligation clause stipulated in the contract. Therefore, it is crucial for the consultant to fully explain to the client and gain their understanding that as long as the confidentiality obligation is imposed, the client’s trade secrets will not be leaked just because the consultant provides advisory services to other companies.

Provisions on Intellectual Property Rights

Article X (Intellectual Property Rights)
All intellectual property rights arising in the course of performing the services under this agreement (including the rights stipulated in Articles 27 and 28 of the Japanese Copyright Law in the case of copyrights) shall belong to Party A upon their creation, except for those that Party B owned prior to the conclusion of this agreement and those that Party B separately designates. Furthermore, Party B shall not exercise any moral rights related to such intellectual property against Party A or any third party designated by Party A.

In advisory services, advice is not only given verbally, but documents such as graphs of business conditions and market analyses may also be created and reported. As these documents are created for the client as part of the advisory services, it is common to attribute the intellectual property rights related to these documents to the client. The proposed clause attributes all intellectual property rights to the client. However, it is necessary for the advisor to retain the intellectual property rights for generic data and other original content created by the advisor. In such cases, when providing the data to the client, methods such as including a statement in the document that “the intellectual property rights belong to the advisor” can be used. The proposed clause allows for the advisor to retain the intellectual property rights if there is such individual designation, excluding it from the cases where the intellectual property rights are attributed to the client.

For more detailed explanations on copyrights and moral rights of authors, please refer to the following article.

https://monolith.law/reputation/unauthorized-photo-reproduction-on-the-internet-author-moral-rights[ja]

Clause Regarding Contract Term

Article ● (Contract Term)
This contract shall remain in effect for ● months from the date of contract conclusion. However, unless there is a special request by the ●th day of the month of expiration, this contract will be renewed for one year under the same conditions, and the same shall apply thereafter.

In advisory contracts for the purpose of receiving continuous advice on management and operations, it is common to set the contract term for a long period of time, such as six months to one year, and to include an automatic renewal clause as in the proposed clause. However, in the case of advisory contracts aimed at receiving advice only for a certain project, it is possible to limit the contract term to the period necessary for the project execution and not to include an automatic renewal clause.

Summary

Even though it’s referred to simply as an advisory contract, the purpose of the contract and the advice required can vary greatly. Particularly in the case of business and management advisors, the expected content can be broad, so it’s important to carefully align expectations with the client when undertaking advisory services. As advisory services are long-term contracts, we recommend consulting with professionals such as lawyers to thoroughly check the terms of the advisory contract to avoid any trouble.

Even though it’s referred to simply as an advisory contract, the purpose of the contract and the advice required can vary greatly. Particularly in the case of business and management advisors, the expected content can be broad, so it’s important to carefully align expectations with the client when undertaking advisory services. As advisory services are long-term contracts, we recommend consulting with professionals such as lawyers to thoroughly check the terms of the advisory contract to avoid any trouble.

Guidance on Contract Creation and Review by Our Firm

At Monolith Law Office, as a law firm with strengths in IT, Internet, and business, we offer services such as the creation and review of various contracts, not limited to advisory contracts, to our client companies and customers.

If you are interested, please see the details below.