Episode 169 - Bespoke Appointment Contracts

Hi and welcome to the Part 3 with me podcast! The show that helps Part 3 students jumpstart into their careers as qualified architects and also provides a refresher episodes for practicing architects. If you would like to show your support for the podcast and help us continue making amazing content, click on the link in the episode notes to sign up to our subscription. I also offer one-to-one mentoring services to help you with your submissions, exams and interview, so head over to our website to learn more or reach out to me on LinkedIn through the Part 3 with me page or Instagram. My handle is @part3withme or email me at [email protected]. I am your host Maria Scudari. And this week we will be talking about bespoke appointment contracts. Today's episode meets PC 2 of the Part 3 criteria and make sure to stay until the end for today's scenario. Now when we refer to bespoke appointment contracts, what do we mean and why do clients use them? A bespoke appointment contract is in essence a tailor-made appointment contract put together by a client's legal advisor and it comprises of clauses they deem as appropriate within it. These types of contracts tend to vary from the standard RIBA professional services contracts. So typically for client has sufficient resources to do so. They tend to deviate from the standard professional services contracts provided by the RIBA and they propose to use a bespoke form of professional appointment. If the client is a regular user of architectural services or a job is particularly complex or high value, then the client may consider that the standard form available doesn't provide sufficient protection for what they need it to. They therefore tend to draft bespoke appointments in order to shift the balance of risk in favor of the client, impose additional duties or limit the architect's authority and to address project specific concerns. As such, it is for the architect and their legal advisor to assess the relative strength of the bargaining positions of the architect and the client in each case and seek for clarification and negotiation. So how do negotiations commence? Firstly, the client's solicitor will send out an initial draft tailored to the nature of the project. There are then three ways the architect should indicate proposed amendments and variations to that contract. Firstly, they can do it through manual handwritten amendments over the appointment. This method should be generally avoided as it may result in confusions over someone's handwriting. The second is using electronic markups, tracking the changes proposed by the parties at each stage in the negotiations. And the third is using an electronic schedule of comments in the format of clause number and then comment. This tends to be the preferred and clearest way to record proposed amendments and to also track the negotiation. So once the appointment has been finalized, the architect should then ask to review the final draft in both clean and also the track changes version before the document is sent out for signing known as execution. Now what happens if a client says they will accept no amendments to be made to the contract? If you come across such a case, the architect may have particular concerns, which are potential deal breakers, making the project no longer commercially viable for them. All the proposed clauses may compromise their PI policy. The architect, however, should still raise these points with the client, even if they state they will not accept amendments. The PI insurer may be willing to agree a specific one-off endorsement to the policy if the client is unwilling to compromise on a particular provision that may create a coverage issue. If everything else is favourable, the architect's proposed design, their approach, the fee, the penalties, then the client would generally be open to a compromise on a particular term of the bespoke appointment. Now let's look at some typical terms and pitfalls found in bespoke appointments. The main issues to watch out for includes unfamiliar clauses. So bespoke contracts may contain unfamiliar legal language, hidden traps or obligations that go beyond what's reasonable or insurable. Another issue may be imbalanced risk. They may shift more risk onto the architect, for example, by requiring a fitness for purpose obligation, unlimited liability or broad indemnities. Another issue could be broad indemnities, whereby requires architects to indemnify to the client for all losses, especially those not caused by negligence. Another issue can be ambiguity, meaning poorly drafted bespoke clauses that can be unclear, that can lead to disputes about what was intended. Another issue that typically can be seen in bespoke appointments is conflicting terms, where there may be inconsistencies with other documents, like the building contracts or collateral warranties, leading to confusion about whose terms take precedence. And another potential issue is intellectual property rights. The architect should ensure they retain their copyright unless adequately compensated for transferring it. So to expand on some of these pitfalls, as mentioned, bespoke appointments tend to have a clause setting at the meaning of certain terms, which appear throughout the appointment document. A client may wish these meanings to be wider on narrower than the architect had anticipated. So for the architect to understand how the definition may work to their disadvantage, they