© 2001 - 1998, Deeth Williams Wall LLP. All Rights Reserved. By: Amy-Lynne Williams

Table of Contents

Many times, companies acquiring or operating computer systems require the services of specialized consultants or employees to ensure that the systems are kept operational. Surprisingly, companies who will spend significant amounts on legal fees to negotiate a software license or a hardware purchase agreement, will enter into these relationships with key employees and with consultants providing critical system planning advice, without any form of written agreement.

Sometimes the companies are not even sure whether an individual is an employee or a third party consultant since they have been on the premises so long and are so integrated with the company and its culture. This can lead to difficulties if the company tries to sue the consultant as an arm's length contracting party, only to find that that consultant is really deemed to be an employee.

Although the contracts to be entered into with contractors and employees do not have to be complicated, there are certain terms which should be covered to make it clear what is expected by each party and to avoid future disputes.

1. Consideration and Payment

A consultant may be paid on a per diem basis or on the basis of deliverables and milestones. If the project is long term and the consultant's deliverables are spread out over the period, payments should be tied to the delivery and acceptance of the materials required and the consultant should be required to deliver regular "dumps" of the information so that, at all times, the company has its own copy of the deliverables.

Holdbacks are fairly common and are normally 10 to 20 per cent of the amount due for a deliverable. The holdbacks may be paid to the consultant after a specified time has passed after acceptance or after the delivery of the final deliverable.

Sample Wording – Regular Delivery

"The Contractor will promptly provide Company with the source code for the custom software on a regular basis, no less frequently than once each week. The source code materials furnished shall be reasonably complete so as to allow Company, using a reasonably competent programmer possessing ordinary skills and experience, to further develop, maintain and operate the applicable software without further recourse to the Contractor, and will accurately reflect the most current version of the software provided."

2. Duties

The work to be performed by the consultant is usually set out in work schedules attached to the agreement. The advantage to this is that as the tasks change, the parties do not need to renegotiate the agreement, but can instead simply add a new work schedule. The responsibilities of the client and the consultant should be clearly set out to avoid future misunderstandings. The consultant will be particularly interested in setting out how approvals of deliverables will be obtained from the client and the client's responsibility for providing information and access to its employees to the consultant so that the project can continue smoothly.

Sample Wording – Work Schedules

"The Services and Deliverables to be provided by the Contractor will be specified in Work Schedules to be attached and made a part of this Agreement from time to time. In the event of a conflict between the terms and conditions of this Agreement and the terms and conditions of a Work Schedule, the terms and conditions of the Work Schedule shall prevail. The Contractor will perform all services and prepare all Deliverables specified in any Work Schedule and shall at all times adhere to the schedule of events and implementation schedule set forth therein. No variation, modification or amendment to a Work Schedule shall be made by the Contractor without the prior written consent of Company."

For significant projects, the parties may agree to appoint project co-ordinators to manage the project and the contractor may be required to appoint and maintain certain employees on the project. In many cases, the success, or failure, of a project is directly related to the staff assigned to it and customers are anxious that productive contractor employees not be moved from their project just as things are going well. It is important for the parties to agree on a regular reporting structure to ensure that communication is maintained. Many projects fail simply because the contractor did not keep the customer informed of its progress and the problems that are being encountered.

Sample Wording – Project Co-ordinators

"Each party shall designate a project co-ordinator to deal with the day to day matters arising under this Agreement. These individuals will, on behalf of their respective employers, co-ordinate the provision of the products and services contemplated herein, including installation, acceptance, operation, maintenance and support of the Deliverables. Either party may replace its project co-ordinator, by notice to the other party, or may request the replacement of the other party's project co-ordinator, in the event that such replacement is reasonably considered necessary for the successful performance of this Agreement. Each party will use its best efforts to maintain continuity of project management. If Company reasonably determines that any representative of the Contractor is unqualified, incompetent or otherwise unfit to perform that person's responsibilities or is interfering with company's performance of its obligations, that person will be removed forthwith upon receipt of written notice setting out the reasons for removal and a temporary replacement will be provided as soon as possible in the circumstances. If the Contractor determines in good faith that the situation can be resolved without replacing the person, the parties will discuss the suggested alternative and attempt to arrive at a mutually agreeable resolution. If such a resolution cannot be agreed on, within 5 Business Days following the date of the notice, the Contractor will permanently replace the person complained of. If the Contractor reasonably determines that any representative of Company is unqualified, incompetent or otherwise unfit to perform that person's responsibilities or is interfering with the Contractor's performance of its obligations, Company will use reasonable efforts to reassign the person complained of and provide a temporary or permanent replacement as soon as possible following receipt of written notice from the Contractor setting out the reasons for such replacement."

