(Previously known as Security for payment of fees)
Sometimes it can be difficult to get your fees and accounts paid. Even if you have taken measures to support your right to be paid, such as:
- entering into a client and architect agreement which allows you to withdraw the owner's copyright license if you are not paid
- taking a deposit before doing any work
- resorting to the Security of Payments legislation (where applicable)
- asking the court to make an order for the owner to pay you.
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Precautions against not getting paid
Where the client has no assets (or the client’s assets are already encumbered with, say, a mortgage), even if a court makes an order in your favour against the client, without having adequate security in place it may be practically impossible to get paid.
An order obtained under Security of Payments legislation, or any order of the court as a result of other legal action to recover your fees, is against the person(s) named in it (which can include a company as a ‘legal person’) and it cannot be enforced against anyone related to that person or company. If the persons named in an order have no assets, your debt becomes a long-term drip-feed at best that requires you to continue to bring legal actions, at a cost, for part payments if and when the person acquires assets and has capacity to pay.
In taking legal action to recover fees owed to you, you should always consider the risk and consequences of your client suing you in response, likely with a counterclaim challenging the value of your fees. This appears to be a somewhat common outcome that can affect the relative benefit of suing for your fees. Legal action against you, like a counterclaim, may have implications for your professional indemnity insurance.
Depending on whether you are going to be engaged by individuals or a private company, there are various precautions you can take. The links above set out actions which you might take to protect the likelihood you will be paid, especially in the event you might need to take legal action to recover your fees. In practical terms, before you take any such actions you should first weigh up the costs in legal and other fees to obtain greater certainty of payment and the impact on the client relationship, against the fees you are likely to earn from that brief.
While there is a restriction on deposits in NSW under the NSW Architects Act 2003, there is no other legal reason why you cannot ask for a deposit related to your projected fee from a client before beginning work, or even before beginning each stage of work. The Institute’s 2019 Client Architect Agreement (CAA2019) includes provision for a Mobilisation Fee (advance payment). Although the deposit, does not secure the payment of your future fees once you have used it up, it at least ensures that early payments are received, and it has a perceived value in demonstrating your expectation to be paid, and promptly. For more see 'Fees paid in advance' in Acumen note: Fees.
Again though, you need to balance this benefit with the likely effect on the client relationship.
In each case, the extent to which you should take steps to secure that your fees are paid will depend on commercial and practical considerations. Of course, the ideal outcome is to avoid fee disputes altogether by taking appropriate precautions in advance. Refer Acumen note: Fee disputes.
There is risk involved in contracting with private individuals directly and asset-search enquiries by your solicitor of an individual could be worthwhile. When dealing with individuals, it is a reasonable precaution to get prior knowledge of the individual’s property assets.
Only title searches and company searches (to determine who the directors and shareholders are) can be performed discretely by you. Obviously, personal guarantees, bank guarantees and deposits require cooperation from your client and other checks or forms of security require you to engage a lawyer.
While no precautions are fool proof, a bank guarantee is generally the more reliable form of security. As a precaution, a caveat can be lodged on property assets to secure your legitimate claim for payment. This is usually possible because the client is usually a property owner; however, the value of that property as security depends on how encumbered it is. Also, this option may end up being expensive relative to the unpaid fees.
In the states and territories where security of payments legislation applies to architectural services, debts against individuals can be enforced via this mechanism. Refer Acumen note: Security of payment.
Where there is any concern about the financial standing or reliability of a company client, or an individual client, it is always a good idea to seek legal advice to ensure that your interests and fees are protected.
Security – individuals
In the simplest situation, common for domestic projects, the owner(s) of land engages you to provide services in relation to that land. It is a relatively simple and inexpensive procedure to do a certificate title check, which will show whether the people engaging you are the owners and, if there is a mortgage, which financial institution holds the mortgage. You can do this search yourself online (for a fee) or have your lawyer do the search. Refer Acumen note: Certificates of title.
If the mortgage is with an established bank, this is generally an indication that at least some of the equity or share (usually at least 10 per cent) in the land is owned by the people named on the title, because the established banks will not usually lend 100 per cent of the value of the property for purchasing it. This may not be the case where the mortgage is to a non-bank lending institution or another family member, as this financier may have lent all or almost all of the purchase price to the owners on the title, and if the property had to be sold to meet debt of the owners, the financier will take all of the sale value as the ‘first in line’ creditor.
It can also be useful to see how recent the mortgage is. While there is mortgage finance that is interest only, a mortgage several years old to an established bank where the title is held by the individuals who propose to engage you, is more likely to have been a principal plus interest mortgage which means that the individuals have been acquiring equity in the land by paying back the bank. This means that if the owner defaults on paying your fees, they will have at least some equity in the sale price of the land over which you and any other creditors could enforce a claim.
