Here’s another categories-of-contract-language issue that I’ve been mulling over:
It’s commonplace for consulting agreements to contain a provision regarding the consultant’s status as an independent contractor rather than an employee. But what category of contract language should you use for such provisions?
Obviously, it wouldn’t make sense to use language of obligation—The Consultant shall be an independent contractor.
You could use language of policy—The Consultant will be an independent contractor. But whether the Consultant is an independent contract isn’t something the parties decide by contract, as if they were stating the governing law. Instead, whether someone is a consultant or an employee depends on the nature of the services performed, not on the label the parties elect to apply to the relationship.
You could use language of declaration—The Consultant acknowledges that she will be an independent contractor. But language of declaration is for statements of fact, and whether someone is an independent contractor isn’t an established fact that a consultant can declare at the outset of the relationship.
So here’s what I’m left with—The parties intend that the Consultant will be an independent contractor. In other words, that’s what they’re planning, but whether that’s how it pans out will depend on the details of the relationship.
That creates a little awkwardness, in that the proposed provision doesn’t fall within any of the categories of contract language outlined in MSCD. Do I need to acknowledge an additional category, language of intention? Generally, the place to express intention is in the recitals, but the body of the contract seems a more suitable place for the provision under discussion.
If the consultant’s status depends on the totality of the circumstances rather than on what label the parties apply, why not omit the provision? Because the label the parties use is one factor that courts might consider in determining whether someone is an employee or an independent contractor. See 19 Williston on Contracts § 54:2 (4th ed.), which includes in a list of factors “whether the parties believe they are creating the relation of master and servant.”
It appears that I’ll never run out of nuances to explore …
28 thoughts on “Language of Intention?”
“It appears that I’ll never run out of nuances to explore …” Ken, I was reading the second edition today, specifically chapter 10, and was struck by how delightfully comprehensive the chapter is. May you, and the next edition, joyfully continue in that vein.
Luis: Thanks for the encouragement! Ken
I think both “acknowledges” and “intends” are language of declaration. The distinction you are making between them is that you would use “acknowledges” for declarations of fact and “intends” for declarations of law.
First, there is not a clear distinction between fact and law. This has two aspects.
(a) Setting can change the meaning of what is fact vs. what is law. “That’s my property” can be a delcaration of fact in one setting and a declaration of law in another. When writing the contract, you won’t necessarily know the setting.
(b) Because there’s no clear distinction, there’s a lot of scope for just getting this wrong in fine cases.
Second, whoever is insisting on the delcaration wants to use it as a both a party admission (in evidence) and estoppel (in substance). I believe that this must be characterized as an admission of fact for it to be useful this way. A statement of “intent” seems more open to challenge than a statement of “acknowledgment.” It just seems easier to me to say, “well, sure I intended that, but that’s not how it worked out.”
Chris: Language of declaration is the label I applied to statements of facts, whether they’re your facts (“Acme represents”) or the other guy’s facts (“Acme acknowledges”).
I’m not convinced that “declaration of law” is a helpful notion. What I’m aiming at with my “language of intention” (if the term survives) is that the parties are saying that they have in mind a certain outcome but recognize that it’s nothing they can decide by fiat. Whether someone is an independent contractor or employee can indeed be a mixed question of fact and law, but that doesn’t interfere with my approach.
And because courts have said that the label the parties apply to a relationship isn’t dispositive, the estoppel value of “The Consultant will be an independent contractor” is slim to none. What matters is the nature of the relationship, and using “language of discretion” recognizes that.
As I understand your proposal, your language of intention is nothing more than a declaration of the legal effect that the parties intend to occur. A legal fact is no different than any other future fact that is not fully within the parties’ control. So, if you are really talking about language of intention, you should apply that concept to non-legal facts as well as legal facts.
For example, “The parties intend to obtain an easement from the neighboring land owner.” That is a statement about a future event that is not within the parties’ control. But it is better addressed by stating what efforts the parties will use to obtain the result.
If your independent contractor example truly worries you, you might take a page out of your own book and treat it as an instruction to the court. “The Consultant is to be considered an independent contractor, not an employee.” MSCD 2.81. I would think that this is a fine approach where the parties have done all that they can and the only question is whether the court will abide by their determination.
This just seems to be a lot more trouble than it is worth. If a representation does not make a thing so, it still evinces the party’s belief and intention that it was so. And it seems like it might be worth rolling the dice that the court — or the opposing party — thinks that saying it makes it so.
An on that last point, I think there is estoppel value in “The Consultant acknowledges that he is an independent contractor, not an employee.” There’s also a possible counter-claim for fraud if the consultant later claims he’s an employee. And it puts you in much better light with the jury. That diminishes greatly if you say “The Consultant intends to be an independent contractor, not an employee.”
Chris: Regarding addressing this in an obligation, see my response to D.C.’s comment.
Regarding using is to be, that would work only if the consultant’s status as an independent contractor were something that the parties could assess when the contract is signed.
All this may well prove to be much ado about nothing. But I always want to make sure that my categories of contract language match reality.