Sample Wording – Status Reporting

"The Contractor will keep company's project co-ordinator fully informed at all times as to the status of the Deliverables in each Work Schedule. In addition, on a bi-weekly basis, the Contractor will deliver to company's project co-ordinator, a written status report describing the activities completed and all outstanding items in the implementation of the relevant Deliverables, the progress made on previous outstanding items and any problems and the solutions proposed. If the Contractor becomes aware of the occurrence of any problem or condition which may adversely affect the delivery, the cost, capability or performance of the Deliverables, then the Contractor shall promptly, and in any event no more than 5 Business Days after becoming aware of same, notify Company of such occurrence and of the nature of the relevant problem or condition in sufficient detail to permit Company to understand the nature and scope thereof. The Contractor project co-ordinator will diligently take all necessary steps to correct the problem or condition and provide written progress reports to Company as reasonably requested."

3. Confidentiality

The agreement should specify what information is to be kept confidential. Drafters should avoid the temptation to have everything possible included in the definition of confidential information, since it dilutes the effect and the enforceability of the clause.

The nondisclosure provisions should cover the obligation of the contractor or employee to keep the specified information confidential and their agreement not to use the information other than in the performance of the services required. If the consultant has information that the company must maintain in confidence, this should also be set out. The agreement should provide that the consultant is not to disclose any third party confidential information to the company.

It is important for the company to make sure that all involved parties are aware what the company considers to be its valuable trade secrets so that future misunderstandings can be avoided. It also imposes a useful discipline on the company to take inventory of its proprietary information.

It is usual to exclude from the obligations of confidence, information which:

  1. is already in the receiving party's possession without an obligation of confidence at the time of receiving the same from the disclosing party;
  2. may be published or become available in the public domain otherwise than as a consequence of a breach by the receiving party of its obligations hereunder;
  3. is lawfully received by the receiving party from any third party without restriction on disclosure or use;
  4. is independently developed without any breach of this Agreement by the receiving party's personnel who have not had access to any of the Confidential Information;
  5. is required by the receiving party by law to be disclosed. In this event the receiving party will provide the disclosing party with prompt notice so that the disclosing party may seek a protective order or other appropriate remedy. In the event that the Confidential Information is required to be disclosed by law, the receiving party will furnish only that portion of the Confidential Information which is legally required; or
  6. is approved in writing by the disclosing party for release or other use by the receiving party according to terms stipulated in such approval.

The agreement should not provide however, that the information in the above exclusions is not longer "confidential", only that the obligations of confidence do not apply in those circumstances.

The agreement should provide for the period of time during which the obligations of confidence will continue. Normally in an arm's length consulting arrangement, the consultant is required to agree that the information will be kept confidential indefinitely. Agreements with employees normally require the obligations of confidence to continue during the term of the employee's employment and for a specified term of years after that. There has been some argument that having an indefinite term for employee obligations is more than is needed to protect the company's interests and so would be unenforceable. This probably depends on the facts of a particular case – in some instances, (e.g., the COKE formula); it would not be unreasonable to require an ex-employee to maintain certain information in confidence for an indefinite period.

Consultant and employees are also normally required to comply with security procedures when on clients' premises, to protect confidential information.

Sample Wording - Confidentiality Obligation

"The Contractor agrees that it:
  1. will not make use of any Confidential Information other than as required for the performance of services under this Agreement and will not divulge or disclose such Confidential Information to any other person, corporation or entity, except to such employees of Company or the Contractor who may require such disclosure in order to fulfil the obligations of the Contractor under this Agreement; each employee who has access to Confidential Information shall be required to sign company's standard security and non-disclosure agreement and to comply with company's procedures in effect from time to time;
  2. will take reasonable precautions against such Confidential Information being used or acquired by any unauthorized person or persons, consisting of the same degree of care as the Contractor uses in preserving the confidentiality of its own confidential information of a similar type. Excluded from this restriction is any Confidential Information which can be demonstrated to have been in the public domain prior to the date of its disclosure, or in the Contractor's possession prior to its receipt from Company;
  3. will not copy Confidential Information without company's written permission or as required by its duties with Company;
  4. will not remove Confidential Information from company's premises without express written permission. If Company requests, the Contractor will immediately return all Confidential Information which is in its possession or control;
  5. will advise Company promptly of any information known to it prior to the performance of services for Company which could be included as Confidential Information but which the Contractor considers to be excluded from the provisions of this Agreement; and
  6. will at all times protect the security and integrity of all data on Company's computer systems be protected and comply with all security measures of which Company notifies the Contractor and the Contractor shall further ensure that its employees do not compromise the security or integrity of such data.
The Contractor further agrees that it and its employees shall, at the request of Company, execute such confidentiality and non-disclosure agreements as may be required by Company's other providers of hardware, software or related services, in connection with the services to be provided by the Contractor hereunder."

