Several different specialities are involved in bringing a construction project to life. The developer or project owner (often referred to as the client or employer), has the duty of appointing a professional advisory team to assist with the technical aspects of project delivery. Given that the stakes are high, particularly the cost if things go wrong, it is common to rely on a professional appointment agreement that sets out the rights, obligations and expectations of each party.
In this article, our experienced construction solicitors walk you through the main practical and legal considerations when appointing a professional advisory team and explore the main terms you can expect to see in such an agreement. We also consider the risks, liabilities and exposure associated with such appointments, and address some of the mechanisms available to resolve any disputes should they arise.
Contents:
- What is a professional appointment?
- What are the key considerations for selecting the right professional for a construction project?
- What are the typical terms included in an appointment agreement?
- What are the implications of a poorly drafted professional appointment agreement?
- What are the key legal considerations when appointing professionals for construction projects?
- Are there any legal requirements to document professional appointments?
- Will I be liable if the appointed professionals fail to fulfil their duties?
- How to terminate or modify an appointment agreement made with a professional?
- What are the different methods for resolving disputes arising from professional appointments?
- Summary
What is a professional appointment?
A professional appointment in construction refers to the formal agreement between a client (the employer) and professionals within the construction industry who provide specialist advice for a project. Depending on the nature of the project at hand, several professionals may make up the advisory board including:
- architects
- structural, mechanical and or electrical engineers
- project/site managers
- quantity surveyors
- design consultants
- environmental consultants
- landscape and interior designers
- certain disciplines necessary by law (for eg a ‘principal designer’ as required by the Construction (Design and Management) Regulations 2015 (CDM)
The professional appointment typically outlines the roles, responsibilities, and expectations of both parties throughout the construction project, and provides a solid foundation for the business relationship.
What are the key considerations for selecting the right professional for a construction project?
- Qualifications: As a starting point it is sensible to look for professionals who have the necessary qualifications, certifications, and experience in the specific type or size of construction project you are planning.
- Reputation: It is worthwhile investing time to research the professional's reputation in the industry and review their past projects to assess their track record and quality of work. This includes reviewing the professional's portfolio to see examples of their previous work and determine if their style and expertise align with your project requirements. You could also request references from the professional’s past clients to get feedback on their work ethic, communication style, and overall performance.
- Synergy: Communication, coordination and collaboration are essential to ensure the success of construction projects, large or small. Choosing a professional who communicates effectively, listens to your needs, and is willing to collaborate with you/other professionals involved throughout the project goes a long way. It is also worth choosing someone that you feel comfortable and easy working with, as these business relationships are not short-term, especially in larger construction projects.
- Fees: The professional's costs for their service must fit within your project budget. It is also wise to discuss and clarify any payment terms and additional costs upfront to ensure these align with your expectations.
- Availability: It is important to ensure that the professional is available to start and complete the project within your desired timeline.
What are the typical terms included in an appointment agreement?
Scope and Standard: This describes the specific services to be provided by the professional, including the extent of their responsibilities and deliverables, and the standard of care expected in the delivery of those services. It is common to specify that the professional consultant uses reasonable care and skill in the exercise of its function. Some employers may seek wording to the effect that the consultant’s services are ‘fit for purpose’, although these incur a higher degree of liability and are generally resisted.
Project Timeline: This sets out the expected start and completion dates of the project, as well as any key milestones or deadlines.
Payment: This outlines the professional's fees, payment schedule, and any additional costs or expenses that may be incurred during the project.
Insurance and Liability: This addresses the professional's insurance coverage and liability limits, as well as the allocation of risk between the parties. It is common for consultants to request a monetary ‘cap’ to reduce their exposure/limit their overall liability. This can be in line with the consultant’s indemnity insurance cover or a multiple of the fee payable under the appointment. Professional consultants may push for net contribution clauses that limit the amount recoverable by an employer when two or more consultants are jointly liable for any defects identified in the construction project. The alternative to this is that the employer seeks to recover 100% of its damages from one of the two liable consultants, who can then seek to recover a share/obtain a contribution in respect of the same from the other party under civil liability and contribution laws.
