Essay: Setting up an architect/interior design business (legal)

Assignment 1
1. INTRODUCTION
This document contains advice that will assist the five young professionals in starting their new venture specializing in the retail sector with motivations on the best style of practice they should adopt, the measures to consider when dealing with professional liability, as well as essential clauses to include in their client/consultant agreements if they do not wish to use the provided PROCSA agreement. This will provide the architects and interior designers with the basic tools they need in order to establish themselves as professionals in the built environment.
2. Style of practice
I recommend that the architects and interior designers register as a Private Limited Company ((Pty) Ltd) in the best interest of their new venture. According to The Companies Act, No 71 of 2008, a Private Company is an independent legal body that is required to act on the rights and duties of its own and must be a recorded tax payer (Private Company (Pty Limited) South Africa [sa]). In this case, the five owners of the company are referred to as the shareholders and they will each have an active role in the company. I recommend adopting this style of practice as the shareholders are protected with limited liability, which will protect their personal assets in the event where the company faces financial distress. In this case, the risk only affects the amount each shareholder invests into the company. This style of practice also constitutes as a legal body which can enter contracts, an essential aspect that further ensures the protection of the company and its shareholders.
Additional advantages include perpetual existence, which means the company will continue to exist beyond the life of its initial shareholders, which will provide the employees with a sense of job security in the event of the retirement or death of one of the shareholders. A (Pty) Ltd has tax advantages as they are only taxed on their profits and are not subject to the higher personal tax rates of a sole proprietor or partnership. Dividends can be paid out to the shareholders (if the income allows it) and is usually only taxed at ten percent. Dividends can also be paid out during any time of the firm’s financial year (Advantages and disadvantages of a Limited Company [sa]). The five architects and interior designers are the main shareholders of the firm, thus they will have complete authority, ownership and control of the company. This will provide them with successful management regarding the decision making that will affect the operations of the company. Registering as a (Pty) Ltd includes the registration of the company name. The name identifies the company in the market sector, separating it from other companies. Essentially, the registered name will become synonymous with the company’s brand (Advantages and disadvantages of a Limited Company [sa]).
Like any other style of practice, registering as a (Pty) Ltd has its disadvantages, such as the limitation of growth as the maximum amount of shareholders stipulated by law is fifty, thus reducing the amount of capital that can be raised from the individual shareholders. The shares within a (Pty) Ltd are limited and cannot be sold or reassigned to anyone else without the explicit consent of each existing shareholder. A Private Company may also be more expensive to set up than a sole proprietorship or a partnership, and a (Pty) Ltd is liable to submit its annual financial statements for auditing, the level of which will be determined by the company’s Public Interest Score (Advantages and disadvantages of a Limited Company [sa]).
The advantages greatly counterbalance the disadvantages, and registering as a Private Limited Company will ensure that the five young professionals’ new firm will be successful in the long term.
3. Dealing with professional liability
In dealing with professional liability, the firm needs to take steps from the beginning in order to protect itself and the shareholders against any mistakes and oversights that may occur at any point during the existence of the company. Liabilities may arise contractually or delictually. Contractual liability occurs when the recipient/client does not receive the expected outcomes stipulated in the contract, resulting in financial loss due to the negligence and lack of performance from the architect/designer. Delictual liability is the result of the architect or designer’s work having a negative impact on the general public, causing a member of the public financial loss or harm. In the event of delictual liability, the affected party is legible to receive a formal solution.
In registering as a private limited company, limited liability insurance is guaranteed in protecting the personal property of the shareholders, however, further steps need to be taken to ensure that the company is protected as a single unit. Lisa League (2015:[sp]) explains that in order to reduce the exposure to liability, the firm should employ good business practices and procedures by making use of contracts, documentation and insurance policies.
3.1 Contracts
A well written contract can protect both the firm and its clients by providing a clear plan of action that is easily understood by all parties. The firm can choose to use tested and existing contracts drawn up and offered by professional bodies such as the PROCSA agreement, or it can choose to compile one of its own with the assistance of a commercial law expert. A signed and agreed upon contract reduces the risk of one party having grounds for legal action unless the other party is in breach of the contract (League 2015:[sp]). According to Michael Wolfe ([sa]:[sp]), a contract provides additional clarity to all of the involved parties as it clearly outlines the steps and processes of the project, as well as what is expected from each party. Contracts allow the parties to remain attentive to their contractual duties, thus lowering confusion and increasing productivity and task orientated focus (Wolfe [sa]:[sp]).