4. Noncompetition

Many employee agreements and some consulting agreements attempt to restrict the activities that can be undertaken by the employee or consultant during the term of the agreement and for a period thereafter.

Noncompetition clauses raise issues with respect to their enforceability, in that they must be reasonable in scope, geography and time in order to be effective. As restraints on trade, all noncompetition clauses are prima facie unenforceable unless the parties seeking to enforce the clause can show that the restriction is reasonable between the parties and not contrary to the interests of the public.

When employees are involved, the company should first determine whether a specific agreement is required or whether the common law and statutory obligations governing the conduct of the employee are sufficient to provide the company with the protection it needs. As a general rule, the more junior the employee and the more comprehensive the noncompetition clause, the more difficult it will be for the company to enforce the obligations.

(a) Statutory Obligations

Under section 122(1)(a) of the Canada Business Corporations Act1 and section 134(1) of the Business Corporations Act (Ontario)2, every director an officer of a corporation in exercising his or her power and discharging his or her duties shall act honestly and in good faith with a view to the best interests of the corporation. No federal or provincial statute places a similar duty of good faith on an employee.

(b) Common Law - Generally

Normally, in the absence of an express restrictive covenant, an employee not occupying a top management position may compete with his/her former employer, but may not take confidential (proprietary) information3.

(c) Common Law – Senior Employees

The case of CHS Air Conditioning v. Environmental Air Systems4 provides a concise summary of the fiduciary principles that apply to an employee who does not occupy a senior management position. In this case, the plaintiff company brought an action for breach of contract and breach of fiduciary duty against three former employees who formed their own competitor business. The following principles were applied:

  1. A former employee has no right to use materials (i.e. trade secrets) obtained in the course of employment against the interests of the employer. This is an implied obligation that underlies all employee and agency relationships. The court cited Canada Bonded Attorney and Legal Directory Ltd. v. Leonard-Parmiter Ltd.5 as an authority for this principle.
  2. A former employee, who is not a senior employee, may use the knowledge and skills acquired to compete against the employer and may canvass the customers of the employer without the use of the employer's customer lists. The resources, lists and trade secrets can not be taken or used by the employee.
  3. It is the nature of the relationship, not the job title that gives rise to the fiduciary duty6.

In RW Hamilton, supra, the court followed the Supreme Court case of Canadian Aero Services v. O'Malley7, for the principle that an officer or manager will not be saddled with a fiduciary duty unless the position he/she occupies is one which has the power and ability to direct and guide the affairs of the business.

(d) Limitations (i.e. time, geography, scope)

The seminal limitation case is JG Collins Ins. Agencies Ltd. v. Elsley8. In this case, the plaintiff purchased the general insurance business of the defendant and subsequently, employed the defendant. The employment contract provided that the defendant employee would not carry on a general insurance business within the county of Welland during his employment and for a period of five years after ceasing to be an employee. A sum of $1000 was to be paid for every breach. The defendant's wife was also required to sign this agreement. The court followed the House of Lords decision in Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co.9, which stated that a restrictive covenant is enforceable if it is reasonable as between the parties and is not contrary to public interest. In order to assess the reasonableness, the Supreme Court looked at the context of the clause in the agreement and the particular circumstances.

The nature of the business and the nature and character of the employment are the key considerations. Where there is substantial client contact, a mere non-solicitation clause may not be sufficient to protect the proprietary interests of the employer. The intimate and special relationship an employee may develop with customers may lead to an unreasonable influence to follow the employee to a new business. For this reason, a non-competition clause may be reasonable.

In Columbus Computer Business Systems v. MacNeill10, a sales representative for a data marketing company signed an employment contract in which he agreed not to compete directly or indirectly for 1 year within Toronto or a 25 mile radius. His, was held as unenforceable, as it prevented the employee from working at a company that carried on the competing business "in part".

In Tank-Lining Corp. v. Dunlop Industrial Ltd.11 the respondents and appellants were in the business of lining railway cars to prevent corrosion from chemical cargoes. The respondents wished to set up an installation plant in Canada, whereas the appellants were already established. In order to do so, the respondents agreed to work with the appellants in return for licensing their unpatented technology to the appellants. The agreement carried the peculiar provision that in the event of cancellation of the agreement, neither party would carry on the business anywhere in Canada for two years.