Intellectual Property: This clause determines the ownership or rights to use any intellectual property created by consultants during the project, such as design drawings or specifications.
Dispute Resolution: This clause establishes a process for resolving construction disputes or disagreements that may arise during the project. The primary purpose is to avoid expensive and lengthy litigation at court (or at the very least ensure it is a last resort). It is worth noting that mandatory adjudication provisions are implied by law into every ‘construction contract’ within the meaning of the Housing Grants Construction and Regeneration Act 1996 (if not expressly specified). Construction contracts here include agreements for architectural, design, or surveying work, as well as the provision of advice on building, engineering, interior or exterior decoration and landscape layouts.
Collateral Warranties/Third Party Rights: It is common practice for the professional appointment to require the consultant to enter into either collateral warranty agreements, or otherwise grant third party rights in favour of any potential funders, purchasers or tenants of the development. Such rights typically contain ‘step-in’ provisions, enabling third parties to effectively step into the shoes of another, take over and complete the project should the consultant be in breach or become insolvent.
Novation: The agreement must set out the procedure and requirements for transferring the rights under the professional appointment to an incoming party. This is particularly important when the client hands over the building works to a main contractor, who is then responsible for the design and workmanship of the project. The contractor will usually expect professional consultants to enter into a direct contractual relationship with them through a process known as novation, which creates a new contract between the incoming main contractor and the design consultant.
Termination: Both parties must be fully aware of the conditions and procedure under which either party may terminate the agreement, including notice requirements and consequences of termination. Confidentiality: This is a typical boilerplate clause found in professional appointment agreements requiring the parties to keep project-related information confidential and not disclose it to third parties without consent.
Limitation: The agreement should confirm whether the appointment is to be entered into as a contract under hand or as a deed. This distinction is important because a breach of contract claim is limited to 6 years for agreements signed as a contract, whereas for an appointment signed as a deed the limitation period is extended to 12 years.
Law and Jurisdiction: This is a standard clause found in contracts which confirms that the agreement is subject to the laws of England and Wales, and that the English courts shall have exclusive jurisdiction.
What are the implications of a poorly drafted professional appointment agreement?
Legal disputes: This is the obvious consequence of a poorly drafted agreement that does not clearly outline the rights and responsibilities of each party, leading to misunderstandings and potential legal disputes.
Financial implications: Ambiguities over payment terms, scope of work, and project timelines, can lead to cost overruns, delays, and disputes over payment.
Quality of work: Without clearly defining the standards of work expected from the professional, this can lead to issues with the quality of work delivered and delays to in rectifying these.
Liability issues: Parties should have a clear understanding of their respective liabilities in the event of errors, delays, or other issues – any issues in this regard can again lead to potential legal and financial issues.
Uncertainty: Although not every possible scenario can be accounted for, a well-drafted professional appointment agreement provides a level of certainty, particularly what to expect from the other party. It also provides a framework to refer to where circumstances change or things may not go according to plan such as in the event of a dispute, the need to terminate or assign the agreement etc.
Lack of protection: A poorly drafted agreement may not include adequate provisions for protecting the legal and commercial interests of both parties, leaving them vulnerable to potential risks and liabilities.
What are the key legal considerations when appointing professionals for construction projects?
Professional Indemnity Insurance (PII): It is important to ensure that the professionals you appoint have adequate PII in place to cover any potential errors, omissions, or negligence in their work. When it comes to PII it is essential to check whether the appointee holds insurance coverage on an ‘each and every claim’ basis or ‘aggregate’ basis.