must cross-reference to the other parts of the appointment, where the defined terms appear. For example, there may be a clause for additional services, which states any substantial additional services, which are not foreseeable by the architect at the date of this agreement, provided that design changes made in discussion with the client and the preparation of alternatives before such design is finally agreed by the client, shall not constitute additional services. So the intention of this wording is to restrict the architect's ability to claim additional fees, even though they have a legitimate claim, because they have carried out additional work over and above their basic services. There is no reason for an architect to accept such a restricted definition. And this doesn't represent the market norm. The use of the wording not foreseeable is very harsh, because it's not subject to a standard of reasonableness. So the client will argue that the architect should have foreseen that the additional services provided were going to be required, and therefore the client should not pay for these services. A similar effect is created by wording requiring the architect to provide the basic services, and in addition do all things that may be reasonably implied by them, or are reasonably incidental to them. But the architect needs to know with certainty what their basic services are, and from that what will be additional, it's impossible to provide an accurate fee estimate without this information, something which is not helpful to the client or the architect. So the wording relating to design changes is indicative of a growing trend for clients to seek redesign for free as part of a value engineering exercise or a series of such exercises on a project. So this is a misuse of the term value engineering, which when used correctly is about innovation through design to reduce cost. So the risk being considered in this section is where the client seeks to oblige the architect to redesign down to cost. This could involve significant redesign by the architect, but the likelihood is that the need for designing down will not be or not exclusively the fault of the architect. It's usually for the quantity surveyor to keep track of likely expenditure. If the quantity surveyor only realizes late in the design process, that a project is over budget and that cost savings can only be made if the design is changed, the amount of work thrown away and work which must be redone can be huge. So it is unreasonable to expect the architect to bear their own costs of the redesign in the circumstances and such work should be treated as an additional service. Ideally the architect's right to additional fees for such work should be expressly stated in the appointment. Ideally the architect should also be allowed some input into green cost changes and should ensure that the quantity surveyor's appointment requires the quantity surveyor to seek the architect's input before changes are made. term we're going to be talking about. tends to be added or amended within such bespoke appointments is one relating to the duty of care. So knowledgeable commercial clients will usually expect an enhanced duty of care over and above the standard of the ordinary skilled professional that is implied by law. The clause tends to read the architect warrants that in respect of the services they have and will continue to exercise all the reasonable skilled caring diligence to be expected over properly qualified professional architect holding itself out as competent and experienced to perform such services having due regard to the size, scope, nature, complexity and value of the project. So that's typically the clause that you might come across. It can be hard to argue against this enhanced duty. It is effectively the market norm in a bespoke appointment and it is easy to see why a client who has selected an architect on the basis of their reputation and past experience expects to be able to rely on the architect achieving a special subjective level of skill not merely an ordinary standard of skill that the client could expect to get from any other architect. Now if the architect in question does actually possess the enhanced degree of skill and care, the practical consequences of accepting the enhanced duty may be limited. Even so, no architect should feel compelled to agree to the enhanced standard without exploring whether the client will accept instead the standard of the ordinary skilled professional. So as a compromise an architect could add wording to the effect saying notwithstanding any other provision of the appointment, the architecture not be construed as owing any greater duty to the client than to exercise the level of reasonable skill, care and diligence required by this clause. So incorporating this wording should be enough to cut across any more owner's standards of care or obligations that may otherwise be expressed in or implied by the appointment. Many PI policies are based on the ordinary standard of care, so agreeing the enhanced standard in an appointment could potentially be a reason for the insurer under such a policy to deny your cover. Now let's look at another term commonly found in bespoke appointments which is one relating to collateral warranties and third party rights. So such a clause tends to state that the architect shall within 10 days of each request made by the client execute and deliver to the client a deed or deeds of collateral warranty in