2020-02-17
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Net contribution clauses: employers beware!

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Posted by Paul Slinger on 17 April 2015

Paul Slinger - Construction and Building Solicitor
Paul Slinger Partner

The decision in West v Ian Finlay & Associates [2014] EWHC Civ 316 highlights the dangers to employers and clients in accepting net contribution clauses in construction documents.

The case will be of interest to any party employing a consultant and/or contractor and specifically in the consequences of signing up to contracts containing NCCs.

Consultants and contractors will be interested in the Court’s approach to the NCC and its application in the face of UCTA and UCCTA.

The facts

When an employer has a claim against a negligent designer on a building project the client may usually claim against that designer for 100% of its losses which flow from a foreseeable breach of the designer’s contract, even where other negligent parties exist. This does not mean that a party will be responsible for losses which it has not caused.

A net contribution clause however effectively acts as a limitation on a contractor or consultant’s liability to the employer as it dictates that the proportion of the employer’s losses for which it is liable. This figure will correspond directly to the degree of responsibility for the losses caused. So if an architect is 60% to blame for defects in the works and a contractor who is responsible for the other 40% is insolvent, the architect will only be liable for 60% of the claimants losses.

A net contribution clause also acts as a limitation on a designer’s liability to the employer, in particular when one or more of the parties is insolvent; as it is no longer pursue the solvent parties for recovery of 100% of its losses.

Net contribution clauses place an additional burden of proof upon the employer in that it has to show in proceedings that the amount it is claiming represents the consultant's "fair share" of liability, and is not more than the amount which the court would order at the end of a potentially complex trial. 

It is unreasonable to expect an employer to anticipate a court's decision in these circumstances. Once the employer has established breach on the part of say the contractor and the consultant and the loss and damage caused, it should be for the consultant and the contractor, not the client, to debate between themselves as to how the loss should be borne between them.

In the case the Wests engaged and architect, Ian Findlay & Associates in relation to the refurbishment of their house. The architect’s appointment contained a 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 consultant, contractors and specialists appointed by you.”

The Wests engaged both a building contractor and specialist contractors directly.

Significant defects were discovered after practical completion the Wests moved out whilst these were rectified.

As the contractor had gone insolvent the Wests sought recovery of their losses from the architect and were successful in their claim as the Court found the clause to be ambiguous and unfair. It therefore applied the meaning of the clause which was most favourable to the Wests. The most favourable interpretation being that the clause did not apply to the building contractor but only specialist contractors.

On appeal however the Court found in favour of the architect ruling that:-

  • the wording was clear and did not require the Court to give it an interpretation more favourable to the Wests. The clause therefore applied to the building contractor too; and
  • it was not unfair and contrary to any statutory requirement of good faith and there was no imbalance in bargaining power between the Wests and the architect.

Conclusion

It is of note that in this case the Court considered that although the Wests were consumers, their commercially “savvy nature” was enough for the clause not to be deemed unfair. The Court’s decision may well been different had the Wests been less commercially minded.

Although the clause was deemed not to be unfair for the purposes of consumer law, I do not think that it can be inferred that the clause is fair as a principle as it prevents an employer from relying on settled and established legal principles.

The case is surprising in that the Judge commented that he doubted whether a lawyer advising a commercial party to a building contract would be likely to object to a net contribution clause. Given that these clauses are almost always unacceptable in the market to an institutional funder and major commercial tenants an employer should always press for the deletion of such clauses not only to satisfy pre-construction funding criteria but to ensure the future marketability of the construction documents. 

About the author

Paul helps clients get their construction and engineering projects delivered within the right timescale, for the right amount of money, and to the correct quality.

Paul Slinger

Paul helps clients get their construction and engineering projects delivered within the right timescale, for the right amount of money, and to the correct quality.

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