Legalese: Unpaid fees
Extracting unpaid fees from unwilling clients can be difficult. Mark Klimt guides us through it
I often receive calls via the RIBA Legal Helpline from architects seeking help with securing payment from recalcitrant clients.
Their problems include clients withholding or attaching extraneous conditions to payment, disputes over what should be included in the construction cost for calculating a percentage fee, and the relatively new phenomenon of clients wanting fees repaid when contractors’ tenders come in below budget. It is also timelessly common for clients to raise phantom counterclaims against architects, particularly in the present climate where the debtor client might not have the money to make the payments it owes, and thinks that a speculative claim may just get home.
Insurers will generally say that fee disputes are an entirely separate matter and are at the discretion of their insured architect. However this distinction is somewhat artificial because the way a fee claim is progressed often dictates whether and how a counterclaim is promoted. Also the size of the excess under the insurance policy (payable if a counterclaim does get home) compared to the fee debt will influence your decision whether to pursue the fees formally.
The fee dispute may also give rise to notification issues, if the way the client resists paying tips over into allegations of wrongdoing, which the architect should notify. Furthermore, should a fee dispute become entangled in a counterclaim and insurers take over conduct of the dispute, your concern is that your fee claim does not become devalued and treated as a ‘make-weight’ when attempting overall settlement. So, what to do?
The foundation for being able to claim fees successfully lies in properly drafted appointment terms and fee proposals. Thus, if a percentage fee is based on a particular construction budget, make it clear that the fee will not reduce if the construction cost goes down; this reduction is usually temporary anyway. If a concessionary fee has been quoted for preliminary stages on the understanding that you will be involved throughout, include clear terms to trigger a balancing payment if, in the end, you are not retained. A licence to a client to use design materials should be subject to payment of outstanding fees; the clearer the payment terms, the more confident you will be in using this potent weapon. You should be diligent in chasing fee instalments, so that a large backlog does not accrue, leaving you vulnerable and compromised.
Once a fee dispute looks likely, you should check your insurance policy for any obligation to inform the insurers before taking formal recovery steps. Keep them informed, even if they are not immediately interested, because it may have relevance later. If a counterclaim does arise and insurers take over conduct of the matter, then you should seek early agreement with your insurer’s legal representative on the true value of the fee claim, so that it has an established presence in the litigation and does not ‘disappear’ in negotiations.
You should also consider putting pressure on the client by identifying a sensible settlement figure, which takes into account how much you will pay to pursue the claim. This includes legal costs (which unlike the counterclaim defence costs will be for you and not the insurers to fund) and the practice time expended in justifying the fees.
Bad behaviour by clients will never be eradicated – particularly in the present industry conditions. Architects are undermined by the scarcity of projects and the readiness of competitors to sign up to unattractive and ill-advised conditions. Clients have also historically exploited architects’ sense of ‘responsibility’ as the pivotal member of the construction team to keep projects afloat, leading to them keeping faith with clients long after it is sensible to do so, and providing additional services on a half-promise of reward sometime later.
This inevitably ends in tears, whether in the short term (for you) or in the longer term (with clients having to replace you with another – probably less qualified – party, who is handed power without proper accountability). Well-drafted payment terms and a thought-through policy for pursuing payments that are lagging behind are important tools if you are trying to avoid these problems.
Mark Klimt has been a partner at Fishburns since 1989 and specialises in professional indemnity insurance, particularly advising architects and engineers, and defending them against claims. He is legal advisor to the RIBA and operates the RIBA Legal Helpline.