UK: Net Contribution Clause Is Crystal Clear

Last Updated: 17 September 2014
Article by Tim Claremont

In Stephen and Carol West v Ian Finlay & Associates [2014] EWCA Civ 316, a case involving the interpretation of a net contribution clause, the Court of Appeal have overturned a first instance decision and held that the architect could rely on the net contribution clause to limit its liability.

What is net contribution clause?
A net contribution clause is designed to limit a party's liability. A typical clause would contain words along the following lines:

"The Consultant's liability for loss or damage suffered by the Employer in the event of any breach of this Appointment is limited to the proportion of such loss or damage that it would be just and equitable to require the Consultant to pay having regard to the extent of responsibility of the Consultant for the same..."

In the absence of such a clause, where two or more parties are responsible for the same damage the claimant can choose to sue any one of them for the entirety of the damage (all defendants liable for the same damage are joint and severally liable). It will then be up to the defendant to bring the other parties into the claim, by suing them for a contribution. Of course, this will not be possible where the other defendants are insolvent and the entirety of the claim will be left with one of the parties. A net contribution clause seeks to address this position by limiting the defaulting party's loss to that which is just and equitable having regard to others' responsibility for the loss.

The facts
Mr and Mrs West (the 'Wests') appointed Ian Finlay & Associates ('Finlay') to act as their architect and contract administrator in relation to the refurbishment of a £1.7m residential property in London. The contractor was Maurice Armour (Contracts) Limited ('Armour'). On completion of the works the Wests discovered serious damp and other defects which required significant remedial works (including the replacement of floor slabs).

Both Finlay and Armour were responsible for the damage, but Armour became insolvent prior to proceedings being issued. The Wests therefore directed their entire claim against Finlay and Finlay sought to limit their liability by relying on the following net contribution clause:

"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."

As well as directly contracting with Armour, the Wests had also directly contracted with separate specialists for a glass conservatory, wooden floors, a spiral staircase and a kitchen. The Court had to consider if the 'other consultants, contractors and specialists appointed by [the Wests]' included Armour or was limited to the specialist contractors only. If it included Armour, the clause would limit Finlay's liability; if it did not the Wests would be able to recover their entire claim from Finlay.

First instance decision – the clause is ambiguous
At first instance the judge said that there was doubt about the meaning of the clause. Accordingly, Regulation 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999 meant that the interpretation which is most favourable to the consumer had to prevail. On this basis, he decided that Armour was not one of the "other consultants, contractors and specialists appointed by [the Wests]" and accordingly did not reduce the Wests' damages on account of the fact that Armour was also responsible for some of the losses. The judge held that Finlay was responsible for approximately £650,000 plus a further £260,000 of interest. Finlay appealed.

The Court of Appeal decision – clause was 'crystal clear'
The primary rule when interpreting contracts is to consider the normal meaning of the words. The Court of Appeal considered that the 'normal meaning' of the net contribution clause was 'crystal clear' and on this basis concluded that Armour was one of the 'other contractors' and that Armour's responsibility for the loss should be taken into account.

As a consequence of the Court of Appeal's finding and the fact that the Wests were 'consumers' (i.e. not a business), the Court then had to consider the Wests' alternative arguments that the net contribution clause was unfair contract term under the Unfair Terms in Consumer Contracts Regulations 1999 and the Unfair Contract Terms Act 1977. The Court of Appeal rejected these alternative arguments and was persuaded by the following key points:

  • the prevalence of the usage of net contribution clauses in standard RIBA forms;
  • the fact that the clause would not be regarded as unusual in a commercial contract; and
  • the fact that it was the Wests who would be taking the final decision on the future choice of main contractor (in other words, it was right that the Wests took the risk of the main contractor's insolvency).

It is common for professional indemnity insurers to ask their insureds to include net contribution clauses in professional appointments and collateral warranties (alongside an overall limit on liability). Whether or not the consultant succeeds in persuading its employer to agree to such a clause will depend on the negotiating position of the parties.

Indeed, contrary to the Court of Appeal's comments, in our experience: (1) net contribution clauses are unusual in commercial developments (the only limitation many employers will accept is a reasonable cap on liability set at the amount of professional indemnity insurance cover that the consultant is asked to maintain); and (2) the use of net contribution clauses in standard RIBA terms and ACE terms does not, in our opinion, demonstrate that they are in general widespread use. Instead, employers will generally seek to avoid the standard RIBA and ACE terms because they are consultant friendly forms and do not represent the commercial 'market norm'.

When acting for consumers, consultants should have regard to the RIBA guidance and specifically draw the consumer's attention to the net contribution clause and its effect. Although not decisive in this case, the Court of Appeal said that it would have been preferable if Finlay had drawn the net contribution clause specifically to the Wests' attention.

Interestingly, the Court of Appeal also concluded that the reference to what might be 'reasonable' for Finlay to pay would be assessed in the same way as what would be 'just and equitable' under the Civil Liability (Contribution) Act 1978.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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