The court outlined a four-part test similar to that employed in JG Collins, supra. The test is comprised of the following:

  1. Is the covenant a restraint of trade (in the broad sense)?
  2. Is the restraint of trade contrary to public policy? While most restraints to trade are against public policy there are exceptions for certain mortgages or leases of real property.
  3. Can it be justified as reasonable in the interest of the parties?
  4. Can it be justified as reasonable in the interest of the public (in a more detailed assessment than 1)?

In Godin v. Gary Abraham Business Consultants12 a North America wide restriction on a computer programmer was held to be reasonable due to "portability" of the knowledge the programmer had about the employer's products. In Hekimiam Laboratories v. Domain Systems13, a worldwide restriction was held to be enforceable due to the worldwide competition of the plaintiff and the employee's new employer.

There is a lower standard for employees who do not occupy senior management positions. The nature of the relationship and not the titles used will be determinative, but it is the intimate knowledge and use of confidential information that will lead to a breach of fiduciary duties.

The same considerations of course apply with respect to any noncompetition obligations imposed on a contractor. The scope of the restraint must be reasonable and no more than is required to protect the interests of the party seeking to enforce it. The courts will look at the nature of the activity covered, the geographical extent of the restraint and the time the restriction is effective. The courts are more likely to enforce such a clause in the case of dealings between arm's length parties than in the case of employees, particularly if the employee is not in a senior or fiduciary position.

5. Compliance with Laws, Privacy and Security Issues

It is always prudent to include a provision in the agreement by which the contractor undertakes to comply with all laws and regulations. Additionally, depending on the nature of the work, the contractor may have access to personal information collected by the company or be required to work on high security projects. In these situations, the company may include, as part of the contractor agreement, the requirement to abide by the company privacy and security polices and submission to periodic background security checks.

(a) Laws & Regulations

One of the things that often times is forgotten in a contractors' agreement is a provision dealing with laws and regulations. Such provision is simply an undertaking by the contractor to comply with all laws and regulations.

Sample Wording – Security

"The Contractor shall observe and comply with all applicable laws, ordinances, codes and regulations of governmental agencies, including federal, state, provincial, municipal, and local governing bodies having jurisdiction over the Work and the Deliverables, or any part thereof."

(b) Privacy

Another area that is becoming increasingly important is privacy. For example, the Personal Information Protection and Electronic Documents Act ("PIPEDA") places positive obligations on private organizations with respect to the collection, use and disclosure of Personal Information in the course of commercial activity. Under PIPEDA, "Personal Information" is considered to include information about race, age, marital status, religion, employment history, credit history, assets, home address, home telephone number and even opinions about that individual.

It is important to have contractors agree to abide by the company's privacy policy as PIPEDA states that a company can be held accountable for the actions of their subcontractors. PIPEDA contains a recommendation that a company use contractual or other means to provide protection while the information is being processed by a third party 14.

Sample Wording – Privacy

"The Contractor shall comply with those policies of the Company dealing with privacy and specifically shall ensure that it is in compliance with the Personal Information Protection and Electronic Documents Act ("PIPEDA") when dealing with Personal Information (as defined by PIPEDA) that was obtained from the Company."

(c) Security

Depending on the nature of the work and the confidentiality of the information being accessed, the company may require contractors to submit to period background security checks. At a minimum, the Company should obtain an undertaking from the Contractor that it will comply with all the Company's policies including those dealing with security.

The frequency and depth of these security checks may vary and can be worked into the terms of the contractor agreement.

Sample Wording – Security

"The Contractor shall comply with those policies of the Company dealing with security and shall obtain the consent of all its employees to enable the Company to conduct personal background checks on the employees of the Contractor from time to time."

6. Change control procedures

It is common for a consulting agreement to provide for a mechanism through which changes and additions to the scope of work are managed and controlled. Otherwise, there is a very real risk that the project will spiral out of control as users discover their "wish list" of functions they would like included and the consultant, in an effort to please the customer, prepares new code and changes without documenting them. Inevitably, when the time line for the project slips, there is an unhappy customer who cannot understand why this is taking so long; mainly because the customer has either forgotten the scope of the changes requested, or has underestimated the time required to do them and the overall effect on the schedule.

A good change control procedure in which all changes have to be in writing and pre-approved can help to avoid this situation and will normally cover the following points:

  1. the company may request the contractor to estimate its charge for and assess the impact of additions, modifications, or changes to the deliverables or the scope of a work schedule.
  2. if the company requests any such changes, the contractor will, within ** business days of receipt of such request, notify the company in writing of the costs of the changes, the impact on the services, the deliverables and the work schedule and any further areas which, in the opinion of the contractor, are likely to be affected by the requested changes and, if requested by company, will provide structured walkthroughs of the changes, associated costs and project impact;
  3. the company will respond in writing within ** business days of receipt of the notice from the contractor advising the contractor whether or not to proceed;
  4. if the company authorizes the contractor in writing within such period to proceed with the work in accordance with the notice from the contractor, the relevant work schedule will be deemed amended to incorporate such changes.

