Payment and Protection

Article Loss Prevention by

Introduction

In the present economic climate every business is feeling the pressure and it has never been more important to take all available steps to ensure you are paid for the services you provide. This article attempts to provide some guidance to assist with recovering consultants’ fees. Firstly it outlines some pre-emptive steps which can be taken by consultants to safeguard their position should they ever have to launch a fee claim. The second half then highlights some of the options available for recovering those fees.1

Section A: Establishing the right to payment

There are two hurdles you must overcome for a successful fee recovery:

1.         Establish that your client has a legal obligation to pay you;
2.         Satisfy both the procedural and legal requirements for a recovery of your fees.

1.         Establishing a legal obligation to pay

Firstly, make sure you identify who your client actually is. This is an obvious but crucial point. Consultants are often engaged through an intermediary or by one member of a group of companies, which can often cause problems later. To avoid this, always ensure you know who your true client is and, where possible, be engaged by a company with assets (rather than a shell or off-shore entity). If you have concerns about your true client’s ability to pay, then consider requesting third party security or advance payments. In certain situations it is possible to recover your fees from a party acting as the agent of the client, but ultimately fee recovery is so much easier if you have established who your client is before you undertake the work.

Secondly, the importance of agreeing and recording all the terms of your appointment in writing cannot be overstated. Subject to statutory intervention, parties are generally free to negotiate and agree whatever payment terms they want. However you should aim to make the terms as clear and unambiguous as possible. It is also important, especially when working for a lump sum fee, to define in writing the scope of your services and the value, scope and anticipated duration of the project. Ideally the appointment should contain mechanisms for varying the lump sum when these matters change. At the very least make sure you record the basis on which the fee is agreed. It is particularly important to ensure that all information or statements are recorded in the appointment, as the presence of an ‘entire agreement clause’ may well preclude you from relying on anything not specifically referred to in the document. Finally, the written appointment should also provide an entitlement to payment for additional services.

In the absence of a formal written appointment, keeping accurate written records is of paramount importance. To this end you should ensure oral agreements are confirmed in writing (usually by sending a letter to the client as soon as possible after discussions). In addition, even where there is no express agreement for payment, there is a rebuttable presumption that services provided by a professional will be paid for at a reasonable rate. However, again, fee recovery is so much easier if payment terms are clearly set out in writing before you undertake the work.

2.         Satisfying the procedural and legal requirements

When it comes to preparing a fee claim you must relate all sums claimed under the appointment back to the relevant terms to show that the requirements of the appointment have been complied with. The key to this is good housekeeping. Make sure you keep written records which:

  • confirm the instructions to proceed;
  • relate invoices back to the appointment/payment schedules;
  • confirm any agreed changes to billing arrangements and reasons for them;
  • particularly where the agreement is informal or under negotiation, record work done and time invested in order to show that the fee claimed is reasonable. Even when working under a lump sum or percentage fee, such records will be invaluable if a dispute arises.

 

Good housekeeping is equally crucial when undertaking additional services. Firstly, check the requirements of your appointment in relation to additional services. In any event, you should obtain prior written confirmation from the client that you are instructed to proceed with the additional services, their scope and the agreed fee/method of calculation. In addition, obtain written confirmation that they are additional services under your existing appointment, to avoid creating a separate contract. This will assist you if you later decide to adjudicate for any outstanding fees.

When claiming fees it is necessary to show that the work has been done and the contractual stage for payment has been reached. The following quote from a judge in a fee claim case illustrates this point:

  “A sum which was not due under the contract could not be turned  into a sum that was due merely by invoicing the employer and  stipulating a date by which the invoiced sum should be paid”.2

Section B: Options for enforcing the right to payment

So, you have set up your appointment correctly and provided the services in accordance with the appointment. However the date for payment has passed and your client has not paid. What can you do?

1.         Legal position

Most fee claims are claims for payment of monies due under a contract. Your client has promised payment in return for you providing services. Therefore once the services have been duly performed (and the contractual final date for payment has passed), you have a cause of action in debt for payment. To recover your fees you must prove that the debt is due and payable, however you do not have to prove any actual loss and also the rules for recovery of damages (e.g. as to remoteness, mitigation and penalties) do not apply. However you should of course be prepared for any counter arguments the client may put forward, whether they be abatement, set off, cross claim or counterclaim.

If the debt claim arises out of a simple contract you have six years to bring a claim from when the cause of action accrued, whilst if the contract is a deed the period is 12 years. In addition it is worth remembering that you can usually claim interest on the amount outstanding.

2.         Options

Firstly, there is of course the traditional option of commencing proceedings through the courts. Alternatively there is the fashionable option of attempting ADR (Alternative Dispute Resolution). Where applicable and appropriate, you could negotiate, mediate, arbitrate or adjudicate. However in addition to these now well known options there are a range of other, perhaps less well known weapons in the fee recovery armoury.