3.2 Documentation
The professionals that make up the firm such as the architects and interior designers, should keep records of everything they do and make use of during each stage for each project. Specification systems are legal documents that contain all of the relevant details for items specified in each project, and this document must be recorded to ensure that the details relating to all of the specifications are accounted for. The firm is advised to document further aspects such as; decision making that results from meetings and discussions with clients and contractors, as well as on-site observations throughout the duration of each project, which includes the production, construction and safety procedures. These planning and documentation methods must coincide with the operating procedures the firm chooses to use to ensure that the contractual obligations are clearly understood in order to limit the unnecessary exposure to any liabilities (League 2015:[sp]).
3.3 Insurance
An error and omissions, also referred to as professional liability insurance, can protect the firm against the entire cost of defending itself against judgments, claims and settlements. In addition, a professional liability cover will protect the firm against financial loss in the event where an act, error or omission occurs due to the firm’s design and architectural services (League 2015:[sp]).
3.3.1 Professional Indemnity cover
The firm needs to adopt a pragmatic approach in protecting itself against potential liabilities which could arise from a negligent act or errors and omissions which could cause the firm’s clients to suffer from economic loss. The new firm has a specific knowledge and skill set pertaining to the retail sector, therefore a professional indemnity cover (PI) is essential to utilize as it will provide the firm with insurance for specialized work. The firm is advised to seek out a PI offered by Camargue (Professional indemnity liability cover [sa]), as their insurance policies are specifically designed and tailored to suit the needs of the construction, design and architectural industries. It is important for the firm to use this cover especially in the event where charges are brought against the architectural/interior design professional as a result of damages sustained due to the mentioned professional’s failure to act according to the heightened standards of their specialized fields. This cover provides restitution for losses that arise from breach of professional obligation, breach of trust, injuries, infringement of copyright, loss or damage of documents in the professional’s care and defense costs that result from a third party claiming from the insured professional (Professional indemnity liability cover [sa]).
Camargue offers additional risk management services that ensures the full protection of the insured party. These added benefits include assessments and contract reviews, commercial law help-lines dedicated to the Consumer Protections Act, emergency medical evacuation services, industry related quality control, private arbitration services and an industry specific Consumer Protections Act website (Professional indemnity liability cover [sa]).
4. Clauses
In the event that the PROCSA agreement is not used, the firm can adopt the following clauses to create a clear and concise client/consultant agreement:
4.1 Agreement
4.1.1 This agreement for the architectural and interior design services for the retail sector is made effective as of (date agreed upon) by and between the client and the consultant for the architectural and interior design services administered by the consultant.
4.1.2 It is agreed as follows:
The client agrees to enlist the full services of the consultant, and the consultant accepts the offer to provide the full scope of design services specified by the client in connection with the project stipulated by the client.
4.1.3 The project will commence on site and at the address provided to the consultant by the client.
4.1.4 This agreement covers a description of the consultant’s full services which includes purchasing services and additional terms and conditions specified throughout this agreement (Interior design and purchasing services agreement [sa]:1).
4.1.5 This agreement verifies the stated agreement between the client and consultant and will be noted upon the date signed upon by each party involved. Any changes to this agreement will not be deemed effective unless stipulated in writing, made concise, and signed by each party involved.
4.1.6 Subject to 3.5.2, this agreement will end in good faith following the competition of services provided by the consultant and once the consultant has received the full fees payable.
4.2 Project
4.2.1 The particular services to be provided by the consultant, if different from the list below, must be provided in writing by the client and provided to the consultant prior to commencement. These services may include, but are not limited to:
• Conceptual/perspective drawings
• Detailing and technical layouts
• Space planning and layout
• Mood and sample boards
• Selection of materials and finishes, which include all sanitary ware and ironmongery
• Sourcing and purchasing of all fixtures, fittings and accessories
• Customized shop fittings ( All working drawings to be handed over to shop fitter) (Interior design and purchasing services agreement [sa]:1).
4.2.2 These services will be executed throughout a number of stages, such as the preliminary, secondary and final design stages of the entire project.
4.3 Client obligations
4.3.1 The client shall clearly and timeously specify his/her needs in relation to the project as well as produce significant information and instructions to the consultant when needed.
4.3.2
The client shall provide the consultant with copies of council drawings (floor plans, elevations etcetera), title certificates, lease terms and any other relevant information needed in regards to the project (Services [sa]:5).
4.3.3 The client will notify the consultant in writing regarding the appointment of additional parties such as the contractor. The client will state in the agreement that the consultant may act as a representative of the client and that the general contractor must comply accordingly with the consultant. The client will present the consultant with a copy of the written agreement between the client and the contractor (Consulting agreement [sa]:1).
4.4 Consultant obligations
4.4.1 The consultant shall be obliged to the client to provide the services stipulated in this agreement in a prompt and efficient manner. The standard of work provided will meet the superior quality requirements expected from the consultant.
