REUTERS | Yves Herman

Ask the team: the contractor has gone bust, do I need to pay his design consultants?

What happens if your design and build contractor goes bust, but hasn’t paid its professional consultants? In particular, what happens if those consultants then contact you to claim that you can’t use their designs and documents, because you don’t have a valid copyright licence to do so?

This situation may be particularly painful if, before the main contractor became insolvent, you had paid it in full (and it should have paid the consultants, as its sub-contractors).

JCT DB05

This Ask the team raises principles that could affect any insolvency situation, where a sub-contractor or sub-consultant carrying out design claims it has not been paid by a contractor. However, in this example, we assume that:

Defined terms used in this post are those defined in the DB05.

The building contract

Key clauses of the DB05 include:

  • Clause 2.38.1, which states the copyright in the Contractor’s Design Documents remains vested in the Contractor.
  • Clause 2.38.2, which states that, provided the Employer has paid the Contractor, the Employer has an irrevocable, royalty-free, non-exclusive licence to copy and use the Contractor’s Design Documents and to reproduce designs contained in them. That licence extends to the Works, but not any extension of the Works.
  • The definition of Contractor’s Design Documents, which includes documents prepared “for” the Contractor, not just documents prepared “by” the Contractor.

In summary, subject to any particular facts that may affect a particular Employer’s position, the building contract between the Employer and the Contractor gives the Employer the right to use the Contractor’s Design Documents and reproduce designs in them to complete the Works. That regulates the position between the Employer and the Contractor.

The design consultants and a solvent contractor

If the Employer does not have any contract with the professional consultants who provided designs to the Contractor (design consultants)  then, while the Employer has a right against the Contractor to use the design consultants’ designs and documents (which fall under the definition of the Contractor’s Design Documents), it does not have the same express contractual right against the design consultants themselves.

If the Contractor were solvent, it would (on the face of it) be a breach of the building contract to not provide the Employer with the right to use and reproduce the documents and designs in accordance with clause 2.38. As such, with a solvent Contractor, if the Employer faced a claim from a design consultant, alleging that the Employer did not have the right to exploit its copyright works, the Employer could (in the worst case) join the Contractor as a third party to any proceedings and look to the Contractor to pay any damages due to the design consultant. This approach would obviously be subject to the detail of the particular claim brought by the design consultant, and the terms of the contracts between all the parties.

Collateral warranties or third party rights?

A design consultant’s collateral warranty or schedule of third party rights in favour of an Employer usually includes a form of copyright licence. If an Employer has the benefit of a collateral warranty or third party rights, it will usually look to those rights. In other words, a collateral warranty or schedule of third party rights usually gives the Employer an express right to exploit the design consultant’s copyright work.

In addition, a collateral warranty or schedule of third party rights sometimes allows the Employer to step-in to the appointment of the design consultant, paying any outstanding fees and (in effect) becoming its employer/client.

The design consultants and an insolvent contractor

The situation is more complex when the Contractor is insolvent and the Employer does not have the benefit of collateral warranties or third party rights. In that situation, if a design consultant who has not been paid alleges that the Employer’s use of its design would breach its copyright in that design or document, the Employer might seek to establish a copyright licence by other means. That could include:

  • An express copyright licence in favour of the Contractor, in the contract between the design consultant and the Contractor, which the Employer can use to demonstrate that the Contractor had a licence to use the design consultant’s documents and designs, and which the Contractor could pass on to the Employer under clause 2.38.
  • An implied licence, if written terms do not exist or do not refer to copyright. It might work in the Employer’s favour if it can show that the design consultant knew about clause 2.38 of the building contract. It might also work in the Employer’s favour if it can show that the Contractor had paid the design consultant the majority of its fees or that, if unpaid, the fees related to supervision (or work on Changes), rather than the original design materials. However, the scope of any implied licence will be fact-specific and might be subject to the payment of sums due to the design consultant.

Request a copy of the terms between the Contractor and the design consultants

It may be appropriate for the Employer to formally request a copy of the terms between the design consultants and the Contractor from:

  • The design consultants; and
  • The insolvency practitioner appointed in connection with the Contractor, who may be dealing with claims for payment from the design consultants against the Contractor.

A design consultant should be prepared to particularise its claim, detailing what it has and has not been paid, and the terms of its agreement with the Contractor.

Summary: the Employer probably needs to reach an understanding with the design consultants

Applying these principles to specific facts may lead to different answers in different circumstances, but (broadly), if the Contractor is in insolvent liquidation, it may be appropriate for the Employer to confirm the copyright position using means other than the building contract, in case the design consultants continue to assert that the Employer does not have the necessary right to exploit their copyright works. In practice, that may mean negotiating and paying additional sums to the design consultants, although that will vary on a case-to-case basis. Fundamentally, the building contract is a contract between the Employer and the Contractor, not between the Employer and the design consultants.

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