And because independent-contractor status is a question of fact and law, it would seem impossible to base a claim for fraud on the consultant’s assertion that he’s an independent contractor. The consultant would simply say that he wasn’t qualified to assess whether as a matter of law he was an independent contractor. He might also say that whatever was anticipated at signing, things worked out differently in practice.
i thought of one other objection.
I often use the word “intends” in a factual representation when I’m not willing to commit to any level of effort, but want to give the other party some comfort. That is, I will tell you what my intentions are, which gives you a fraud claim if I am lying. But I’m not willing to agree not to change my mind or to use any effort to carry the intention to completion.
So, I might say something like “ABC Company intends to promote XYZ Corporations services to its current and prospective customers.” That tells the other side that I’m serious about it, but it doesn’t tie us to them forever. Sometimes, I couple it with a provision that we will inform them if our intention changes.
This is most often the case in very loose marketing alliances, where each party is somewhat concerned that the other side might be playing them, but the real certainty in the deal is in the relationships created by working together. All you really need is something at the beginning to create the basis of the relationship.
Chris: How is that an objection? And I suggest that your ABC Company provision isn’t a statement of fact; it’s a statement of intent. Ken
I’ve taken to trying to insert specific covenants to accompany policy-type language.
For example: “The parties are independent contractors; each party will conduct itself accordingly.”
Another example: “This Agreement may not be amended, nor any of its rights or obligations waived, except in a writing signed by both parties that expressly refers to this Agreement and expressly states the amendment or waiver; neither party will ever assert to the contrary.” (I know, some courts would take the view that the italicized covenant can be orally modified or waived, assuming there were no statute of frauds problem. But a party wanting to make such an assertion in court would have to stop and think whether it would thereby be breaching the contract itself.)
D.C.: The first part of your first example is language of policy; see the reservations I note in my post. The second part appears to be language of obligation, but I’m not sure how it would work: it takes both parties to construct a working relationship, so both would be in breach if a court or other government authority were to decide that it’s in fact an employment relationship.
Your second example is language of prohibition. But it suggests that someone would be in breach if the contract were amended orally, and that in turn the other party would be entitled to remedies for breach: that doesn’t make sense. I suggest that instead, it makes more sense to use language of policy: an amendment won’t be effective unless it’s in writing.
And I’m not sure whether a provision prohibiting someone from making a claim is enforceable. That’s your cue to write something about it!
Ken: Concerning my first example, about independent contractors (“each party will conduct itself accordingly”), I’m thinking more of the following situation:
(A) A sales rep for an independent window Installer, making a sales pitch to Homeowner, illicitly says that Installer is a division of Window Manufacturer;
(B) Installer is an authorized service provider of Manufacturer, but it’s not a division thereof;
(C) An Installer employee, standing on a ladder, accidentally drops a hammer on Homeowner, seriously injuring Homeowner;
(D) Homeowner sues not just Installer, but also Window Manufacturer on a theory of respondeat superior.
In that situation, if I’m Window Manufacturer, I want Installer to be in breach of an express obligation to conduct itself as an independent contractor.
Sure, if I’m Window Manufacturer’s lawyer, I could include a laundry list of specific things that Installer is not allowed to do. But that would raise the prospect of an inclusio unius, exclusio alterius response by Installer.
And I’m pretty sure I’d be able to get to a jury with just the simple “each party will conduct itself accordingly” language.
Concerning the second example, requiring amendments and waivers to be in writing, and prohibiting either party from asserting to the contrary:
Suppose a contract between Alpha and Bravo required Alpha to comply with Requirement R.
And suppose that employees of the parties orally agreed that Alpha doesn’t have to comply with Requirement R after all.
If Bravo never sued Alpha for noncompliance, no problem. But if Bravo ever did sue Alpha for noncompliance with Requirement R, then arguably Alpha would be in breach of contract if it tried to claim that Bravo had waived the requirement.
If I’m Bravo’s trial counsel, I’m happy about having the mere possibility as an additional arrow in my quiver.
I like your “conduct itself accordingly.” It’s a great use of a somewhat vague obligation to cover off lots of things that coulc concern you, but you can’t articulate without a five-page agreement running into encyclopedic volumes.
D.C.: So the concern you’re seeking to address in your first example is narrower, and easier to address, than the question of whether the consultant is actually an independent contract.
I still think your second provision is counterintuitive and wouldn’t be enforceable.
1. I think that “the parties are independent contractors” or “the parties will be independent contractors” is, when considered with the preamble “The parties agree . . .,” actually language of obligation. The party hiring the independent contractor is granting a certain amount of freedom to the contractor with regard to the method used to obtain the desired results.
2. Although you are certainly correct that the parties are not entirely in control of the determination of independent contractor status, as a practical matter this status is rarely challenged successfully unless other portions of the contract or the actions of the parties cast serious doubt on the declaration. I think using the term “intends” creates unnecessary uncertainty and makes it easier for one of the parties to defeat that intention later because the language seems less mandatory.
Kevin: Regarding your first point, if the idea is to have a party commit to giving a consultant a certain amount of latitude, you’d best do so explicitly, rather than trying to read that into “The Consultant will be an independent contractor.”