4.4.2 All work prepared and executed by the consultant is copyright and protected, and remains the intellectual property of the consultant and cannot be copied or replicated in anyway without providing adequate compensation to the consultant. The client reserves the right to use such documents solely for the purpose stipulated within this contract, however, the consultant needs to gain written permission to photograph completed and paid designs from the client in order to publish such photographs for marketing purposes (Services [sa]:7).
4.4.3 The consultant is obligated to provide the client with copies of the Professional Indemnity insurance policy that has been put in place in order to protect the consultant against the exposure to liabilities (Services [sa]:1).
4.5 Limit of consultant’s liability
4.5.1 The consultant shall not be held liable for any materials, systems or workmanship that fails to perform in accordance to the acts or omissions of the manufacturers, and other parties involved (Services [sa]:6).
4.5.2 The client cannot enforce any allegations against the consultant in respect to any design services rendered by the consultant after five years (5) have transpired from the date of completion of the final product.
4.5.3 The consultant cannot be held responsible the negligent actions caused by the contractor or client that is in direct breach of this agreement.
4.5.4 The client is further responsible to seek out an insurance policy for all materials and furnishing used throughout the project to cover potential damage or negligent care during the moving, storage and installation process. The consultant will not be held accountable for the client’s insufficient insurance coverage (The anatomy of an interior design agreement [sa]).
4.5.5 The consultant will not be liable for the delay in production and completion of the project caused by factors that go beyond the control of the consultant.
4.5.6 The consultant will not be liable for any interruptions and delays caused by the client’s failure to pay each invoice within the allocated period of time.
4.6 Professional Indemnity insurance
4.6.1 As stated in 3.4.3 and 3.5.4, both parties are subject to seek out specific insurance policies and to provide proof of such prior to the commencement of the project (Consulting agreement [sa]:4).
4.6.2 The insurance for the project must be valid and maintained for the five year liability period following the completion of the project.
4.7 Consultant’s fee
4.7.1 Payment shall be made to the consultant whereby the client agrees to the fee structure pertaining to the scope of services received for the project.
4.7.2 The intended fees will allow no more than an agreed upon number of re-designs during the initial design stage, thereafter changes will be charged at an additional hourly rate.
4.8 Reimbursements for out-of-pocket expenses
4.8.1
The client is responsible to pay the consultant, in addition to the prescribed fee structure, reimbursements for expenses incurred by the consultant in relation to the project.
4.8.2 Reimbursement includes costs incurred by travel, printing and plotting of various sizes and tonal variations, accommodation, cell phone and communication and presentation equipment and materials (Services [sa]:4).
4.8.3 The client is responsible to make the reimbursement payments within a limited timeframe, such as thirty days, upon proof received from the consultant that such reimbursement claims are viable.
4.9 Payment conditions
4.9.1 All fees quoted exclude VAT.
4.9.2 Invoices will be issued after each stage has been completed. The consultant will provide the client with an allocated number of days in which to settle the outstanding amount after the invoice has been issued (Services [sa]:4).
4.9.3 If the client fails to pay within the allocated payment period, the consultant can charge the client interest for all outstanding amounts and the client will be responsible to settle all of the outstanding amounts timeously.
4.9.4
The consultant reserves the right to desist any further production of work in the event of the client failing to comply with the payment conditions set out in the agreement (Services [sa]:4).
410 Termination of agreement
4.10.1 The termination of this agreement/project may be implemented at any time by either party and will be notified in writing, and by such notice, the termination will be deemed effective
4.10.2 If the client chooses to terminate the contract, the client is liable to pay the consultant in full, the amount of all fees of completed work, as well as any reimbursements (Services [sa]:6).
4.10.3 If the consultant chooses to terminate this contract, the above mentioned terms shall apply. The consultant is only entitled to the fees of all completed work up to the notice of this agreement cancellation (Services [sa]:6).
5. CONCLUSION
In summation, the five architects and interior designers are advised to register as a (Pty) Ltd as this provides them with the necessary structures they need in order to establish their business as well as to protect their individual and personal assets from loss arising from liabilities, as (Pty) Ltd companies are protected with limited liability.
The new firm needs to adopt good business practices in order to enhance their quality control methods by implementing contracts/agreements for every project they take on, as well as keeping explicit documentation of every business aspect, which not only protects the firm, but it allows for a smooth and uninterrupted operating procedure.
The clauses listed above, as well as the those mentioned in the PROCSA agreement have been implemented to ensure that both the client and the consultant agree on the procedures and payment methods stipulated throughout the agreement. The clauses, which must be stated in writing and signed by both parties, will ultimately protect each party against unwanted liabilities, as well as providing clear and easily understandable plans from the inception stage to the completion stage of each project.