Mind your language1: are you sure your bespoke contract is tight enough?

Perhaps the most important term of your appointment, from a commercial point of view, is the payment provision: how much and when you will be paid. As Stacy Sinclair notes, recent case law demonstrates that you must take care when drafting bespoke fee schedules.

Introduction

Pickard Finlason Partnership Ltd v Mr and Mrs Lock, the first judgment of 2014 in the Technology and Construction Court, principally concerns professional fees and highlights just how wrong things can go if your payment terms are not clear. The Locks purchased a Grade II listed property in Prestbury, Cheshire, known as Butley Hall, with a view to its development. At the time Butley Hall was subdivided into 7 self-contained apartments. The Locks had purchased Butley Hall with the aid of funding from their bankers, Allied Irish Bank, who had also agreed in principle to make funding available for the development.

In April 2008 the Locks retained PFP to provide what was effectively a full professional service in relation to the design and construction of the development. In return, they would receive 10% of the final cost of the project. The parties did not contract on the RIBA standard form of appointment – bespoke terms were created and tailored to the particular client and project. The fee was payable in four stages and included terms entitling them to 40% of the total fee upon planning permission being obtained and the development cost accurately established.

The Architect was aware that the client required funding for the project and agreed to keep their fees low until planning was achieved and further funds raised. Accordingly, the following terms were agreed which specifically concerned the planning period:

• “In accordance with RIBA guidelines we are entitled to 40% of our overall fee for the work up to planning determination, however for your project we recognise the need to be flexible and we therefore offer to reduce our invoicing to 20%.”
• “Our fee entitlement remains at 40% but this proposal keeps our fee payments low during the early stages of a project. Once planning is obtained a more accurate cost of the building and contract works can be established and the professional fee entitlement and overall fee is recalculated and the balance of our fees due becomes payable. At that stage we would agree a lump sum for the remainder of our fees.”
• “We will recalculate and re-advise you of our fee entitlement when the development area and cost become firm.”

By the time planning permission was granted, the relationship between the parties had broken down. The Architect raised their invoice but the Locks did not pay. The Locks were unable to obtain funding for the revised scheme which ultimately had been granted permission. They considered that the Architect had failed to give them proper advice at the relevant times about the risks and costs of this revised scheme. In addition, the Locks claimed that the Architect had failed to obtain firm costs from contractors which would have enabled them to move the development forward

Ultimately the Architect commenced proceedings claiming the balance of their 40% fee.

PFP’s case was that all that it was required to do was to revisit its cost plan as provided under stage two and to undertake any recalculation of that cost plan as might be necessary consequential upon the outcome of the planning application. Thus if, for example, the planning application was for a development of 20,000 ft², but the planning permission limited the development to 15,000 ft², it would be necessary to recalculate the cost plan accordingly. The same would be true, for example, if a condition of the planning permission required the Locks to undertake some further expensive works not included in the cost plan. It did not, however, require PFP to undertake any further detailed design to refine costs, or to enter into discussions with contractors to obtain a price estimate, or indeed to take any other of the steps which were required under stage three.

The Locks’ case was that it required PFP, post-planning permission, to establish an accurate cost of the building and contract works so that the cost became firm. The Judge considered that this could connote two possible scenarios. The first was that all that was required was that a more detailed cost plan should be provided, perhaps with the benefit of price estimates given by prospective contractors. The second was that PFP must provide such of the stage three services as are reasonably necessary to procure a tender from a contractor which the Locks are ready, willing and able to accept, such that there is thus a known contract sum.

The Judge held that, on proper construction of their bespoke terms, the Architect’s claim failed – they were not entitled to their invoiced amount of approximately £182k. They had not established, post-planning permission, a firm and accurate cost for the building works – which was a condition precedent to rendering their invoice.

The express wording of their appointment made it clear that the cost only became “firm” once the “cost estimates are refined and the contract sum is known” and once “a more accurate cost of the building and contract works is established”. There were two expressly stated purposes of establishing the cost of the works. The first was to establish the balance of the 40% fee entitlement. The second was to establish the “overall fee” so that “at that stage we would agree a lump sum for the remainder of our fees”.

The Judge did not consider that it was possible for a lump sum to be agreed until, at the earliest, such time as there is an agreed contract sum. It would on any view not be possible to do so on the basis of the broad cost plan, adjusted as necessary post-planning permission, which is all that PFP say they were required to do. It was not enough to simply revisit the cost plan and undertake any recalculation required. As the Architect had not procured a tender from a contractor which the Locks were willing and able to accept, they were not entitled to present their invoice.

The Judge also held that the Architect failed to comply with their obligation to provide an indication of the magnitude of the cost of the revised scheme at any time during the feasibility stage.

One issue that parties often raise in disputes such as these, especially if the contract has been drafted by the other side, is the contra proferentum rule.

Contra proferentem

The full phrase of this Latin term is: “verba chartarum fortius accipiuntur contra proferentem” or “the words of an instrument shall be taken most strongly against the party employing them”.

Legally, it is a rule of construction whereby doubt about the meaning of words will be resolved against the party who has put them forward.

In the case of Pickard Finlason Partnership Ltd v Mr and Mrs Lock (discussed above), the Judge noted that if there was any ambiguity as to what was meant by the phrase “when the cost becomes firm” in the bespoke appointment terms, then it should be resolved against the Architect on the basis that they had drafted the appointment and were then seeking to rely on a particular construction of it when enforcing their right to payment.

Conclusion

The findings in this judgment are of course very fact specific. Nevertheless, they are a timely reminder that when you draft bespoke, complex provisions, you do so at your own peril.

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• 1. A version of this article was first published in The RIBA Journal, March 2014