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The Enforceability of Net Contribution Clauses

  1. A net contribution clause is essentially a type of limitation clause. They are a common feature in construction contracts. A net contribution clause states that where two or more parties involved in a construction project are each jointly liable for the same loss or damage, the liability of each party will be limited to the amount which would be apportioned to that party by a court on a fair and reasonable or just and equitable basis.
  2. The normal rule in contract or tort where there are two parties both liable for the same loss is that both parties are liable for the full loss and have to bring a claim against the other to get a contribution. This means that where there are two defendants to a claim who are jointly liable for the damage suffered, the claimant can bring a claim against either one of them for the full amount of the loss. This is mitigated to some extent by the Civil Contribution Act 1978. Section 1(1) of the 1978 Act provides that: “any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise.”
  3. The purpose of the net contribution clause is to short circuit this rule and avoid the need for a claim under the 1978 Act, which is the basis upon which other wrongdoers are normally joined into the action by a defendant. Accordingly, a defendant to a claim, relying on a net contribution clause will only be liable for the extent of his responsibility.
  4. Despite the prevalence of net contribution clauses, there is very little decided case law on the effect and interpretation of net contribution clauses.
  5. The Court of Appeal, Civil Division’s decision in West and West v Ian Finlay & Associates (a firm) 153 ConLR 1, [2014] BLR 324 (hereinafter the West case), provides an interesting decision on the enforceability of a net contribution clause. This article looks at what the decision decided and what the impact of the case will be.
  6. The net contribution clause in the West case was in the following terms:
    1. “Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you” (the NCC).
  7. At first instance, the Technology and Construction Court essentially held that:
    1. The NCC should be construed in the context that, by the date of the agreement, it was understood that the claimants would themselves procure several aspects of the work, which would not form part of the main building contract.
    2. There was doubt as to the true meaning of the NCC: the words “other consultants, contractors and specialists appointed by you” could either mean: (i) everyone with whom the claimants entered into a contract in relation to the project apart from the architect; or (ii) the various specialist contractors or suppliers with whom the claimants were proposing to enter into direct contracts outside the main building contract, which the architect was expected to administer.
    3. Since there was doubt as to the meaning of a written term in the agreement, reg 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (the 1999 Regulations) required the court to give the NCC the interpretation that was most favourable to the claimants, which was the second meaning above.
    4. It was not therefore necessary to decide the true meaning of the NCC, but if the judge had done, he would have decided that it had the second meaning, given the circumstances of the case.
    5. The clause was not unfair, pursuant to reg 5(1) of the 1999 Regulations, because the architect was not guilty of any lack of good faith.
  8. The Court of Appeal overturned that decision and held that the meaning of the words were clear and unambiguous and the meaning found by the TCC was not an available meaning.
  9. The net contribution clause was saying that the architect’s “liability for loss or damage” was to be limited to the amount that it was reasonable for it to pay having regard to the “contractual responsibilities of other consultants, contractors and specialists appointed by [the claimants]”. There was no limitation on the words “other consultants, contractors and specialists appointed by [the claimants]”. The Court of Appeal further concluded that the clause did not breach the 1999 Regulations or the Unfair Contract Terms Act 1977.
  10. Therefore, the clause was binding and the judge should therefore, have gone on to consider the amount that it was reasonable for the architect to pay having regard to the contractual responsibilities of the contractor. That amount should be approached by the court in the same way as an evaluation of contribution under s 2(1) of the Civil Liability (Contribution) Act 1978. That meant that the recoverable amount would be an amount that the court found to be just and equitable having regard to the architect’s responsibility for the damage in question. The Court of Appeal accordingly remitted that assessment back to the judge.
  11. Whilst the case does not decide any new principle of law, it does provide some interesting observations and analysis on the use of net contribution clauses.
  12. The following conclusions can be made as a result of the case:
    1. Any worry or doubts that the TCC decision raised as to the enforceability of net contribution clauses can be put aside.
    2. Notwithstanding the above, net contribution clauses should be drafted very carefully – there was argument in the West case as to whether the words of the clause were ambiguous. Whilst it was held, eventually, by the Court of Appeal, that the words had a clear meaning, such doubt is best to be avoided with careful wording of such clauses.
    3. When dealing with consumers it is best practice to draw such a clause to their attention. Whilst a failure to do so will not necessary result in the clause being found to be unfair, it could weigh in the balance.
    4. Net contribution clauses are common within the construction industry and are not regarded as unusual in a commercial contract. The Court of Appeal stated that whilst it is doubtful that any lawyer advising a commercial party to a building contract would be likely to object to such a term or press for its deletion, it could look to protect their interests by insurance or the taking of a performance bond from the main contractor. This statement should be treated with caution. A performance bond or insurance policy will not have the effect of increasing the amount that can be claimed, in the event of a breach, against a defendant who relies on a net contribution clause. However, if all the contractors, sub-contractors, consultants and sub-consultants have insurance policies, the risk of being unable to make a claim against a relevant defendant because they have become insolvent is, to some extent, mitigated. This is of course assuming that the relevant defendant maintains their insurance policy in accordance with their contractual obligations. Most policies are renewed on an annual basis and this may become impossible in the event of insolvency.
    5. Following on from the above, notwithstanding the prevalence of net contribution clauses, the West case demonstrates the disadvantages that such clauses can put clients in. It limits the amount that can be claimed against one defendant and put the onus on the claimant to sue each individual defendant that bears responsibility for the loss. Such clauses should be carefully considered and negotiated before being agreed to.
    6. In considering whether such a term is unfair consumers who are “savvy” and “intelligent” will be expected to understand the pitfalls of such a clause. In the West case, this and the fact that the claimants were probably more able to understand the ramifications of the NCC (had they taken the time to so) than the architect (notwithstanding the fact that he had proposed the clause) put the parties in an equal bargaining position.