7. Warranties

At common law, a duty is owed by professionals to exercise reasonable skill and care in providing advice to parties who rely on that advice. A consulting agreement will normally require the contractor to provide the following warranties:

  1. its services will be performed by experienced personnel and will be of professional quality;
  2. there are no agreements, covenants or encumbrances which in any way conflict or interfere with the contractor's right to enter into the agreement, to provide the deliverables to the company or interfere with the company's right to exercise the rights granted under the agreement and the contractor shall not enter into any such agreements, covenants or encumbrances without the prior written consent of the company;
  3. all deficiencies or errors in a deliverable will be corrected promptly, in accordance with the timetable agreed to by the parties;
  4. the contractor has the necessary financial resources to carry out its obligations as they may arise from time to time and shall promptly provide written notice to the company should its financial position materially and adversely change;
  5. the deliverables will be original works developed solely by the contractor or its employees and will not contain works created by any other person - OR - The contractor shall not develop any custom software by modifying pre-existing software, or incorporate any pre-existing software into the custom software, unless the contractor is authorized by the owner of such pre-existing software to do so and unless appropriate licenses have been granted to the company for the use and copying of the pre-existing software with the custom software. The contractor hereby grants to the company a nonexclusive, perpetual license to use and copy any the Contractor-owned pre-existing works included in any custom software;
  6. the deliverables and the use of same and the exercise by the company of its rights in the deliverables will not infringe the patent, copyright, trade secret or other intellectual or industrial property rights of any third party; and
  7. it shall ensure that the deliverables do not contain any routines or devices that could interfere with their use (including without limitation, time locks, keys or bombs) or interfere with, delete or corrupt data (commonly known as "viruses");

8. Liability

Most consultants will require that their liability under the agreement be limited, normally to the amounts paid or to be paid by the company for the services. The company will usually require that the consultant maintain insurance (including sometimes, errors and omissions insurance) and in many instances will only agree to a limit of liability which is a multiple of the amounts to be paid under the agreement. The limitation of liability will normally not apply to claims for infringement and for breaches of the confidentiality clauses (and the noncompetition clause, if applicable).

Each party will want to provide that in no event will it be liable for any special, indirect or consequential damages even if it has been advised of the possibility of such damages including, but not limited to, lost profits, lost business revenue or failure to realize expected savings.

The company will want the contractor to indemnify the company from any loss, claim or damages to persons or property or the company's use or possession of any deliverable, where such loss, claim or damages was caused by the negligence, wilful misconduct or lack of good faith of the contractor, or the negligence, wilful misconduct or lack of good faith of any of its directors, officers, employees, representatives or agents, or by any deceitful, false, dishonest or fraudulent act of the contractor or any of its directors, officers, employees, representatives or agents.

9. Ownership

The agreement with the consultant must provide for which party is to own the deliverables and results of the consulting services. Many companies make the mistake of assuming that if they pay for the development of a manual or program that they automatically own all rights in the manual or program. Under the terms of the Copyright Act, if the work is prepared by an employee of the company in the course of employment, the company is the owner of the copyright in the work, but if the person developing the work is not an employee, but an independent contractor, the copyright in the work will be owned by the contractor unless a written assignment of the contractor's copyright is given to the company.

Contractors will generally agree to assign the copyright in specific project deliverables (e.g. written reports, client specifications, and vendor analysis) but sometimes not to project methodology or other "background" materials or know-how. The contractor may have developed this over many other projects, so that the materials form part of the contractor's "tool kit" that will be useful in future projects. This is a negotiated item.

All individuals creating the works for the company have moral rights in those works that must be waived. Moral rights cannot be assigned and are not transferred with an assignment of copyright. Moral rights may entitle the holder of the rights to prevent, by way of injunction, the modification of any work, or its use in connection with a product, service, cause or institution if such modification or use would prejudice the honour or reputation of the author. No one really knows what practical impact these rights have on the ability to modify and use a computer program, but the potential remains for future action by an author who feels that his or her moral rights have been infringed. Most employment agreements require a waiver by the employee of the moral rights in works created by the employee for the company and contractor agreements typically provide that the contractor must have its employees waive their moral rights in all works created for the customer.

