Outstanding Fees: Will a Fee Claim Dispute Lead to a Negligence Claim?

Several similar articles rolled into one Feb 2017The simple answer is: “Quite possibly”. There is no easy way of collecting disputed fees. Sometimes it may not be commercially or psychologically worthwhile to pursue a disputed fee: the cost and collateral consequences may suggest letting things lie, or agreeing what has been paid as full and final settlement.The standard NZIA terms of engagement specifically address fees disputes, and should be the first point of reference. As with most issues, communication with the client on a regular basis can ensure timely and amicable resolution to the satisfaction of all parties.With progress payments, recovery of the final claim is a commercial risk – ie it might be better to write it off if circumstances (lack of leverage, potential counter claim, unrecoverable debt recovery costs, loss of goodwill) so require. For similar reasons, collection of a single end-of-project lump sum fee can be problematic, quite apart from the inherent problems of cashflow to cover work in progress.The first step is to establish what the dispute is, so that you can address it. In particular you need to know why the payment is not forthcoming: an inability to pay is something you can potentially negotiate; as is a response that the fees are more than expected. These are commercial issues not affecting liability.But whether real or not, the client’s response to pressure being applied for fees recovery may be that the architect’s performance has been poor and/or has incurred unexpected costs or losses. This readily escalates to a counterclaim (or threat of one) and you need to hone in on what the issues are and reduce them to writing:

• What were the terms of engagement and the scope of works: did they vary and did you comply?
• Did the design meet client expectations and budget – if not, why not?
• Were the timeframes reasonable?
• Did the construction proceed as it should have, and if not, what was your role in the perceived problems?
• To what extent did the client (by action or character) contribute to adverse outcomes?

Before you respond to any allegations you need to give very careful and objective thought – supported by all the documentation and peer review you can muster - to your performance, and the best/worst case outcomes if the stoush escalates.The potential for fee disputes can be reduced by

• Ongoing monitoring and management of the cash flow in the practice. Invoice (and follow up on payments) on a frequent and routine basis instead of leaving things until cashflow is critical or a progress claim is too lumpy.
• Dealing with fee issues (communicate!) as soon as they appear problematic. The longer things fester, the harder they are to resolve.
• Initiating a quality assurance procedure whereby “sign off” for a project stage by the client also requires payment of the fee relating to that stage before the architect commences the next stage.

The process of fee recovery:

Consider the following scenario:You send out an invoice. After a reasonable delay, you request that non-payment be rectified. In the absence of any meaningful response, you issue a Summary Judgement for the sum due. How do you expect your client to respond?Are they most likely to:

1. a) promptly pay the full outstanding sum or
2. b) pay a sum they deem reasonable, and seek the opportunity to discuss the portion that they have concerns about or
3. c) apologise, agree payment is due, but explain why funds are unavailable at present or
4. d) deny having received any such invoices or
5. e) agree an unspecified amount is payable but they are witholding the entire amount until problems are resolved or
6. f) serve notice of a claim against you which is well in excess of your invoice!!

A Summary Judgement application may be useful to recover an undisputed debt where there is no arguable defence to a claim. But it is an invitation to hit back. An argument based on ignorance/stupidity/irrationality/misinformation or even blatant bullying is still an argument, and design and construction provides plenty of opportunities for debate or error.We are trained to anticipate what might go wrong, and how to resolve compromises: those skills are likely to lead to better fee recovery than a Summary Judgement!The following true stories are from recent claims:

1. Two clients were good friends. It happened that they engaged the same member for their projects. A fee dispute with Client 1 was settled judicially in favour of the member. But, in a show of solidarity with his friend, Client 2 then terminated his contract with the member! That fee recovery was not hassle-free.
2. A developer client’s modus operandi was to set up and dissolve companies on a project by project basis. The member was engaged for several projects, using NZIA AAS, but fee payments were slow, and significant outstanding fees accumulated. Sensing that the client may not pay because some companies had ceased trading, the member - as permitted by AAS - sued the developer’s director as an agent of the company. Retaliation followed by way of a counterclaim in negligence, and escalated the legal fees and the stress levels. The negative cost-benefits of the fight put an end to it, but there was further unpleasantness over the copyright in project photos.

Good legal advice, and/or a chat with the Claims Committee, should be sought when a fee recovery is likely to initiate a set-off claim. Sometimes it is better to let sleeping dogs lie.