-Partners in Practice -

Vol. 5 No. 7		July 1986

The letter from your client seems innocuous enough: "Our construction lender is preparing our loan documents. To complete the transaction package, the bank requires that you sign the enclosed 'Assignment of Plans and Specifications.' We understand this to be a routine requirement. To avoid delay, we would appreciate it if you would execute the assignment form and return it to us at your earliest possible convenience."

Before you leap to comply, take a few minutes to read the bank's form carefully. Do not be deceived by the fact that the document is typeset and single-spaced. It is anything but routine, and in spite of your desire to help your client as best you can, it is important to find a way to do so without compromising your own, vital interests.

Most bank forms consist of two parts-one for the borrower, the other for you. The borrower's part provides for the assignment of ownership in your plans and specifications to the bank in the event your client should default on the construction loan. Your part is a consent to that assignment. It affords the bank an unrestricted and unilateral right to use your documents for completion of the project as it sees fit.

Three troublesome assumptions appear to underlie the bank's demand for ownership: 1) that another architect or engineer can be brought in to complete your work without consideration of the added risk the change imposes on you; 2) that the project can be taken over by the bank without obligation to you for additional costs you may incur as a result; and 3) that ownership of your plans and specifications can be transferred to others without regard to the interests you have in protecting the integrity of your design. None of these assumptions can be allowed to go unchallenged.

You may have to bring the bank to understand that plans and specifications cannot be bought and sold like building supplies or paper clips. They are instruments of professional service which have to be used properly to achieve a satisfactory result. Unless you are present to interpret their intent, resolve ambiguities, and identify and correct errors before they become costly mistakes built into the project, you cannot complete your work, and you cannot meet the professional obligation you have under the law to keep the public safe from harm.

It is unreasonable for the bank to expect you to relinquish your right to see the project through to completion, and it is certainly not in your interests for you to do so. If the lender is concerned with the possibility of having to pay twice for the same services, this concern can easily be met; leveraging a default on the part of your client into a windfall for your firm is unlikely to be your intent. What you do need is some degree of protection against risks you have no reason to assume in the first place. Subject to the advice of your attorney, you might consider introducing the following changes to the bank's form:

1. That the bank acknowledge your plans and specifications to be instruments of professional service, ownership in which is being transferred to the bank as an accommodation to your client (this will help to deflect an allegation later that you sold a faulty product to an innocent and ever-so-reliant financial institution).

2. That, in the event of default by the borrower and assumption by the bank of the borrower's interests, the bank expressly acknowledge its obligations to pay your unpaid invoices for services already rendered and retain you through completion of the construction phase of the work (most bank forms leave the bank with the option to do one or the other, but not necessarily both).

3. That the bank agree to reimburse you, as an extra service, for any additional costs you incur as a result of the default of the borrower and the takeover by the bank of your client's duties and obligations to you (assistance to the bank in its negotiations with a new owner, for example, or evaluation of alternatives for reducing costs).

4. That, should the bank elect to terminate your services prior to the end of the construction phase, it agree to indemnify you and hold you harmless against liabilities and costs, including costs of defense, arising out of the modification, misinterpretation, or misuse of your plans and specifications (except only those liabilities and costs arising out of your sole negligence).

5. That the bank agree not to reassign any right, title, or interest in the plans and specifications to a third party without your express, written consent (which you might agree not unreasonably to withhold-so long as a satisfactory resolution of the foregoing can be reached as respects the new owner).

You can expect the loan officer to reject your modifications to the bank's form out of hand. You are likely to be told that no architect or engineer in the history of the known universe ever questioned the form; that if you persist, you will jeopardize the loan and delay the project. Notwithstanding the sudden anxiety attack your client may suffer, this is sheer nonsense.

Unless your agreement with your client requires you to "cooperate with the lender in every respect," you are under no obligation to do so. Nor are you holding up the loan. Only the bank can do that. What you are doing is seeking to accommodate your client by finding a reasonable way to work with the bank to address its principal concerns.

The bank's loan officer may well lack the authority to negotiate changes to the bank's "standard" forms. He or she may also be reluctant to forward your request to those who have that authority. If you find yourself in something of a stalemate with the loan officer, it might be necessary to suggest that the matter be referred to the bank's General Counsel for resolution.

You will undoubtedly have to begin your explanation all over again. You may encounter a certain amount of resistance. Nevertheless, as those who have gone before have discovered, with patience, persistence, and a carefully articulated rationale, you can prevail. You may not wind up with everything you have asked for, but you should come out of it with protections sufficient to preclude incursions on rights and interests that ought not to have been under fire in the first place.

This is not the end of it, however. Before permanent financing is authorized, the bank will be back with yet another "standard" form, this one asking you to certify that certain things are so. The bank would like nothing less than your unqualified guarantee that it will never, ever have to worry about the quality of your work or that of the contractor. You are not likely to be willing to sign this form either; at least not without modification. Given this, an early introduction to the bank's General Counsel could prove to be well worth your while.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
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