Getting Paid Without Inviting Litigation

By: Eric Cheng, Partner, Wilson Elser and Wendy Testa, Partner and Co-chair, Design Professional practice, Wilson Elser

Fee disputes in the design professional industry are not a new phenomenon, but their prevalence has noticeably increased in recent years. Several factors contribute to this rise, including economic fluctuations, evolving client expectations, and the complexity of design projects. As clients become more demanding and projects more intricate, the potential for misunderstandings and disagreements regarding fees increases.

Most fee disputes tended to arise from client changes, so it is important that clients are made aware, in writing, that changes can have a cost. Any changes with a potential cost impact must be detailed in writing, bearing in mind that the client tends to look to the architect automatically to resolve any problems that may arise. Any misunderstanding or miscommunication which is not clarified in writing, in the contract or an amendment to the contract, is guaranteed to increase the potential for a fee dispute due to a lack of clear communication between the design professional and the client.

Common scenarios which we see resulting in fee disputes include: the design professional's services being terminated at some point during the project because the client believes it can manage the project alone to save money; and where a client is unreasonably demanding, creating undue stress or pressure on the design professional which may escalate into a falling out over fees, or accusations by the client that the design professional’s services were not up to snuff.

If you contemplate bringing a claim to recover fees, it is always good practice to anticipate a counterclaim and assess whether the collective claims are worthwhile prior to commencing fee claim litigation. In addition to the unpaid fess for performance of professional services, a counterclaim asserted against a design professional will have a significant impact as follows:

• Deductible payments for legal fees and costs (note: E&O policies do not provide coverage for fee claims); an insurer will likely assign separate defense counsel who will work in tandem with the insured’s fee collection counsel, or require separate invoices for the prosecution of the collection claim, which does not count against the deductible.
• Insurance premium/renewal of policy may be affected by the loss history.
• Negative publicity and/or required disclosures in future responses to RFPs for claims history.
• Lost internal time and resources for participation in defense.
• Potential uninsured exposure for prevailing party attorneys’ fees if the negligence counterclaim ends in an adverse result to the client. (Any settlement discussion may involve partial waiver of fees).

In light of the above, it is good practice to notify your insurance broker prior to commencing fee collection litigation. Most E&O policies provide pre-claim assistance in the form of telephone hotline or free consultation with attorneys from an approved panel of law firms that specialize in defending professional malpractice claims. The design professionals will therefore have an opportunity to “walk through” their projects with the attorney who can point to any potential pitfalls and provide a recommendation as the viability of the collection suit. It is crucial for design professionals to recognize that a collection attorney generally does not practice in the area of defending design professionals and may not be able to provide sound advice to the insured as to any potential exposure to a counterclaim.

It is equally important for a design professional to recognize some of the due diligence that can be performed in house before a situation arises. For example, whether it is a new or an existing client, a design professional should investigate the client’s track record for payment and litigation. If a client has a tendency to carry a balance well beyond the due period called for by the invoice, close attention should be paid to the client’s account with prompt follow-ups before the balance balloons out of control.

Design professional should be cognizant that the individual wealth of the owner/developer or valuation of the company does not always mean timely or complete payment. Similarly, pending/past litigations are public records can be searched on line for free or for a nominal fee. Design professionals should consider investigating the actual ownership of the project property in order to assert lien rights and make ultimate collection of payments possible.

As a rule of thumb, no later than thirty (30) days after a payment becomes overdue, contractual remedies should be identified and brought to the table for discussion. Before taking the drastic step of walking off the job, a design professional should always refer to the applicable contract to understand the respective parties’ obligations. Nonpayment for professional services does not give a professional open license to breach the applicable contract. Specifically, a careful review of contract language is key to weigh your options for potential relief in the event of nonpayment of fees. Professional services contracts may require a design professional to meet certain conditions prior to terminating services including but not limited to proper and timely notification to owners and lenders. The legal remedy for nonpayment of fees, in breach of a professional services contract, is not a breach of the same contract. If statutory remedies such as lien notices and stop work notices are required steps, an attorney should be consulted. Most agreements require a notice period to allow the owner/developer to “cure” the nonpayment of fees by payment or dispute a portion of the fees. If there are deadlines or appointments in the project, it is also good practice to seek an adjournment or extension and advise the client of same prior to termination of the agreement to avoid the missed deadline/appointments becoming the basis of a counterclaim.

In sum, poking the hornet’s nest could lead to a swarm of legal problems you did not anticipate when you contemplated taking action against a client to get paid. With an eye toward risk management, design professionals should note the following when considering whether or not to assert a fee claim:

1. Have you reviewed the applicable contract language to (a) see what avenues of relief you may have; (b) if the payment terms regarding payment type and timing are clear and express in the contract, with a specific eye toward any changes in payment arrangements being documented; and (c) what, if any, obligations are contractually imposed on the design professional which may be a potential basis for a counterclaim by the client who has not paid your fees;
2. Have you effectively communicated to the client, throughout the period of providing professional services, what your expectations for payment are and documented these expectations (e.g. did you agree to be paid an amount certain per month but then accepted some different type of payment arrangement over the course of providing services so that the contract payment terms have now been altered by the course of dealing);
3. Have you and the client agreed on a procedure or system for triggering additional fees and have you adhered to prior notice and other obligations to trigger fee payments; and
4. Lastly, have you managed the client’s expectations effectively (and in writing) regarding your fees and when additional fees will be incurred – before, during and after providing professional services (in the contract, in addenda to the contract, in communications to the client setting forth the basis for potential additional fees or for a potential fee claim).

The bottom line regarding fee claims is that they more often than not end up encouraging much larger litigation and significant associated time and expense. To the extent a design professional can avoid the need to assert a fee claim, one should vet clients carefully, communicate with clients frequently and openly, and document all changes to material terms of payment and the scope of work.