It is often the case in construction projects that substantial work is carried out by professional contractors (such as architects and project managers) before any form of actual construction takes place. The Technology and Construction Court recently considered parties’ entitlement to be paid in respect of such work in TC Development (South East) Ltd v Investin Quay House Ltd [2019] EWHC 3727. In this case the question arose as to whether the professionals were entitled to seek payment of their fees and if so, the amount that they were entitled to.
The case itself
The case concerned claims by an architect and a project manager for their fees (or damages representing those fees) for services that they had provided to the defendant, Investin Quay House, to advance an anticipated application for planning permission in respect of Quay House, London. The defendant had sold this property “for a considerable profit” around July 2018, at a stage when the planning application had not been formally submitted, although the planning application process was “well advanced”.
The defendant initially defended the claim and submitted a counter-claim for alleged poor performance by the claimants. However, the defendant did not comply with the court’s directions in relation to its case such that its defence was ultimately struck out. By this stage, the defendant had ceased to engage with the proceedings. The court therefore decided the case only on the basis of evidence and submissions made by the architect and project manager.
The project manager’s terms provided for a fee of at least £500,000 if the property was sold with favourable planning permission or £150,000 if the property was sold prior to planning permission being granted. The second scenario was held to be applicable in the case – this element of the claim was described as “incontestable” – and the project manager was accordingly awarded £150,000 (plus VAT).
The architect’s terms were not so straightforward to apply to the facts. These terms principally entitled the architect to a basic fee of £750,000 on the grant of planning permission. Of this, £500,000 would be due on the earlier of the sale of the property or six months following the grant of planning permission. (The remainder was due immediately.)
The architect’s terms also included terms in relation to termination that made provision in relation to fees. Under these terms, the defendant could give 10 days’ written notice of termination of the contract, but would be liable to pay a fee of £295,000 if the defendant terminated the contract prior to applying for planning permission or £500,000 if terminating the contract after applying for planning permission.
As mentioned above, the facts were not neatly covered by any of the above terms. As to the fee on the grant of planning permission, planning permission had not been granted at the stage that the defendant sold to the property. Further, as to the fees due on termination, the defendant had never formally given notice to terminate the architect’s appointment.
The architect categorised its claim in a couple of ways. Of these, the court preferred an analysis under which:
there was an implied term of this contract, to the effect that if the client intended to terminate by virtue of selling the property prior to planning permission – because on that basis there could be no further employment of the second claimant – it must do so by using the designated form, which would trigger the payment of the fee.
As no such termination notice had been provided, the claimant was entitled to claim damages of £295,000 for the defendant’s breach of the implied obligation to give notice (with the £295,000 being the amount that would otherwise have been due had the defendant served the notice).
What the court considered to be the “primary [analysis]”, however, was that by the architect serving an invoice for £295,000 on the defendant in respect of its fees, it had waived the defendant’s obligation to serve a notice of termination. This analysis reached essentially the same outcome as the architect’s analysis as the £295,000 was still due, save that the legal character of the amount due was slightly different (ie it was a debt as opposed to damages arising from the defendant’s failure to serve the termination notice).
Take-home points
This case is a reminder of the importance of trying to ensure that contractual terms cover every possible eventuality. Particularly where substantial fees are conditionally due, potentially many months or years down the line (as in this case), there is always a risk that one party will attempt to deny that the other party is entitled to any fees on the basis of any reason that it can find. This may be the case even if the underlying reason is simply that the relationship between the parties has broken down.
Further, this case illustrates the financial risks that businesses must accept if they agree to terms under which they are only entitled to fixed payments on the occurrence of certain events. In this case a witness statement given on behalf of the architect recorded that it had spent 6,892.5 hours on the project, which would equate to around £738,000 on a usual charging basis. However, the (implied) termination of its appointment meant that the architect was only entitled to claim £295,000 despite all the work that it had undertaken on the project.
If you would like any more information on the above or have any questions/ queries please contact us on 01473 232121 or development@prettys.co.uk.