When there is a problem in a project resulting in loss, it may be the fault of more than one party. It is becoming increasingly common for consultants to request limits on liability, such as net contribution clauses, within their professional appointments. This is partly due to the increasing pressure from insurers to do so.
What is a net contribution clause?
A net contribution clause seeks to limit the liability of each consultant to the amount, which would be fair and reasonable having regard to each consultant’s responsibility for the loss caused. This is distinct from the law of contribution which in the absence of a net contribution clause can mean that a party responsible for say 10% of the loss can be held 100% liable.
Take care when casting your “net”
Earlier this year in the case of West v Finlay, the England and Wales Court of Appeal considered the effect of a net contribution clause in an architect’s appointment, which resulted in the reversal of the first instance judge’s decision: that the particular clause did not operate to limit the Architect’s liability.
This case provided a useful insight into the Court’s approach to net contribution clauses.
Mr and Mrs West (the Wests) engaged, Maurice Armour (Contracts) Limited (Armour) as its main contractor, and Ian Finlay & Architects (Finlay) as its architect, to carry out renovation and improvement works to their home.
Various problems arose with the building work including the waterproofing, mechanical services and electrical installations; which resulted in the Wests blaming both Armour and Finlay for poor workmanship and design. Unfortunately Armour became insolvent, so the Wests were left to pursue the entire claim against Finlay, relying upon the principle of joint and several liability.
Finlay argued that it was not solely responsible and that Armour was also to blame. They relied on a net contribution clause within their appointment. The net contribution clause provided that Finlay’s:
“…liability for loss or damage will be limited to the amount that is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by [the Wests].”
The Court had to consider whether the reference to “other consultants, contractors and specialists” included Armour, or whether it was limited to specialist contractors. In doing so, the judge at first instance made the following points:
- The net contribution clause was ambiguous.
- He emphasised the fact that the various parties listed in the reference “other consultants, contractors and specialists” were parties who were to be engaged by the Wests directly. Equally, Armour, as the main contractor, whose contract Finlay would be expected to administer, had not been included in the list.
- Pursuant to regulation 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999, a more favourable interpretation of the net contribution clause was given by the judge as the Wests constituted consumers within the meaning of those Regulations.
Accordingly, the judge found that Armour did not fall within “other consultants, contractors and specialists”, and therefore Finlay was responsible for the total losses. Finlay appealed the decision.
The Court of Appeal disagreed that the net contribution clause was ambiguous and instead considered that the ‘normal meaning’ of the clause was ‘crystal clear’.
It found that Armour was one of the ‘other consultants, contractors and specialists’ and therefore Armour’s responsibility for the loss should be assessed. The Court of Appeal found there was nothing within the net contribution clause, nor any supporting post-contractual documentation, which clearly suggested that it ought to be limited as the judge at first instance found.
Too much reliance had been placed on the parties’ knowledge that the Wests would engage other specialist contractors directly. In other words, the judge at first instance was incorrect to interpret the reference to persons “appointed by [the Wests]” to refer to only to those persons appointed directly by the Wests, and not to the main contractor.
The Court of Appeal provided useful guidance as to quantifying what is “reasonable” for Finlay to pay under the net contribution clause. The Court decided that the same approach as that taken when deciding a just and equitable contribution under section 2(1) of the Civil Liability (Contribution) Act 1978 should be adopted. Namely where two parties are liable for the same damage, the amount recoverable is “such a may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage”.
This case also demonstrates that it is key when acting for consumers e.g. householders, that consultants specifically draw the consumer’s attention to the net contribution clause, and its effect. The Court of Appeal stated that it would have been preferable if Finlay had drawn the net contribution clause specifically to the Wests’ attention.
From the point of view of employers or clients, alternative means of limiting liability, may be preferable to avoid the complications of establishing (particularly in a construction context), the extent of a party’s responsibility for specific damage.