You cannot as easily find out whether the owner is in default in the mortgage at the time they engage you, what other debts the owners have, or their asset base other than land, but through your lawyer you can make discreet enquiries as a credit check. Further into an engagement, reluctance to pay or late paying should obviously alert you to a possible problem. Difficulty experienced by clients in obtaining finance later in the project at tender or construction should also alert you to the possibility that they will not be able to pay your further fees.
If you do have payment problems and your client is a land owner (eg they are named on the title) you usually have the right to have your lawyer place a caveat on the title to ensure the property cannot be sold, mortgaged as security, or otherwise dealt with unless and until your right to be paid is met. Caution should always be exercised with this option though. When you place a caveat on the title, the client will automatically be notified. This may prompt your client to sue you to remove it, based on a claim against you which may exceed the amount you are owed, in order to prompt you to negotiate on the outstanding fees.
Security – private companies and trusts
Your clients may want to formally engage you under contract with a private company - either a Pty Ltd company, a Trustee for a family, discretionary or other trust, or a Pty Ltd trustee company. In these cases, you should be cautious about your ability to recover a debt owed by your client. A company structure is no guarantee that the company has assets that can be used to pay your fees.
Where the client is a company and the company turns out to have no assets (eg a two-dollar company), if you don’t have adequate security already in place it may be practically impossible to get paid, even if a court makes an order against the company in your favour. Similarly, if your formal client is a trustee individual, or a trustee company, but not the persons who are giving you your instructions, your ability to have your fees paid by, or debts recovered from the trustee client depends on whether the trust holds enough valuable assets and whether the trustee is properly using those assets in accordance with their authority as trustee.
If it turns out that the trustee individual or trustee company was acting outside their authority as a trustee, you would be entitled to ask the court for an order that the trustee pay its debts to you out of its own pocket. However, this raises the same issue: whether the trustee individual or trustee company has sufficient assets to meet the debt owed to you. This is a complicated area of law and you should obtain legal advice if unsure about how best to enter into a contract with a trust.
One of the ways in which you can secure any debt that a private company or trustee company may have to you, is to insist that one or more directors of the company provide you with personal guarantees or obtain an unconditional guarantee from the client.
Security – directors’ guarantees
Directors' guarantees have the effect that the directors of a company personally promise that if the company does not perform its obligations under a contract, they will personally satisfy those obligations and do so out of their personal assets.
If the company defaults in an important obligation under the contract (such as paying the contract price), the service provider (eg the architect who holds directors' guarantees), can sue both the company and each of the directors for defaulting on the obligation to pay.
To find out exactly who the company directors are, a search can be carried out by your lawyer, or personally at an ASIC office in your capital city (for a fee) or at www.ASIC.gov.au (accepts online payment by credit card). It is accepted business practice to carry out a company search through ASIC and the names and addresses of directors are public knowledge to anyone who wishes to know.
If the company is a public company (eg XYZ Ltd with public shareholding), there may be less need to ask for such guarantees, because it is much more likely that the company has assets. The company’s financial statements can also be inspected by payment of a fee to ASIC in the same way. This is not to say though, that public companies never get into financial difficulties which can leave creditors stranded.
While there is usually a close connection between ownership of the private company (a Pty Ltd company) and your client and its directors, they still have to be willing to enter into such guarantees. Directors of a public company are far less likely to be willing to enter into such guarantees (or may be prohibited as a matter of company policy) and other means of security provided by the company itself – such as unconditional guarantees discussed below – are more common.
While the contract should be executed by the client company in accordance with its Constitution or Memorandum and Articles of Association, directors' guarantees must be given and signed by each director of the company personally, even where there are a large number of them. On occasions, a husband and wife or members of the same family will be the co-directors of a private company and will suggest that only one member gives a guarantee. This is not prudent for you as a potential creditor, because the signing director may not actually own any assets, which are instead owned by the other member(s) of the couple or family.
A lawyer must be involved in drafting the wording of the guarantees and in the signing to ensure that the guarantee can be enforced. The company seal must not appear on the directors' guarantee as this would put enforceability in doubt because it may suggest that the guarantee was being given by the company, rather than being a personal guarantee given by a director as an individual. The same problem can arise if the seal is present, even when all of the directors of a private company sign a guarantee.
A thoroughly prudent person would also undertake land title searches for each of the directors giving guarantees, to ensure valuable property assets are held by them personally and that these assets are largely unencumbered by mortgages or charges. Mortgages and charges on property, and joint-tenant ownership, could make that property asset practically worthless as security. Once you have a personal guarantee, supported by largely unencumbered property assets, if the client defaults in payment under a contract such as your client and architect agreement, you also usually have the right to lodge a caveat on the title, as described in Acumen note: Certificates of title.
