With the beginning of a new year that looks better for business than it has in a long time, it is a good time to pause and think about how architects will practice in the new economy that is developing before our eyes. The following article discusses my thoughts on two questions that architects should consider before they start any project.
Things happen and things change during the time it takes to plan and build a project. Over time, even the most best-planned undertaking can go awry. Project owners, architects, engineers, and construction contractors all deal with uncertainty through contracts that distribute the various risks among the parties. Contracts, anticipating the unexpected, typically contain provisions that adjust the relationships, responsibilities, and rights of the parties when the inevitable occurs.
A good contract relationship directs risk responsibly — that is, to the party or parties best able to reduce exposure by carefully managing the activity and to absorb the cost of the potential loss. The first factor turns on the authority and qualifications, while the second turns on the price or value received and the financial ability to respond. Because of varying levels of sophistication, or due to a lack of bargaining leverage, architects may feel compelled to accept contract responsibility for project risks beyond their management or financial ability. This situation results in an increased exposure to the project and uncertainty as to who will actually bear the losses when something goes wrong.
Where's the Money?
Architectural services are expensive. Most of the costs of providing expertise, time, and facilities needed to build a building are incurred before construction starts. Then months or even years pass as materials, labor, and energy are poured into the project while the owner waits for the benefit he or she expects to realize only when the project is completed and placed into service. It is the owner's money that pays for the architect's services and the work. Usually, the money costs money because interest accrues on accumulating expenses until the project is designed and the work is done. Owners, architects, and builders alike have to face the risk that the money runs out before the work does. When the money runs out — or runs short — the work slows, the quality slips, and eventually progress stops.
For architects, the initial work begins before the client has committed construction financing and at times before the client has closed on the property. The client corporate entity may not be formed until well into the design process. The person or entity who pays for the initial services may not be the entity on the written agreement — the entity with a legal responsibility to pay. If the entity cannot pay, it is unlikely collection can be forced from another who has the resources but has not taken legal responsibility for the debt.
The simplest way to protect against this risk is to investigate the proposed source of funds to satisfy the obligations. Is there enough money available before starting work? Will sufficient funds remain available as the work progresses? A fee deposit in advance of services or some other form of payment security can moderate the risk if the architect remains vigilant and avoids providing uncompensated services beyond prudent limits. If the opportunity appears to outweigh the risk, make sure you are in a position to avoid the loss if you are going to "front" valuable services for an uncertain venture.
Contract payment provisions protect both the architect and the owner. Payment provisions regulate the flow of money, allowing the architect to apply staff and other resources to the intense effort involved in producing construction documents. They allow the client to moderate the timing of expenses as the project develops. Good contract payment provisions are a must, and they should be followed and managed rigorously. Keep accounts current. Late payments are not like money in the bank. Late invoices and late payments are the most likely to go unpaid, and enforcing collection incentives, such as high interest rates and collection cost provisions, are of no value against a noncollectable account.
In Oregon, as in most other states, architects may have construction lien rights, a legal security interest against the improved property if the money runs out. These liens can be a powerful collection tool, but the statutory provisions are complicated when applied to the architect's services, and the notice and timing requirements are rigidly enforced. If an architect intends to rely on his or her lien rights as payment security for a project, the intricacies of the statute should be worked out with an attorney before there is a problem with payment.
Who Owns the Design?
In negotiations between architects and owners, the question often arises: Who will own the design when the work is completed? The discussion — invariably complicated — may result in agreements that are more baffling than illuminating.
To the extent that a design is expressed in an original work, the author of the work can stop others from displaying or copying the work or make them pay for doing so without permission. These powers are called copyrights, and they apply to architectural or engineering documents and can even apply to completed buildings.
Copyright protection does not extend to the ideas, procedures, systems, or concepts depicted, even if they are completely original — if the work is not copied, no infringement occurs. Copyrights belong to the author of any original work and arise automatically when the work is created. The copyright owner can license, sell, or give away all or part of his or her copyrights, and such transfers often occur as part of consulting contracts and employment contracts.
Viewing their analyses, drawings, and specifications as instruments of service, design professionals vie to keep their copyrights, granting the client a license to copy and distribute the documents for the project only. The license expires when the project is complete, when the professional relationship ends, or when fees are not paid. Unlicensed use of the documents exposes the infringing user to injunction and damages.
Clients respond by demanding the copyrights, even claiming ownership of all project documents, including the designer's sketches, drafts, and internal communications. Of course, such transfers could put a designer out of business — unable to develop its own body of work. A complete copyright transfer also leaves the architect without recourse if others copy the work to his or her detriment without offending the client copyright holder.
The resulting compromises, including a tangle of copyright transfers, licensing, and indemnification schemes, defy common sense and would probably befuddle any court or jury. Consider the following proposal that addresses both parties' interests.
First, leave copyrights with the author. The client has no need for all the documents. Let the designer be responsible for the originality of the work and for protecting his or her original work from usurpation. Protect the client's trade secrets and assets with a confidentiality agreement. If a building's appearance is part of the client's trademark or trade dress, assign the copyrights to the completed building to the client.
Let the client own "deliverables" — actual copies (not the copyrights) produced as part of the professional services. Grant a broad license to use the documents for any purpose related to the project that is consistent with the purpose for which the document was produced. The client can accept the risk and responsibility for any unauthorized use and should agree to indemnify the architect from claims brought by others arising out of such use.
Finally, uncouple the license from the fee. Construction-delay damages will dwarf the amounts typically at stake in a fee dispute. Provide for fee disputes and account collection rights in the contract that do not create the risk of liability to the client for economic damages. Good payment provisions, with late payment and collection remedies, are the best way to ensure compensation — not copyright litigation.
This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations. For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.