If it is difficult to determine whether a person is an independent contractor or an employee, the factors to look at are:

  1. whether the job is performed at the office/workplace or at the worker's home;
  2. whether the worker is using the employer's equipment or other facilities;
  3. whether there has been the use of the employer's trade secrets; and
  4. the level of the worker in the organization (if the worker has a position with significant decision-making power, she might be considered an employee).

The company will normally require the contractor to indemnify the company from infringement claims arising from the use of the deliverables provided to the company. The actual benefit of this clause will of course depend on the financial strength of the contractor and the odds that the contractor will still be in business several years later. Having a comprehensive infringement indemnity clause from an impecunious contractor is not of any practical benefit to the company.

Sample ownership wording; reservation of the right of the contractor to use skills and techniques; and infringement clause:

  1. "All right, title and interest in and to all Company Software, data and other software or materials provided to Contractor by Company hereunder shall be and shall remain in Company. Contractor will document all processes, procedures used in the performance of the Services and any custom software, documentation or other materials written during or as part of the performance of such Services. Contractor acknowledges that all right, title and interest, including all intellectual and industrial property rights in and to all Deliverables, shall be and shall remain the property of Company. Contractor agrees to sign and to cause its employees and all others involved in preparing any Deliverables to sign such documents as may be reasonably requested by Company to fully assign all rights therein to Company. Prior to allowing any employee or other person to provide Services to create any Deliverables, Contractor will ensure that such employee or person has executed a waiver of all moral rights to the Deliverables in favour of Company. To the extent that Contractor may have any right or interest in the Deliverables, Contractor hereby sells, transfers, conveys and irrevocably assigns in perpetuity, all such right and interest world-wide to Company."
  2. "Company acknowledges that Company shall benefit from the skill, knowledge and experience acquired by Contractor prior to its association with Company under this agreement and further acknowledges that Contractor must be free to continue to use and build upon such skills, knowledge and experience subject to the confidentiality provisions of this Agreement. This Agreement and any discussions hereunder shall not prevent Contractor from undertaking similar efforts with third parties provided that the obligations of this Agreement are not violated. Contractor specifically reserves the right to use the ideas, concepts, know-how and techniques developed by Contractor under this Agreement, subject to any patent or copyright rights owned by Company and to the confidentiality provisions of this Agreement."
  3. "Contractor agrees to indemnify Company and to hold it harmless from any and all claims, demands, actions or proceedings alleging that any Deliverable or the exercise by Company of its ownership rights therein constitutes an infringement of any U. S. or Canadian patents, copyrights, trademarks, trade secrets, or other proprietary rights or the contractual rights or obligations of third parties, provided that Contractor is given prompt notice of any such claim and the right to control and direct the investigation, preparation, defense and settlement of each such claim and further provided that Company reasonably co-operates with Contractor in connection with the foregoing and provides Contractor with all information in Company's possession related to such claim. Should a Deliverable become, or in Contractor's opinion be likely to become, the subject of any such a claim, demand, action or proceeding, Contractor shall at its option, in addition to its other obligations hereunder modify the Deliverable with a functionally equivalent product to make it noninfringing. If such options are not reasonably available, then Company may terminate all or part of this Agreement upon written notice to Contractor and Contractor shall promptly refund to Company the amounts paid by Company for the affected Deliverable."

10. Dispute Resolution

Any large project will generate differences of opinion and in many instances legal action is generally not a practical solution, nor are financial penalties always appropriate. Generally, a multi-stage dispute resolution procedure is advisable in accordance with the following sample:

  1. The first stage is resolution by the project managers.
  2. If they cannot agree, the matter may be referred to the project steering committee or the senior management of each party.
  3. If the dispute still cannot be resolved by agreement of the parties, it may be referred to an independent mediator or arbitrator.
  4. The arbitrator should be a person with appropriate technical expertise. (If the dispute is purely a matter of contract interpretation, an arbitrator with legal training may be selected.)
  5. The contract should include arbitration rules that provide for relatively speedy and inexpensive resolution of the matter. However, the parties should recognize that, if the other side does not wish to cooperate, there are many ways to delay the process.
  6. The arbitrator's decision should be final and binding.
  7. The contract should state that, while the dispute is being resolved, each party will continue to perform its obligations under the contract.

11. Remedies and Enforcement

The contract should include specific penalties for failure to meet project milestones. These may range from a reduction in the contract price to a right to terminate the contract completely.

In many instances, the company will want to be able to require the contractor to dedicate additional staff to the project or the company may want to complete the deliverable itself and invoice the contractor for the cost of doing so.

Financial penalties may be set on a sliding scale, increasing with the seriousness of the default.

As an alternative, the company may offer financial incentives, if the vendor meets or exceeds the contract requirements.

