While the construction press seems to be full of speculation over which contractors are currently facing financial difficulties, coverage in relation to consultants' insolvency seems relatively minimal.
The news that Archial, the UK's sixth largest architectural practice, was placed in administration last year will not have escaped many in the construction industry's notice and, unfortunately, it is unlikely that it will be the last consultant to become insolvent. With experts agreeing that 2011 is going to continue to be a difficult year for the construction industry, employees and funders need to be aware that the insolvency of a consultant can be as harmful for a project as that of the main contractor.
Employers must ensure that the forms of appointments they sign their consultants up to provide as much protection as possible from the effects of consultants becoming insolvent.
- To start off with, employers must ensure that consultants' appointments contain a robust “termination at will” clause so they can terminate the appointment immediately.
- The appointment should also allow for important rights, such as copyright licence, and the provision of all design documents (unfettered by any dispute over unpaid fees) to continue beyond termination.
- One other practical point is that consultants' appointments should contain a comprehensive payment schedule rather than just a single fee for the whole project. Employers should liaise with their project managers to ensure that all payment requests are in line with that agreed in the consultants' appointments, as they do not want to find that they have paid an insolvent consultant for services that have not been carried out, especially as it is unlikely they will recover the overpaid fees.
Employers should be particularly cautious where they have appointed a lead-consultant to employ all the other design consultants as sub-consultants. While there are numerous advantages to having one point of responsibility, these advantages could come crashing down if the lead-consultant becomes insolvent. The risks surrounding leadconsultancy insolvency are very similar to those of main contractors. An employer could be paying all the subconsultants' fees directly to the leadconsultant, but that does not mean that the lead-consultant is then paying the sub-consultants for the services they are providing. If an employer is concerned with lead-consultancy insolvency, it might decide to try and pay the subconsultants fees direct to ensure that they continue to provide their services. However, the danger with this is that the lead-consultant or its administrator would be entitled to claim from the Employer those very same fees again.
One solution that is currently becoming popular in circumventing the issue of direct payment to sub-contractors, is the use of project bank accounts. There is no reason why project bank accounts cannot be used in this scenario as well. Finally, employers should ensure that the sub-consultants' appointments are back-to-back with lead-consultant's appointments. Sub-consultants' warranties in favour of the employer should also be drafted so that subconsultants have to immediately inform the employer if the lead-consultant has failed to pay its last two months' fees. At this point the employer should have the right to step into sub-consultants' appointments in place of the leadconsultant to enable the project to continue with limited delay and additional cost.