the form set out in Appendix X or will agree that the schedule of third party rights set out in Appendix Y shall apply in favor of any funder providing finance in relation to the whole or any part of the project, any purchaser or tenant taking an interest in the whole or any part of the project, any group company or affiliate of the client and any free holder. So the main point for the architect to consider under this clause is to whether the job is one which warrants an obligation to provide contractual rights to third parties at all. If there is no limit on the overall number of collateral warranties that may be required, this obligation can soon become very onerous, not just in terms of the extension of contractual liability to many parties over and above the architects, immediate client, but also because of the amount of management time required to deal with them. There is also a temptation for clients to propose particular amendments to suit individual beneficiaries if the enabling clause allows for reasonable amendments to be proposed. So most architects will be willing to consider changes. The time, outlay and potential costs, however, of taking legal advice can significantly mount up over the course of 10 or even 20 individual collateral warranties. It is most sensible to seek certain limitations on the overall obligation to provide collateral warranties, although this would depend on the nature of the project. Now if the client has a strong bargaining position, they may argue for the inclusion of an obligation to provide collateral warranties in response to a reasonable request. The implication of this wording is that some requests may be unreasonable. A client will find this hard to accept, but this wording would protect the architect from the possibility of providing a collateral warranty to, for example, a beneficiary with a track record of making nuisance claims. As an alternative to address this issue, the architect may propose a specific exclusion of the obligation to provide collateral warranties if the parties are in dispute over fees or are right for the architect to reasonably object to providing a collateral warranty in particular circumstances. The architect may also be obliged, under the enabling clause, to procure collateral warranties from some or all of their subconsultants. They should always be subject to the architect's reasonable endeavors. The client under such circumstances will argue that procuring such collateral warranties is within the architect's control, and they will say that if the architect had not chosen to engage subconsultants, the additional collateral warranties would not be required. However, the architect can make the point that even if there is a strict obligation to provide collateral warranties in a subconsultant's appointment, this is still not a guarantee that the collateral warranty will be provided. The subconsultant may breach their obligation. So looking at another key term commonly found within bespoke appointments is relating to indemnities. So clauses relating to indemnities might state that the architect shall be liable for and shall indemnify the client against any and all claims, actions, liabilities, losses, damages and expenses, including legal expenses incurred by the client, which arise out of or in connection with directly or indirectly the architect's performance under this agreement. So this type of indemnity clause should never be accepted as PI policies tend to not cover for claims based on an indemnity. As the client doesn't have to prove that the architect has acted negligently in order to successfully claim under an indemnity, an example could be that the architect exercised reasonable skill and care and properly refused to grant an extension of time. If the contractor goes to a gentication claiming an extension of time and prolongation costs, and the adjudicator takes a different view from the architect and makes an award in favor of the contractor, the client will then be entitled to sue the architect under the indemnity to recover all their resulting losses and expenses, even though the architect's original decision was not negligent. Additionally, the limitation period for an indemnity starts to run only when the client suffers a loss, which could be years after the contractual limitation period expired. To, in order to mitigate indemnity clauses, the architect can try ways to limit this scope if the client does not accept in removing them. So an architect could seek general wording to the effect that they shall owe no greater duty than to exercise reasonable skill, care and diligence. This would ordinarily cut across any indemnity provision. Now another important matter to be addressed within appointment contracts is of course copyright, and who owns that copyright. So by law, the copyright in any designs through the drawings and the finish building representing the designs is owned by the architect and the architect is generally free to recycle their work on other projects. The client will usually be granted a license to use any copyrighted material for the purposes of the respective project. This license may be granted expressly under the terms of the architect's appointment or implied by law. The architect should include a provision linking the copyright license to the payment of their fees. Commercial clients in particular are often unwilling to agree to this, but if there is any question about the strength of the client's financial