Net contribution clauses have been incorporated into collateral warranties for more than 15 years but, surprisingly, until the Scottish case of Langstane v Riverside & Others  CSOH52 earlier this year there had been no court decision specifically considering their effectiveness. In that case the Court of Session at last addressed this issue and, even more surprisingly, decided that the Unfair Contract Terms Act 1977 does not apply to the usual form of such clauses as they do not exclude or restrict a consultant's liability for its own fault or breach of duty.
Net contribution clauses arose as a response by proposed warrantors (i.e. consultants, contractors and sub-contractors) to the invention of collateral warranties in the 1980s. Before then third parties who had suffered from defects in the design or construction of building work resulting from negligence had normally sued the wrongdoer or wrongdoers in tort. However, the decision in D&F Estates Ltd -v- Church Commissioners for England, ultimately confirmed by the House of Lords ( AC 177), restricted an injured party's ability to recover economic loss resulting from tortious negligence, and so collateral warranties were created to provide a more comprehensive remedy in contract. Inevitably, some employers then sought also to expand the warrantor's potential liability in other ways under these new contractual arrangements, while at the same time warrantors tried to find new ways to limit or exclude their liability. That process continues in the negotiation of collateral warranties to this day.
One particular problem identified by warrantors was joint and several liability. The common law has always provided that, unless there is express agreement to the contrary, where two wrongdoers are each responsible for the same loss or damage the injured party who sues one of them should not bear the risk of the other's insolvency, i.e. each wrongdoer can be sued for the full amount but can pass on a fair proportion of its liability to the other by way of contribution proceedings. Net contribution clauses were devised by warrantors to disapply such joint and several liability by limiting each warrantor's liability to (usually) a "fair and reasonable" proportion of the loss or damage, thereby passing the insolvency risk back to the injured party. Warrantors argued that otherwise collateral warranties might operate unfairly, whereas employers responded that there was no good reason why the common law doctrine should be reversed. This remains a highly contentious issue, with many employers still refusing to include net contribution clauses in collateral warranties in any circumstances, whereas consultants and contractors are now often requesting that net contribution clauses be included in primary agreements, such as consultant's appointments and building contracts, as well as in collateral warranties. As part of this continuing debate the consultants' professional bodies, such as the RIBA for architects and the ACE for engineers, have included net contribution clauses in their respective standard forms.
Typically, net contribution clauses are drafted using the language of limitation of liabiity clauses. They provide that the liability of a party is limited to such proportion of the injured party's loss or damage as it is fair and reasonable for it to pay, having regard to the extent of its responsibility for such loss or damage, and on the assumption, first, that contractual remedies in the same terms are available to the injured party against all other wrongdoers, and secondly, that the other wrongdoers have paid their fair and reasonable contributions to the injured party.
Some commentators have expressed doubts as to the effectiveness of net contribution clauses, at least in some circumstances. For example, if such a clause is included in a standard form contract, will it be ineffective if it does not pass the "reasonableness test" imposed by the Unfair Contract Terms Act 1977 as amended (the "Act")? Should such clauses be interpreted contra proferentem, i.e. so that the onus is on the party attempting to rely on the limitation of liabililty to demonstrate that the clause is effective and, if it is held to be effective in principle, to prove the extent to which its liability should be limited? Even if such a clause is effective in principle, if it is not reasonably possible to determine a wrongdoer's proportionate liability, for example because the absence of other relevant parties means that key evidence is missing or not properly challengeable, will the clause cease to bite ?
Langstane v Riverside, decided on 3 April 2009, addressed the first of these issues, i.e. whether the Act applied to a net contribution clause found in a consultant's appointment incorporating the ACE Conditions of Engagement for Consulting Engineers (which had first been adopted in that form in 1993). The claimant, a large housing association, maintained that Section 17 of the Act should apply, requiring the standard of reasonableness for a term in a standard form contract. It argued that the clause (i) was contained in the consultant's written standard terms of business, (ii) purported to exclude or restrict the liability of the consultant, and (iii) was not fair and reasonable, but on the contrary was "unusual and controversial" as it altered the common law position by placing upon the client the risk of insolvency of the contractor or other consultants. In response the defendant consultant argued that (i) these were not its standard terms but those of its professional body, (ii) the clause merely sought to ensure that it would not be liable for breaches of duty by other wrongdoers, and (iii) this was in any event a fair and reasonable clause.
The Court of Session agreed with the defendant consultant's position on all three issues. It held that the Act did not apply, both because the claimant did not deal on the basis of the defendant's written standard terms of business as it was unclear that the defendant had proposed the use of these conditions, which were used widely within the profession, and because the clause simply sought to ensure that the defendant was only held liable for the consequences of its own breach of duty and not for others' breach of duty. The Court of Session also held, although not formally as part of its decision, that the clause was fair and reasonable, with Lord Gennie stating that "it is the pursuers who choose their contracting parties and it is the pursuers who can, no doubt at a price, insist that their contracting parties carry appropriate insurance", implying that the insurers could be proceeded against under the Third Parties (Rights against Insurers') Act 1930.
It is very hard to understand how the Court came to these conclusions. Even if one could accept that a large (and presumably well-advised) client might voluntarily propose the use of the unamended ACE standard conditions, the net contribution clause contained in those conditions limits the consultant's liability both by its express drafting and in its intended and actual effect. Moreover, while the "reasonableness" issue can certainly be argued both ways, the Court's suggestion that an employer can adequately protect itself through insurance against the insolvency of its contractors and consultants seems to miss the point in that, in the event of insolvency, the employer's attempt s to proceed directly against their professional indemnity insurers is unlikely to be successful in practice and it will usually need to proceed, as an unsecured creditor, against the consultants' administrators or liquidators, which is the very reason why net contribution clauses are so often resisted.
This decision is not binding in England and Wales, but it may nevertheless be of persuasive authority. It will be interesting to see how the English or Scottish Courts address these issues on the next occasion that they arise.