What does your contract say about the ability to recover legal fees or staff time incurred to recover unpaid fees? Good question, huh?
Two recent cases show that architects with good contracts can recover not only unpaid fees for services rendered but, in some cases, termination expenses and internal costs of collection. Design professionals can learn from these cases that when seeking unpaid fees, there may be additional costs that can be recovered if proper wording is included in the contract.
AIA language. The 2007 edition of the AIA B101 Owner-Architect Agreement, like the old B141 form, contained the following language dealing with termination: “9.6. In the event of termination not the fault of the Architect, the Architect shall be compensated for services performed prior to termination, together with Reimbursable Expenses then due and all Termination Expenses as defined in Section 9.7.” Section 9.7 then stated: “Termination Expenses are in addition to compensation for the Architect’s services and include expenses directly attributable to termination for which the Architect is not otherwise compensated, plus an amount for the Architect’s anticipated profit on the value of the services not performed by the Architect.” The 2007 AIA form unfortunately did not contain any percentage or other method to calculate “termination expenses.”
The AIA has revised this language in the new 2017 edition of B101. Section 9.6 now states: “If the Owner terminates this Agreement for its convenience pursuant to Section 9.5, or the Architect terminates this Agreement pursuant to Section 9.3, the Owner shall compensate the Architect for services performed prior to termination, Reimbursable Expenses incurred, and costs attributable to termination, including the costs attributable to the Architect’s termination of consultant agreements.”
New Section 9.7 provides a blank space to fill in a “Termination Fee.” This is a helpful change, and architects would be wise to include such language and fill in the blank so that a court or arbitrator can compute those termination costs. A new 2017 case out of California shows how such a formula can work to the architect’s advantage.
California case. In this case, an architect (FCA) performed services for a hospital project. The contract contained a termination clause which allowed the hospital to terminate the contract “for convenience” after seven days’ written notice. If the termination occurred during the design or bidding phases of the work, however, the contract said that the hospital was obligated to pay FCA a fee in the amount of 20 percent of all compensation. After the design phase, the hospital asked FCA to submit a fee proposal for the bidding and construction administration phases of the project. When the parties disagreed on the fee for those phases, the hospital hired another architect. The next day, FCA confirmed its termination by letter and invoiced the hospital for the 20 percent termination fee pursuant to the contract – in the amount of $2.7 million. The hospital refused to pay and FCA filed for arbitration. The arbitrators awarded the full $2.7 million in termination expenses and the hospital appealed. The California court of appeals upheld the arbitration award in the architect’s favor.
Maryland case. In another 2017 case in Maryland, the architect had a contract for design and professional management services for a new visitor center on a corporate campus. The owner withheld fees allegedly due and the architect filed a lawsuit for the unpaid fees, plus interest, losses and attorneys’ fees. The owner filed a counterclaim for damages allegedly due to substandard design work and inadequate project management. The jury ruled in favor of the architect and awarded unpaid fees of $58,940.
Following entry of the jury’s verdict, the architect filed a motion with the court for attorneys’ fees, costs, expenses, and other losses. The court awarded a total of $287,920 and the owner paid all but $62,190, which was the amount awarded for “losses.” The parties had modified an AIA contract to add a new section 11.10.2 which said, “If Architect employs counsel or an agency to enforce this Agreement, Owner agrees to pay the attorneys’ fees, costs, expenses, and losses incurred by Architect prior to and through any trial, hearing, and/or subsequent proceeding, relating to such enforcement.”
The “losses” sought by the architect consisted of the value of the time spent by a principal in the architectural firm plus several of its employees related solely to the enforcement of the contract. The architect made it clear that he was not seeking “lost profits” on new business not obtained – but merely the value of his time that he was not able to devote to that pursuit. The court noted that section 11.10.2 was not a part of the standard AIA form, was negotiated separately, and added as an addendum.
The architectural firm produced evidence that its employees had expended 79.5 hours evaluating the case and preparing for and attending mediation, 154.5 hours investigating the facts, dealing with discovery, and preparing for and attending depositions, and 69.5 hours preparing for and attending trial. At oral argument, the court was advised that the architect was a small local firm with between 20 and 30 employees. The court ruled that diverting a total of more than 300 hours of staff time at hourly rates ranging from $100 to $200 from income-producing work to assist legal counsel in preparing a lawsuit to collect wrongfully withheld fees, and defending against a meritless counterclaim by the owner, constituted a measure of “loss” as defined by the dictionary. As a result, the award of $62,190 for “losses” was upheld by the Maryland Court of Appeals.
Your contract. What does your contract say about the ability to recover legal fees or staff time incurred to recover unpaid fees? Does your contract have any method to compute termination expenses? Many architects do not like to bring up the unpleasant thought of termination or legal expenses at a time when the parties are trying to establish a working relationship. But these two cases show that paying attention to these topics up front can reap benefits in the event that the relationship does not turn out as hoped. Two firms in California and Maryland are sure glad they were bold enough to address collection of unpaid fees early on.
William Quatman is general counsel and senior vice president at Burns & McDonnell Engineering Co. He can be reached at firstname.lastname@example.org.