The former typically means the full limit of the indemnity applies to each claim notified to the insurer during the policy period. For aggregate based policies on the other hand, the limit applies to the total claims made during the policy period. This means that once the limit is reached, no more claims can be made. As such, even if the value of the policy is significant, for example, £2 million, this may not be sufficient to respond to a significant claim if the professional in question has already exhausted the policy limit through claims made during that insurance year. It is important to consider whether the cover held by any professional is sufficient to respond to any potential claim about to the service they provide, particularly if the policy is held on an aggregate basis and claims have already been made.
Robust Contractual Agreements: It is essential to have clear and comprehensive contractual agreements in place with the professionals you appoint, outlining the scope of work, project timelines, payment terms, dispute resolution mechanisms, and other key terms and conditions.
Compliance with Regulations: The appointed professionals should comply with all relevant laws, regulations, health, and safety matters when carrying out their work. For example, the agreement may specify a list of prohibited materials (such as the use of asbestos), although it is more common to specify that the professional complies with industry best practice.
Intellectual Property Rights: It is important to address copyright laws as the client/employer will want to ensure they have the right to use any designs produced by professional consultants for the purposes of the project. It is common in practice for the employer to request a royalty free licence (and the ability to grant sub-licences) from the consultant to use copyright material for any future maintenance, alteration or advertising relating to the project/development.
Collateral Warranties: The professional appointment agreement typically contains a list or schedule of rights that the professional must warrant in favor of third parties who may not be involved in the construction but have an interest in the end project, such as purchasers, tenants and/or funders.
Are there any legal requirements to document professional appointments?
As with any business relationship, it is best practice to have written contracts in place to clearly outline the terms and conditions of the appointment. In practice, professional consultants are usually appointed via a standard form appointment, a bespoke agreement or letter of appointment. Standard form appointments are templates recognised in the industry, such as RIBA contracts. They are often used as a starting point, then tailored to suit the needs of the project. More commonly, employers or their solicitors draw up their own robust contracts with bespoke features depending on the nature and complexity of the project.
Will I be liable if the appointed professionals fail to fulfil their duties?
If the professional breaches any of their obligations under the appointment, then as with any contract – the aggrieved party can seek damages for their losses. The situation may be more complicated if because of a breach, oversight or omission by the professional – third parties are impacted. A good example of this is where defects appear because of faulty workmanship, incompetence and or negligence on the part of the professional in exercising their duties. For this reason, it is standard practice for professional appointments to contain a schedule of collateral warranties made by the professional in favour of interested third parties, providing them with direct construction remedies against the consultant. Consultants will often seek to limit the number of third parties to whom they can be held liable to reduce their exposure. One must also not forget the recourse of the professional’s PII.
How to terminate or modify an appointment agreement made with a professional?
Construction contracts may be terminated because of express contractual provisions that set out circumstances and procedures by which parties can bring the contract to a premature end. There are also common laws that enable a party to terminate outside of the express terms of the contract. It is worth remembering that parties can always agree mutually to release each other from their respective obligations under the contract and part ways.
Terminating under the contract:
The ability to prematurely terminate the contract in construction is often limited to specific events or heavily prescribed within the document itself, to reflect the time and investment when taking on projects. The express contractual rights could be actionable by the employer, consultant/contractor or either. Any party wishing to invoke termination rights carefully must follow the contractual notice requirements to avoid unintentionally breaching the contract themselves. Some contractual provisions may provide the defaulting party with an opportunity to rectify the breach before the right to terminate kicks in. Typical scenarios that express contractual provisions cover include:
- In the event of insolvency, which usually allows for automatic termination without the need to follow any prescribed notification procedures
- Force majeure – this covers circumstances beyond the control of the parties that cannot be reasonably anticipated and prevent one or both parties from fulfilling their contractual obligations, such as natural disasters, strikes, and government actions.