Solicitor’s letter of demand

Instructing your solicitor to send a formal letter demanding payment frequently prompts the client to pay. Often the involvement of solicitors also assists in disposing of unmeritorious claims and defences.

In addition, a well drafted solicitor’s letter also has the benefit of kick starting the Pre-Action Protocol for Construction & Engineering Disputes, which must be complied with anyway before you commence court proceedings.

Statutory Demand

A statutory demand is usually used as part of the insolvency process, as the failure to comply with it provides the court with proof that a company is insolvent. However it is also a powerful weapon in the fee recovery armoury.

A statutory demand requires the debtor to pay the outstanding amount within a specified period, which is clearly stated in bold on the front of the demand. The advantage is that a debtor knows that failure to comply can be relied upon by a creditor when presenting a winding up petition against the debtor.

However a statutory demand should only be served where there is no dispute that the sum is due, there is no genuine argument to resist the demand and no prospect of the claim of set off being raised. If the debtor produces a credible argument of a genuine triable issue then it may be better to withdraw the demand rather than have it set aside with a potential adverse costs order.

Exercising a lien over documents until payment is received

You are entitled to retain documents you have prepared as part of your services until the client has paid for them. However, the lien will be lost if you provide copies of the documents. Beware of terms in proposed appointments which would nullify your ability to exercise your lien.

Appropriation of payments

Where a client has paid money without appropriating it to a particular debt (i.e. paying a cheque but not in respect of a particular application for payment or invoice), you may appropriate the money to any debt you choose. However, the money must be due as a debt (e.g. it cannot be appropriated against an invoice which is not in law due).

Banking cheques received in settlement

Frequently, cheques for less than the full amount due are sent in ‘full and final’ settlement of fee claims.  Banking or retaining a cheque and not rejecting the offer immediately is viewed by the courts as strong evidence of acceptance of the offer. If you accept the cheque as part payment only, the safest course is to hold the cheque and seek immediate confirmation from the payer that it can be banked on account, alternatively, return it.  A further, but more risky, option is to bank the cheque whilst immediately rejecting the offer, to demonstrate that it has not been banked in satisfaction of the claim.

Termination or suspension

If you are engaged in an ongoing project for a client, but they are refusing to pay you as your fees become due under the appointment, then the following two options may also be relevant:

Treating non-payment as a repudiatory breach of contract

In certain situations a breach of contract may entitle the innocent party to terminate the contract. However the breach must either be so fundamental that it deprives the innocent party of substantially the whole benefit that it was intended to obtain from the contract, or the parties have agreed (expressly or by implication) that the breach will entitle the innocent party to terminate.

Non payment may constitute such a breach and you may therefore be able to terminate the contract. However, this option comes with a health warning especially when dealing with failure to pay by instalments. Whether a failure to pay by instalments due under a contract is a sufficiently fundamental breach is a question of fact in each case. However there is case law indicating that the failure to pay three instalments was insufficient, where the client had not demonstrated an intention not to pay at all. In addition if the client can ultimately demonstrate that the instalments relied upon to treat the contract as at an end were not in fact due, then you will have  put yourself in breach by having terminated the contract.

Suspension of performance of the services

Subject to the Construction Act 19963 applying to the contract, s112(1) provides you with a right to suspend your services. The right can be exercised when a sum due under the appointment is not paid in full by the final date for payment and no effective withholding notice has been given. However the right cannot be exercised without first giving to your client at least 7 days’ notice of intention to suspend performance, stating the grounds on which it is intended to suspend performance. Furthermore the right to suspend ceases when your client makes payment in full of the amount due.

Suspension of performance can be a very effective threat. However, the risk in suspending is that if the client can demonstrate that the monies were not due as claimed, then you will be in breach for withholding your services.

Settlement

Finally, if you have agreed terms for settlement for your fee claim it is crucial to record the terms formally. This is of particular importance if it has been agreed that you will compromise your fee claim in exchange for the release of negligence claims which have been notified against you by the client. Do not leave your position exposed by not recording these terms in writing and allowing the client to send you a cheque which purports to be in settlement of the fee claim only. Should the client later pursue the negligence claim, you will have a much more difficult time proving the basis of the settlement if the only written evidence is that of payment of the fee claim.  A strategically prepared compromise agreement could obtain a wider release of claims than might be in dispute in the fee claim.

 

This article is for guidance only and should not be relied upon for legal advice. In any particular case specific legal advice should be sought.


1. This article is based on talks given on 18.11.2008 by Guy Lane, Robert Stevenson & Peter Stockill of Berrymans Lace Mawer solicitors.

2. HHJ Thornton QC in CWF Architects v Cowlin Construction Ltd [2006] EWHC 6 (TCC) 35

3. Full title of the Act is the Housing Grants Construction & Regeneration Act 1996 (HGCRA).