Professional service firms need to set appropriate fees for their services and collect those fees to stay profitable. Regular billing and follow-up will open communication about a client’s concerns that could otherwise lead to a fee dispute. Implementing billing controls can minimize the risks that come with trying to collect on an unpaid invoice.
Enforcing Rights by Suspending Services
If the client fails to make timely payments for services, firms should have the right to suspend performance or to pursue the legal remedy of termination of the contract. Termination is a drastic step that has important legal consequences and potential liability associated with it, and should be pursued only after careful consideration and discussion with legal counsel. Suspending performance for nonpayment is a less drastic measure. As distinct from termination, the suspension of services merely stops the performance of services while the nonpayment or other default that forms the basis of the suspension continues. As with termination, suspension should be preceded by at least the contractually mandated advance written notice to allow the client an opportunity to cure the default. Professional services contracts should clearly deal with the parties’ rights to suspend or terminate the contract.
Recovering an Unpaid Fee
Filing suit to collect an unpaid fee may seem logical. But doing so invites a countersuit for negligence. Even if the counterclaim is merely retaliatory, it still takes time and money to defend. Worse yet, it may be a legitimate claim that would not have been pursued but for the fee action. Firms seeking an unpaid fee must do a cost-benefit analysis–are the risks involved justified against the potential benefits? Considerations include whether the client can pay, the costs in fees and lost time during the effort, the likelihood of success and for what percentage of the amount.
Giving the Client the Right to Withhold a Fee
Clients often demand the right to determine whether payment is justified and to protect themselves by having the option of withholding payment. But firms must realize that while professional liability insurance is triggered by a demand for money or services alleging negligence, the client’s withholding of a fee based on a contractual provision is not a claim. For a professional liability policy to respond, a claim must be filed and a settlement, award or judgment rendered.
Agreeing to Pay a Client’s Legal Fees
Firms that have successfully sued a client to recover an unpaid fee often feel that the legal expense of doing so also should be reimbursed. Clients have the same feeling. And this shared attitude often results in a “prevailing party” contractual agreement. Such provisions can create significant risk.
Any agreement on the recovery of legal fees by the prevailing party is a contractual condition a firm is free to assume. Professional liability insurance, however, does not cover the risk of the firm paying prevailing party costs related to a successful claim of negligence. The firm’s agreement to pay prevailing party legal fees is a contractual obligation chosen by the firm and is therefore its sole responsibility. There is no common law entitlement to recover attorneys’ fees and few statutes award such fees. Therefore, there is no coverage for awards that are based on some contractual fee-shifting provision.
In addition, prevailing party provisions often result in the coercion of the weaker party—often the design firm—by the financially stronger client. While it is not a certainty that a client will use a prevailing party provision to coerce a settlement, such a provision increases the likelihood of prolonged litigation, the exposure of the design firm’s assets, and the cost of any covered claim.
Business lines of credit, cash reserve funds, and carefully scrutinizing expenses can assist a firm in surviving in difficult times but the most important risk management tool is preserving cash flow through appropriate contract terms and collection procedures.
For more information, read the AIA Trust white paper about “Getting Paid Without Getting Sued.”
The Victor and CNA program provides Professional Liability, Cyber Liability and Business Owners’ insurance coverage to AIA members and their firms through the AIA Trust.