- Non-payment of fees due
- Interference with, or obstruction of, the issue of any certificate
- Subcontracting or assigning the contract without consent
- Unlawful suspension of works without reasonable cause or abandonment of works
- Failing to perform obligations regularly under the contract with diligence or care
- Failing to comply with health and safety or other applicable regulations such as CDM
- Failing to provide the security required by the contract (such as a performance bond)
Terminating outside of the contract:
- Misrepresentation or fraud – a contract can be rescinded if one party made a misrepresentation of fact or law to the other, and the misrepresentation induced the other party to enter into the contract. If, in reliance on the misrepresentation, the aggrieved party suffers a loss then it can bring a claim against the defaulting party. An obvious example of this in the context of professional appointments is when the consultant misrepresents their qualifications, expertise, or experience to win the appointment.
- Repudiatory breach of contract – this common law tool covers the situation where a defaulting party has committed a breach so serious as to entitle the aggrieved party to terminate the contract with immediate effect. Whether a breach qualifies as sufficiently serious enough to terminate the contract outright depends on its effects and whether it is a core term of the contract. Examples may include refusal by the consultant to perform works, abandoning the site, gross misconduct, reckless incompetence and so on.
- Frustration of the contract – this is where an unforeseeable supervening event occurs which renders performance of the contract fundamentally different than that originally contemplated by the parties. The burden of proof with frustration is seemingly high and must amount to more than increased hardship in performing contractual obligations. Examples may include essential supplies becoming unavailable, changes in legislation that make the performance of the contract illegal, or where the subject matter of the contract ceases to exist. Where the contract is frustrated, it is considered a no-fault termination and both parties are excused from their obligations under the contract with no liability to each-other.
What are the different methods for resolving disputes arising from professional appointments?
Disputes are sometimes unavoidable during a construction project, particularly in lengthy or complex projects. From delays in completing the project, defects in workmanship to non-payment, parties may find themselves at loggerheads. That does not always mean that expensive and time-consuming litigation in court is inevitable. Ideally, legal proceedings should be a last resort for those very reasons.
The contract itself should contain a dispute resolution mechanism that should be the first point of reference in case of a dispute, and may include the following methods:
- Negotiation – This is an informal, flexible process of discussions between the parties seeking to reach a mutually acceptable position. Negotiations are often conducted on a ‘without prejudice’ basis so that they cannot be referred to in any later court proceedings if commenced. Negotiations can be conducted in writing or at a meeting, and often involve compromise on both parties to find a common ground.
- Mediation – Here, a neutral third party gets involved in negotiations to try to help both parties to resolve their dispute. Any settlement reached through mediation is not binding, therefore there can be uncertainty in this regard, and may not always be appropriate.
- Adjudication – Parties to a construction contract have a statutory right to refer a dispute to an adjudicator. The adjudicator reviews the evidence and arguments presented by both parties and makes a decision on the dispute within 28 days. The adjudicator's decision is legally binding, but it can be challenged in court later if necessary. Adjudication provides a fast and efficient means of resolving conflicts specific to construction projects.
- Dispute Review Boards – This is a panel consisting of one to three members appointed to help parties involved in a construction contract to resolve disputes. This form of dispute resolution is more prevalent in the US, and it is associated with larger construction projects. The idea is that the panel consists of highly qualified members with knowledge or insight of the project, which aids them in navigating any issues that may arise.
- Arbitration: Unlike adjudication, there is no statutory right to arbitration in construction contracts – parties must opt to do so by way of a written clause in the contract. A private process, in arbitration a neutral third party is appointed by one or both parties to provide a final determination of a dispute, which can be enforced in court.
Summary
Professional appointments are heavily used and relied on in construction projects. Employers should take care to do their homework and make an informed decision when selecting a professional consultant to work with. Professional appointments are usually long term business relationships for the duration of the project, and the appointee’s competence/professionalism can have a huge bearing on the success of the project. It is important for both parties to carefully review and negotiate the terms of the agreement to ensure that their rights and obligations are clearly defined and agreed upon before starting the project to help avoid disputes further down the line. The legal and financial implications of a poorly drafted agreement can result in huge setbacks. If you need to make professional appointments for your construction project or have been asked to enter into a professional appointment agreement, our expert construction solicitors are here to help.