Sample Wording – Remedies

"(a) If the Contractor fails to deliver, install and successfully implement any Deliverable or any phase thereof in accordance with the Work Schedule(s) agreed to by the parties, or fails to correct a deficiency or error in any Deliverable in the timeframe agreed to, and the Contractor is materially responsible for the delay, then Company may, in addition to any other remedies it may have:
  1. extend the time for such delivery, installation, implementation or correction. Such extension shall not affect any other dates for performance unless agreed to by Company and shall not preclude the exercise by Company of any remedy in the event such other dates or any new dates are not met;
  2. require the Contractor to dedicate additional full time personnel to the performance of the required services, without charge to Company;
  3. perform all required services or obtain same from third parties; (and the Contractor shall indemnify Company, or Company may set off against any amounts owing to the Contractor, an amount equal to all costs, expenses incurred by Company in connection therewith); and
  4. terminate this Agreement, or the relevant Work Schedule on 10 Business Days written notice.
(b) If the acceptance test for a Deliverable cannot be successfully completed within 60 Business Days from the commencement of same for causes attributable to the Contractor or the performance of the Deliverable, Company shall be entitled, at its option to:
  1. accept the Deliverable as is and be entitled to an abatement of the price therefor in the same proportion that the Deliverable failed to meet the requirements of the acceptance test;
  2. permit the acceptance test to be continued for such period as Company may designate in writing, not exceeding 60 days, at the Contractor's cost and expense. The Contractor shall make all necessary changes to the Deliverable during the test period and in the event the Deliverable cannot be accepted during the extended test period, the Contractor may terminate this Agreement or the relevant Work Schedule, at company's option, upon 5 Business Days' written notice to the Contractor, or restart the acceptance test; and
  3. terminate this Agreement or the relevant Work Schedule, at company's option, on 5 Business Days' written notice.
(c) If the scheduled date for live operation of any of the Deliverables is delayed by more than 3 months from the last mutually agreed delivery date, and the Contractor is materially responsible for the delay, Company shall be entitled to terminate this Agreement with respect to any uncompleted Deliverables(s) and any subsequent Deliverables(s) and receive a refund of any amounts paid for the uncompleted Deliverables. Company shall further be relieved of the obligation to pay any outstanding holdback amounts. (d) In addition to any rights of termination Company may have, if the Contractor fails or refuses to perform any other obligation under this Agreement, Company shall be entitled to provide written notice to the Contractor requiring the correction of the breach within 30 days after delivery of such notice. If the Contractor does not remedy the breach by the end of the 30 day period, or present a plan acceptable to Company to do so, Company shall have the right to terminate all or any part of this Agreement or any Work Schedule by sending written notice to that effect to the Contractor, effective immediately. Company shall pay the Contractor the amounts due in accordance with the phases agreed to by the parties for all Deliverables delivered and accepted prior to the effective date of termination. (e) If the Contractor becomes bankrupt or insolvent; makes an assignment for the benefit of its creditors; takes the benefit of any statute relating to bankrupt or insolvent debtors; a receiver is appointed under a debt instrument or a receiving order is made against the Contractor; or an order is made or a resolution passed for the winding up of the Contractor, Company may, to the extent permitted by the laws of Canada, upon giving notice to the Contractor, immediately terminate this Agreement, in whole or in part."

12. Term and Termination and Actions on Termination

It is customary for the client to require the ability to terminate a consulting agreement on fairly short notice, as well as retaining the right to terminate individual work schedules. The consultant will of course want to be able to terminate for failure of the client to pay and may also want to be able to terminate in the event the consultant cannot get approvals or information from the client when needed.

The agreement should provide for the delivery by the consultant of all deliverables and work in progress on termination. The consultant should also be required to return all confidential information of the company and any third party materials provided by the company.

The agreement should set out the payments that are to be made to the consultant for accepted deliverables and work in progress. The payments for the work in progress may be calculated on the basis of the percentage completion compared to the amount to be paid for the full deliverable.

The agreement should provide how and whether holdbacks will be paid to the consultant.

Sample Wording – Termination Without Cause

"Notwithstanding anything else in this Agreement, and in addition to any other remedies it may have, Company may terminate any Work Schedule(s) or this Agreement at any time upon 10 Business Days prior written notice. Upon delivery of such notice, the Contractor shall cease work, in accordance with and to the extent specified in the notice, but shall proceed to complete any parts or parts of the Deliverables not affected by the termination notice. If notice is given under subsection 19(a) above, the Contractor shall be entitled to be paid (to the extent it has not already been paid) all amounts (plus holdbacks) due for all completed and accepted Deliverables in accordance with the Work Schedule."