Regarding your second point, I’m just stating how the semantics play out. Trying to make mandatory that which isn’t conducive to being made mandatory seems ultimately unhelpful. But I’m obviously still chewing this over.
As Chris was saying, why not make the intention language an efforts representation? In a simple example, one might say “Company in good faith will consider hiring Joe Smith as an independent contractor.”
In this way, you might avoid the awkwardness of intention language by transforming it into a qualified rep.
MBF: That’s not a statement of fact, so it’s not a representation. It could only be an obligation, but the problem is that an obligation to consider something would, like an obligation to agree, be unenforceable. Ken
Ken, to me this one seems to be another take at addressing simple principles. When reading case law, I constantly come across judgements where the court claims to be looking to determine the intent of the parties, particularly where the language is ambiguous. For what it’s worth, I would suggest the ‘intention’ provision does no more than that. So, if a court or tribunal has to decide whether the Consultant actually is an independent contractor as opposed to an employee or joint venturer, at least the parties have stating what they thought they were doing. I wouldn’t be surprised if this was considered helpful by a court. I don’t mind your awkwardness – at least a ‘meeting of the minds’ has been clearly expressed.
Patrick: The problem I see with your suggestions is that whether someone is an independent consultant is a question of fact and law, so what the parties say in a contract can only go to what they have in mind. Ken
Ken, in my (UK) experience, the drafter may be trying to address a number of issues, taking account of the following legal context:
1. If the contractor/consultant is an employee, the employer must deduct income tax and national insurance contributions at source, before paying a net amount to the employee. If the employer fails to do so, the tax authorities can demand the taxes from the employer.
2. If he is an employee, he has extensive employment protection rights.
Therefore, what the drafter, acting for the company, wants to do, is:
a. establish by agreement between the parties that deductions will not be made at source (a factual position), and that the contractor is not expecting this to happen. Or at least not until the tax authorities catch up with the arrangements and declare it to be an employment relationship.
b. get the contractor to acknowledge that he does not consider himself to be an employee for the purposes of tax and employment legislation. This won’t be binding on the tax authorities but it may (i) be a (small) factor for the tax authorities to take into account when making their analysis, and (ii) create some kind of estoppel against the contractor.
c. get the contractor to indemnify the company against any claims by the tax authorities. The argument being that the company could make it simple and deduct tax now, but this means the contractor/employee gets a smaller amount, so in return for the company taking some risk by agreeing to pay the gross amount, the individual must indemnify the company.
Sometimes, the drafter is trying to roll all of these objectives into some brief language, which is not ideal from a legal perspective.
What I take from this is that that “intend” may cover some of these points but probably not all of them. It may cover the public law question of the contractor’s legal status, but not the private, contract law aspects of how the parties will conduct themselves to one another. There may be some “acknowledge and agree” aspects in there as well.
Mark: My “language of intention” wouldn’t cover your “a” or “c”; those issues would have to be addressed explicitly. Regarding “b”, we’re again left with the fact that what the contractor considers him- or herself to be at signing is less relevant than what the law and facts dictate, at signing and later in the relationship.
But “acknowledge and agree”! I’d sooner jab myself in the eye with a pencil than use “acknowledge and agree”. It’s language of declaration plus a redundant expression of agreement—redundant because we already know, thanks to the lead-in, that the parties are agreeing to everything in the body of the contract.
Mike: A late comment, but a great one! And the same issue applies to language of belief.
I guess the first question is whether language of intention and belief serve a useful purpose at the independent-contractor-issue end of the scale. If they do, then I guess you shift to language of policy once you’re comfortable enough that a court would have no reason to object to the choice reflected in the contract.
Is the independent contractor concern analogous to a severability clause?
The latter states what happens if a court disagrees with the parties about the validity of part of the agreement.
A provision governing the independent contractor relationship could similarly allocate the risk of judicial disagreement:
“The risk that a court having jurisdiction will determines the contractor to be an employee will be on the contractor. If such a court so determines, the contractor shall indemnify the contractee for all loss and liability arising from the determination. The contractor waives any claim to be an employee, shall not make any claims to be an employee, and shall not accept any benefit arising from any determination that the contractor is an employee.”
I suppose such a provision might be unenforceable as against public policy under certain legal regimes. But there may still be help. How about alternative provisions, depending on what the contractor’s status is determined to be:
“If the contractor is an independent contractor, the contractee shall compensate the contractor as follows [blah, blah].
“If, however, a court having jurisdiction determines that the contractor is an employee from the start or from some point, then the contractee shall compensate the contractor as follows, with a credit in favor of the contractee for any compensation the contractee gave the contractor for services rendered after the contractor became an employee: [blah, lbah].
This would follow, in concept, termination and general release agreements I have seen whereby the departing employee gets benefit package A if he gives the employer no release, and benefit package B (much sweeter) if he gives the employer the desired release.
I realize that there may be other benefits than money to being an employee, such as job security, but the two-prong approach might at least mitigate the contractee’s pain at finding itself the contractee’s employer.
Interesting. I’ll have to chew this over.