covenant, the architect has a stronger position from which to argue this point. So the use of wording of grants with full title guarantee, unconditional, royalty-free or irrevocable license should. be removed and avoided and the architect should generally not accept an obligation to assign the ownership of their copyright material generated in carrying out their services in relation to the project. So these are just a handful of terms architects need to be wary of when reviewing a bespoke appointment contract. Some key tasks they should always ensure they carry out when faced with a bespoke appointment is not to assume that just because a clause looks familiar it has the same meaning as in a standard form. Every word matters and special attention must be given to firstly the scope of services. Is it clear what you're being asked to do? Are there any hidden obligations? Another item to be wary of is standard of care. Are you being asked to guarantee a result of fitness for purpose rather than exercise reasonable skill and care? The latter is the professional norm and insurable. The former is not. Another item to be wary of is liability and indemnity. Are there caps on your liability? Are you being asked to indemnify the client for all losses even those outside your control? Another one is insurance requirements. Do the insurance provisions match what your policy covers? Never agree to obligations your insurer won't support. Another key term to be wary of is payment terms. Are they clear, fair and incopliance with the construction acts? Another is termination points. Can the client terminate at will? And what happens to your fees if they do? And lastly another key element to be wary of is dispute resolution. Are the mechanisms for resolving disputes fair and practical? So make sure to negotiate and don't feel pressured to accept every term as drafted. Make sure to propose amendments that restore a fair balance of risk and responsibility. Use standard forms as a benchmark for what's reasonable and keep a clear record of negotiations, agree changes and the final version of the appointment. This is vital if a dispute arises later and ensure that all documents are signed, dated and that you have copies of all project correspondence. So those are some key tips to be wary of and to consider when reviewing or being asked to sign bespoke appointment contracts. Before I move on to today's scenario, let's just quickly sum up what we ran through today. So unlike standard RWA forms, bespoke appointment contracts are tailored by clients, often to shift risk in their favor, add duties or address project specific concerns. Architects and their legal advisors must carefully assess the balance of bargaining power and negotiate terms that are fair and commercially viable. Effective negotiation is therefore vital and involves clear trackable methods for proposing amendments, preferably using electronic schedules of comments rather than handwritten changes. An architect should always review the final draft in both clean and tracked formats before signing the contract. Bespoke contracts often introduce unfamiliar legal language, broad indemnities, ambiguous terms or obligations that exceed what's reasonable or insurable. So architects must scrutinize definitions, risk allocation and any clauses that could restrict their right to additional fees or impose unlimited liability. So some key areas to review include the scope of services, standard of care, liability and indemnity provisions, insurance requirements, payment terms, termination rights and dispute resolution mechanisms never assume familiar wording means the same as in standard forms, every word matters. An architect should not feel pressured to accept every client drafted term. They can propose amendments to restore a fair risk balance, use standard forms as a benchmark and maintain clear records of negotiations and final agreements. Proper documentation is vital for protecting both parties if disputes arise later. So that concludes broadly what you should expect when it comes to bespoke appointments. So to put what I just went through into context, let's run through a scenario. In today's scenario, a client has approached your practice with site located, let's say, in East London. The existing development replaced traditional railway arch small businesses and was intended as a regeneration project and to shake up outlet fashion and appeal to Londoners as well as tourists for its success. However, by 2019, most of the arches were vacated and remained empty. The two larger buildings that bracket the arches at the East and West ends of the site are also empty. So this development scheme failed commercially in general. The site was then bought by the practice's client, which will be forming a special purpose vehicle consisting of three stakeholders to have ownership of the site and fund the project together. So they approach your practice to put together some ideas for the project and a feasibility study. They have sent to the practice a bespoke services contract drafted by their lawyers, which they claim to use on all their projects. Your manager has asked you to read the contract and you see that it's for full architectural services up to the end of construction. The contract is proposed as a deed and you also see that the client requires you to sub-consult members of the design team including the structural engineer, MEP engineer and interior designer. The client asks that the practice proposes