Sample Wording – Termination By The Contractor

"If Company fails or refuses to pay any amounts due under this Agreement, and Company is not in good faith disputing such payment, the Contractor shall be entitled to provide written notice to Company requiring payment of the outstanding amounts within 30 days after delivery of such notice. If Company does not remedy the breach by the end of the 30 day period, or present a plan acceptable to the Contractor to do so, the Contractor shall have the right to terminate this Agreement by sending written notice to that effect to Company, effective immediately. If Company becomes bankrupt or insolvent; makes an assignment for the benefit of its creditors; takes the benefit of any statute relating to bankrupt or insolvent debtors; a receiver is appointed under a debt instrument or a receiving order is made against Company, or an order is made or a resolution passed for the winding up of Company, the Contractor may, to the extent permitted by the laws of Canada, upon giving notice to Company, immediately terminate this Agreement, in whole or in part. If Company fails or refuses to perform its obligations under any Work Schedule and such failure or refusal materially and adversely affects the ability of the Contractor to meet the implementation schedules agreed to by the parties in the Work Schedule, the Contractor shall be entitled to provide written notice to Company requiring the correction of the breach within 30 days after delivery of such notice. If (i) Company does not remedy the breach by the end of the 30 day period; or (ii) present a plan acceptable to the Contractor to do so; or (iii) the parties cannot agree on a new implementation schedule, the Contractor shall have the right to terminate all or any part of the relevant Work Schedule by sending written notice to that effect to Company, effective immediately."

Sample Wording – Procedure On Termination

"Upon termination of this Agreement by Company, the Contractor shall deliver to Company any completed parts of the Deliverables which have not been delivered and accepted prior to termination and any materials or work-in-progress which the Contractor has acquired or produced specifically in the fulfillment of this Agreement. Subject to the deduction of any claim that Company may have against the Contractor arising out of this Agreement or its termination, Company shall pay or credit the Contractor the value, determined on the basis of the agreed price for the Deliverable, of all completed parts of the Deliverables or work-in-progress delivered to Company pursuant to this Section ** and accepted by Company, but in no event shall the aggregate of the amounts paid by Company under any Work Schedule and pursuant to this Section ** exceed the total amounts that would otherwise have been payable by Company for such Deliverables under the Work Schedule if this Agreement had not been terminated. Upon termination of this Agreement by the Contractor, Company shall forthwith pay to the Contractor the amounts due in accordance with the phases agreed to by the parties for all Deliverables accepted prior to the effective date of termination, as well as all holdbacks for such Deliverables. Any Deliverables not accepted or paid for by the effective date of termination shall be returned to the Contractor. Upon any termination of this Agreement, the Contractor shall deliver all Deliverables paid for by Company and return all Confidential Information and any software or documentation obtained from Company and shall certify to Company that no copies of such information remain under the Contractor's possession or control. In addition, if requested to do so by Company at any time, the Contractor will return to Company all Confidential Information obtained from Company and certify that no copies of such information remain under the Contractor's possession or control."

Conclusion

With care taken at the start of a contractor relationship to define the obligations and rights of the parties in an agreement, many pitfalls can be avoided. Similarly, well thought out agreements with employees can ensure that certain standard sources of disagreement, such as the obligation of employees to disclose inventions, the types of information which the company considers to be confidential and the obligations of the employee after termination are minimized.

The agreements do not need to be long or particularly complex. In fact, the clearer they are and the more they reflect the actual transaction and project expectations, the better.

Endnotes

  1. RSC 1985, c.C-44
  2. RSO 1990, C.B-16
  3. RW Hamilton Ltd. v. Aeroquip Corp. (1988), 65 OR (2d) 345 (Ont, H.C.)
  4. [1996] OJ No. 1316 (Ont. Gen. Div.)
  5. [1918] 42 OLR 141 (CA) at 157
  6. Guerin v. The Queen (1984), 13 DLR (4th) 321 (SCC)
  7. [1974] SCR 592
  8. [1978] 2 SCR 916
  9. [1894] AC 535
  10. [1988] O.J. No. 236
  11. (1982), 40 OR (2d) 219 (CA)
  12. (1988), 2 QAC 317 (Que. CA)
  13. 664 F. Supp. 493 (SD Fla 1987)
  14. PIPEDA Schedule 1 - 4.1.3 An organization is responsible for personal information in its possession or custody, including information that has been transferred to a third party for processing. The organization shall use contractual or other means to provide a comparable level of protection while the information is being processed by a third party.
Contact Amy-Lynne Williams or any other members of our Information Technology Group for more information on Agreements with Contractors and Employees.