UK: Net Contribution Clauses – Do They Work?

Last Updated: 11 February 2010

What is a net contribution clause?

A net contribution clause seeks to limit the proportion of any loss or damage payable to the negligent party's "fair share". Such clauses are now common in collateral warranties and are being requested more often in consultants' appointments.

In the construction world, if there is a loss then it is likely that there is more than one party who can be blamed for that loss, for example, two or more consultants, the architect and engineer, may have both contributed to a defective design, or a defect may be partly attributable to defective design and partly attributable to defective workmanship and so is the fault of the contractor and the architect. Each party who has been involved in causing the loss has joint and several liability and is liable for the entire loss, regardless of their share of blame. So, for example, a defect might be 90% attributable to defective workmanship and 10% attributable to defective design, but the designer will be 100% liable for the losses which flow from the defect as will the contractor.

Under the Civil Liability (Contribution) Act 1978, a person who is liable to a claimant for a loss may recover an equitable contribution from another person who is liable in respect of the same loss. However, this does not offer sufficient protection to a party where the other liable parties are either insolvent or no longer exist.

The effect of a net contribution clause is that the consultant is liable only for the proportion of the loss caused by his actions. Joint and several liability does not apply.

Do they work?

Net contribution clauses have not yet been properly tested in court and no one really knows how effective they are. However, two Scottish cases do indicate that net contribution clauses are effective and that they do work.

Glasgow Airport Limited –v- Messrs Kirkman & Bradford [2007]

In this case, Glasgow Airport Limited wanted to recover damages of £2million from Messrs Kirkman & Bradford (structural engineers) for a breach of a collateral warranty. The collateral warranty contained a net contribution clause. The case centred on what losses were governed by the clause and, in the judgement, Lord Clarke acknowledged that the proper liability of the engineers was, under the warranty, subject to a net apportionment having regard to the responsibility of others.

Langstane Housing Association Limited –v- Riverside Construction (Aberdeen) Limited and Others [2009] CSOH52

In this case, a housing association was suing the contractor, the engineer and the architect over the collapse of a building. There was a trial of preliminary issues dealing with a net contribution clause in the engineer's appointment. The issues were:

1. Did a particular set of ACE Conditions, which incorporated a net contribution clause, apply?

The court held that the answer to this question was yes.

2. Was the contract subject to the Unfair Contract Terms Act 1977 (UCTA)?

The answer to this question was no.

UCTA was introduced to restrict the ability of contracting parties unfairly to avoid or reduce their liabilities for breach of contract by the use of unfair contract terms, particularly in relation to consumer contracts. Under section 16 of UCTA "where a term of the contract purports to exclude or restrict liability for breach of duty arising in the course of any business.....that term......shall.....have no effect if it was not fair and reasonable to incorporate the term into the contract".

The court decided that the net contribution clause did not purport to exclude or restrict the engineer's liability, it simply "sought to ensure that the second defenders were only held liable for the consequence of their own breach of duty and were not held liable, by the doctrine of joint and several liability, for breaches of duty by other contractors and consultants". UCTA did not therefore apply.

3. If UCTA did apply, was the net contribution clause fair and reasonable?

Under Section 17 of UCTA "any term of a contract which is ...... a standard form contract shall have no effect for the purpose of enabling a party to the contract who is in breach of a contractual obligation, to exclude or restrict any liability of his to the...........customer in respect of the breach.....if it was not fair and reasonable to incorporate the term in the contract......customer means a party to a standard form contract who deals on the basis of written standard terms of business of the other party to the contract who himself deals in the course of a business".

The Judge held that the parties did not contract on the engineer's written standard terms of business. They were using a set of terms and conditions drafted and published by the ACE and furthermore it was not clear who proposed the ACE conditions for use so they could not be attributed to either party as their standard terms of business. So again, UCTA did not apply. However, the Judge went on to say that, even if UCTA did apply, the net contribution clause was fair and reasonable. The Judge considered that net contribution clauses are not unusual or onerous for two reasons. Firstly the clause was part of a body of conditions drafted by a professional body which are widely used in the construction industry and secondly the employer was free to ensure that proper insurance was in place so that in the event that one or more of the contractor or professional team was insolvent, it would have been possible to claim against the insurer. He added "I see nothing unfair or unreasonable in the client taking the risk that he has adequately covered himself against the possible insolvency of those whom he himself has appointed".

Criticisms

The decision of the Scottish Court has come in for criticism on a number of grounds.

The Judge's idea of the availability of insurance is out of touch with reality. For example, it is not possible to insure in respect of defective workmanship. It is possible to insure against one of the construction team becoming insolvent, but this type of cover is very expensive.

It can be extremely difficult and expensive to claim against the insurer of an insolvent party. In England it is necessary to use the Third Party (Rights against Insurers) Act 1930 which requires a protracted and therefore expensive legal process before a claim can be pursued against insurers.

A net contribution clause does limit the consultant's liability by ousting the long established principle of joint and several liability. The effect of this principle is that the risk of insolvency is not borne by the employer but by the other members of the professional team.

Conclusion

Given the current economic climate and the rise in both insolvencies and negligence claims, it is inevitable that a net contribution clause will come before the courts again for consideration and it is to be hoped that this will occur sooner rather than later and that the courts will finally provide some clear guidance on how net contribution clauses work.

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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