Clearly the cost in solicitor's fees for setting up personal guarantees, making sure they are properly executed, that other formalities – such as the director confirms independent legal advice has been obtained – as well as the cost of title and asset searches, need to be weighed against the value of the fees to be gained. The architect needs to weigh up taking exhaustive protection against both the fees and obviously, the client relationship.
Security – bank guarantees
An unconditional guarantee from the client's bank is a better alternative security to directors’ guarantees because it can be called on more readily.
Unconditional guarantees are also known as ‘unconditional undertakings’ or ‘bank guarantees’.
An unconditional guarantee document is in effect a written promise (guarantee or undertaking) by the issuing bank, to pay the agreed amount, without any limitations or conditions (hence the description unconditional), to the person who presents the document. In this sense, an unconditional guarantee is more secure than a cheque in your name.
However, the contract or agreement under which the unconditional guarantee is given often specifies limitations or pre-conditions on use of the guarantee. For example, your client architect agreement might set out a procedure to be followed in exercising your right to call on the bank guarantee if the client fails to pay your fees. If so, you must faithfully follow that procedure in the agreement. If you don’t, then a client might be able to get a court order that resists your right to call on the guarantee.
There are usually bank fees and charges for a bank to issue an unconditional guarantee, which the client would have to pay. It is the same kind of ‘financial instrument’ as the 'unconditional guarantees' in ABIC contracts that a contractor may provide to the owner as security under a building contract instead of cash retention. For the client’s bank to be prepared to give this guarantee on behalf of the client, the bank would have to be satisfied that it was not taking undue financial risk in issuing the unconditional guarantee. Usually, the bank would have to be granted by the company, or the directors, or already hold, security over valuable assets of the company or the personal property of the directors.
Getting paid when the project does not proceed
The decision in James Birrell Mack and Partners v Neil Gary Evans (1985, 1 Building and Construction Law 345) deals with the right of a firm of architects to sue for and recover fees for work done but not completed to the extent contemplated by the contract between the parties.
The case
The owner's land was zoned to allow 16 storeys 'as of right', but there was a proposal to amend the Town Plan to limit the height of buildings on that land to six storeys.
The architects were engaged to preserve the defendant landowner's right to build a high-rise building on his site when they advised the landowner to apply for a building permit to gain full approval before the changes to the Town Plan were gazetted. For this, the landowner agreed to pay the architect:
- Out-of-pocket expenses, whatever happened; and
- Full fees if a building permit was issued, or work was completed to a stage where a building permit would be issued.
On the day before the Town Plan was amended, a building application for a 13-storey building was lodged. The local authority required planning consent and the architects applied for it.
Four months later, the local authority issued a notice of its intention to grant the building application subject to the outcome of objections that had been received. It could be inferred from the notice that the local authority acknowledged the right of the landowner to proceed with the application for a building permit.
The planning approval obtained did not amount to a building permit, and the building permit was not obtained, because the land was sold after the notice of intention was issued by the council and the new owner, as it turned out, was not interested in the design.
However, the architects argued that they should be paid full fees on the basis of 'substantial performance' – the purpose of the contract having been fulfilled even though all the work initially contemplated had not been done. This argument failed at trial because the amount still to be done by the architects was substantial. In the alternative the architects argued for payment on a quantum meruit basis, that is 'a fair and reasonable sum' for the work performed. On the facts, this was more than the out-of-pocket expenses, but less than full fees for the commission up to the issue of the building permit.
The trial judge also dismissed a claim for quantum meruit by holding that the special conditions that were agreed upon made such a claim inappropriate.
The architects appealed to the Full Court where the decision of the trial judge with respect to the quantum meruit claim was reversed.
Justice Connolly found that the sale of the property made completion of the contract impossible and that the circumstances of the case led both parties to regard the contract as ended. No matter which approach is adopted, the architects were entitled to recover remuneration on a quantum meruit basis.
The court ordered that there be an inquiry to determine a fair and reasonable amount to be paid to the architects for work actually done.
Conclusion
Firstly, it is well worth the money to have a solicitor experienced in building matters draft the agreement for you whenever you are arranging a 'special deal' with a client. You can then be better assured that the intentions of both parties will be reflected in the agreement rather than risking the uncertainties that may accompany a loosely drafted, or worse, an oral agreement. In fact, the dispute in this matter arose not because the landowner denied the architect's right to remuneration, but because he believed the liability to pay the architects had passed to the purchaser. A written contract specifying the rights and liabilities of both parties may well have prevented the necessity to resort to costly legal action.
Secondly, if your fees are dependent upon reaching a certain stage and you are prevented from doing this by an action of the client, there is a prima facie case that you are not restricted to out-of-pocket expenses, but entitled to fair and reasonable recompense.
Disclaimer
The material contained in this publication is general comment and is not intended as advice on any particular matter. No reader should act or fail to act on the basis of any material contained herein.