a fee to be paid on completion of each key milestone. So your manager asks you to review the contract and to highlight any risks of a green to the contract as it stands. So you would draft the response to your manager highlighting the key risks of a green to the bespoke contract as it stands. The first thing that would be beneficial to highlight is the liability for sub-consultants work. So by green to sub-consult the structural engineer, MEP engineer and interior designer, the practice will become the single point of responsibility for all design disciplines. If any of the sub-consultants fails to deliver or make any error, then the practice is liable to the client and must pursue recovery from the sub-consultant which can be a complex process, costly and time consuming. This exposes the practice to significant risk, especially if the sub-consultants become insolvent or lack adequate professional indemnity insurance. So that's the first risk. Another risk you could highlight is the contractual and financial risk with the fees. So having the fee being paid on milestone completion instead of monthly increases the risk if the project scope is unclear or subject to change. Any ambiguities or changes not covered by the original contract can lead to disputes over what is included in the fixed price and what isn't potentially resulting in additional costs or delays. So if the contract lacks clear mechanisms for handling variations, delays or discoping, then the practice will not be compensated for extra work or prolonged project timelines. That's the second potential risk. Then another one is having the bespoke contract signed as a deed. So executing the contract as a deed typically extends the limitation period for claims to 12 years instead if it was just signed as a simple contract. This means that the practice could be exposed to claims for a much longer period, increasing long-term liability and something that PI policies might not be willing to cover. Another key risk to highlight to your manager is potentially having the contract poorly drafted or have one-sided terms. Bespoke contracts drafted by clients lawyers may contain terms as we mentioned earlier in the episode heavily favouring the client themselves and having broad or vague service descriptions, they might also have strict liability clauses or limited provisions for additional fees in case of variations or delays. This can result in unclear scope, leading to scope creep without additional payment and then as a result, leading to difficulty in recovering fees for extra work or delays caused by factors outside of the practices control. So this increases risk of disputes and potentially harming the relationship with the clients. So a very thorough process of reviewing the contract will be needed. And not another potential risk is insurance and insolvency risks whereby the practice must ensure that both our own and the subconsultant's professional indemnity insurance is sufficient to cover potential claims. If a subconsultant's insurance lapses or is inadequate, then the practice may bear the full financial burden of any claims. If the practice or a subconsultant becomes insolvent, then the client may lose access to the whole design team or may be left with unrecoverable costs. Also another key risk is relating to payment. So as a practice, we might be required to pay the subconsultants if they are appointed under the practice. Even if the practice hasn't been paid by the client, the practice will still need to pay the subconsultants exposing the practice to cash flow and financial risk, particularly if the client delays payment or disputes milestone completion. So these are just some potential key risks that you could raise to your manager. Then you could provide just a quick list of a few points that you would recommend in how to handle this. So you could suggest that the practice carefully reviews and negotiates the contract to ensure clear scope, fair risk allocation and robust provisions for variations, delays and discoping, ensure back-to-back terms with subconsultants, including insurance, liability and payment terms. The practice should also insist on provisions for additional fees if the project is delayed or the scope changes, assess the adequacy of the lump sum fee to cover management coordination and risk exposure, and the practice should definitely seek legal advice before signing, especially with bespoke contracts drafted by the client's lawyers, and agreeing to the contract as it stands, exposes the practice to significant legal, financial and operational risks that must be carefully managed and where possible mitigated through negotiation and clear amendments to the terms. So hopefully that provides you with a good overview of how you could go about tackling such situations with bespoke contracts if you ever come across this in either your own practice or in an exam question or coursework. So that covers what I wanted to discuss today, and that concludes today's episode. If you would like to get in contact with me, please feel free to email me on the address provided in the show notes. Thank you for listening. This is an educational show aimed at supporting the future generation of architects. The information opinions and recommendations presented in this podcast are for general information only, and any reliance on the information provided in this podcast is done at your own risk. Please join me next week for some more part three with me time.