If the architect was engaged on the basis of an RIBA Agreement and the client is being funded by a public body such as the Lottery, must the architect wait for fees until funding comes through?
Although one is told never to generalise, it is difficult not to do so and, therefore, one might say that architects, as a class, are not noted for their keen business sense, particularly where their own contracts with their clients are concerned. This is something of which many clients are not slow to take advantage.
Architects enter into contracts with their clients in many ways. Although both the RIBA and the ARB Codes of Conduct require architects to consign all their appointments to writing, setting out key points regarding fees, services to be provided and so on, it is still the case that some architects find themselves working for clients on contracts which, if they exist at all, are purely oral. If the clients of these architects drag their heels on payment, there is little to be done without complex legal action.
The remainder of architects either contract on the basis of an exchange of letters, one of the standard RIBA forms or a bespoke set of terms drafted for the client by solicitors – in other words, in writing. That is very important, because agreements in writing fall under the Housing Grants, Construction and Regeneration Act 1996.99 The Act does not apply to ordinary consumers constructing residential property for themselves, but it is a very useful Act so far as other clients are concerned. At the time of writing, Part 8 of the Local Democracy, Economic Development and Construction Act 2009 is not yet in force. When it is, among other things, it will amend the 1996 Act to remove the need for construction contracts to be in writing before the Act applies to them.
SFA/99, S-10-A or similar RIBA terms comply with the current Act. Therefore, they set out the way in which payment must be made and what is to happen if the client wishes to withhold payment. They also include provision for adjudication – a quick and relatively inexpensive way of settling disputes.
It is quite common for a client to be reliant upon funding from elsewhere. Typically this might be a bank, a mortgage provider, an insurance company or some body such as the Lottery. Perhaps the appointment document includes a term which says that, notwithstanding the payment provisions (which are probably for monthly payment), the architect will be entitled to payment only when funding comes through to enable the client to pay. Sometimes, there is nothing in the terms and the client simply springs the surprise on the architect at their first design meeting or, more likely, not until a fee account becomes seriously overdue. Many architects try their best to accommodate such clients and do not press for payment until funding appears. They do this partly because there is no point in pressing someone who has no money for payment, and partly because architects naturally try to assist their clients, usually far beyond what is required by the law, codes of conduct or sometimes even common sense.
It is surprising that a client will even consider embarking on expensive construction work without having the necessary means to pay and trusting that money will be made available in time. There is no doubt that, under RIBA Agreements, the client is obliged to pay the architect the amount stated on the invoice if no withholding notice has been served.
The architect is not simply entitled to stop work if payment is not made. However, the architect is entitled, under RIBA Agreements and under section 112 of the Act, to suspend performance of all obligations if payment is overdue provided that at least 7 days’ notice in writing is given stating the intention to suspend and the grounds for doing so. Few architects seem to avail themselves of this right, although nothing concentrates a client’s mind so well as the knowledge that all work will stop in 7 days. The right is valuable because, contrary to popular belief, there is no such right of suspension under the general law if the client fails to pay, although consistent failure to pay might be grounds for treating the client’s defaults as repudiation.
There is another important part of the Act that is not reflected in RIBA Agreements nor in most other construction contracts. This is a provision that strikes at the heart of the ‘pay when paid’ ethos. The key part is as follows:
Section 113(1) A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent.
Therefore, if a client attempts to insert a clause making payment dependent on receiving funds from elsewhere, the clause is ineffective unless the supplier of the funds becomes insolvent. The likelihood of a bank, building society or the Lottery becoming insolvent, while not negligible, is not significant. Therefore, there is no need for the architect to act as the source of a bridging loan until money comes through: it is up to the client to make its own arrangements.
Where the client simply notifies the architect that payment is dependent on a third party after the terms of engagement have been agreed, the architect can, and usually should, simply reject the statement out of hand. There is a danger if the architect gives the client to understand that the architect will wait for the money until it arrives from the funder. In those circumstances, the architect may be estopped (prevented) from subsequently having a change of mind and demanding the money. Estoppel is a legal principle with many facets. In this instance, the principle is that, if the architect represents to the client that strict legal rights will not be enforced and if the client has acted to its detriment in reliance on that representation (such as in this case using its own money which might have been used to settle the architect’s debt), the architect is prevented from going back on the representation.
The moral is that an architect should insist on being paid on a regular basis. If the architect is moved to allow the client time to pay, that time should have a defined end, which must be clearly set out in writing and acknowledged by the client. Far better for the architect to use the tools set out in the contract and the Act: the right to payment, suspension on failure to pay, adjudication, arbitration or litigation appropriate to secure payment and statutory interest on late payment.