The recent Court of Appeal decision of West and Another v. Ian Finlay & Associates [2014] EWCA Civ 316 overturned the first instance decision and found that a net contribution clause contained in an architect's appointment with domestic clients (the Wests) relating to a domestic property was effective. In doing so the Court of Appeal considered some interesting points on net contribution clauses.

The net contribution clause

The dispute in this case arose in relation to the renovation and improvement works to a property owned by Mr and Mrs West. The project ran into difficulty and extensive damp issues arose, amongst other problems. The Wests blamed both the contractor, Maurice Armour (Contracts) Limited (Armour), and the architect, Ian Finlay & Associates (IFA). Armour subsequently became insolvent so a claim against it could not be pursued. The Wests brought a claim against IFA. One of the issues the Court of Appeal had to consider was the interpretation of the net contribution clause contained in the agreement between the Wests and IFA. The clause provided:

"Our [IFA's] 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 the other consultants, contractors and specialists appointed by you".

At the time the agreement was entered into with IFA, the Wests were proposing to procure several aspects of the work directly, which would not form part of the main building contract. Consequently, the judge at first instance found that there was doubt as to the meaning of the net contribution clause. In his view, the words "other consultants, contractors and specialists appointed by you" could mean either:

  • any consultants, contractors and specialists that the Wests contracted with in respect of the project apart from IFA (this would limit the liability of IFA where the other culpable party was Armour); or
  • any consultants, contractors and specialists that the Wests were proposing to enter into direct contracts with outside the scope of the main building contract with Armour (i.e. Armour would be outside the scope of this clause and the clause would not have the effect of limiting IFA's liability when Armour was the other culpable party).

The Court of Appeal disagreed that the net contribution clause was ambiguous but rather considered it had "a clear meaning". The clause had the effect that IFA's liability was to be limited to what it was reasonable for IFA to pay having regard to "the contractual responsibilities of other consultants, contractors and specialists appointed by [the Wests]". This would include Armour.

As IFA was contracting with the Wests in their capacity as consumers the Court of Appeal also had to decide whether the net contribution clause was fair and reasonable. The Court of Appeal was satisfied that the clause was fair and reasonable and concluded that it was an effective limitation on IFA's liability.

Net contribution clauses – "not unusual"

Interestingly, in reaching its conclusions the Court of Appeal stated that net contribution clauses "at least of a more formal nature - are by no means unusual" and went on to say "we doubt whether any lawyer advising a commercial party to a building contract would be likely to object to such a term or press for its deletion". This does not reflect our experience or our understanding of market norm. We do not believe it reflects the general approach of construction lawyers advising employers/developers, funders or end users. Agreeing to the inclusion of a net contribution clause means that if there is a claim then the claimant is likely to recover less than he otherwise would because of the clause. Ordinarily the position in contract law, assuming that a contractual relationship is in place, is that where two or more parties have each caused the same loss – so an overlapping or coextensive loss, they will be jointly and severally liable for that loss (it was caused by each of their breaches of contract and logically the loss would have occurred in the absence of the breach by the other party). The injured party can pursue either of the breaching parties for 100 per cent of the loss. Assuming the injured party ("Party A") claims against one of the parties in breach ("Party B"), if there is a net contribution clause in the contract under which the claim is brought, it has the effect of limiting the liability of Party B to Party A by taking into account the responsibility of the other party in breach ("Party C") for the loss, there is an apportionment and Party B is treated as severally liable not jointly liable to Party A, the injured party.  If the net contribution clause was not there then Party B would be responsible for all of the overtapping or co-extensive loss to the injured party, Party A, and Party B would be left to claim against Party C to recover a contribution.

A claimant who has suffered a loss which is caused by each of two separate parties is potentially disadvantaged where there is a net contribution clause. First, the claimant would have to bring claims against both parties to recover the full loss. Secondly, there is the insolvency risk: if one of those parties is insolvent then the losses attributable to the insolvent party will be irrecoverable. Thirdly, there are the potential evidential problems which could be faced (in obtaining relevant documents and witness statements) in order to demonstrate the responsibility or not of the other party in breach if that party is not a party to the proceedings.

The Court of Appeal suggested that the first two risks above could be managed. A party's interests could be protected by taking out a performance bond from the main contractor or obtaining insolvency insurance protection. Performance bonds will usually expire upon practical completion, or perhaps when the notice of making good (or equivalent) is issued, and will not cover latent defects occurring thereafter. Insolvency insurance, if realistically available and affordable, is an additional development cost and is not market norm even in a commercial context.

Net contributions clauses reverse the basic contractual position, which holds the two culpable parties jointly and several liable for the loss (allowing them to resolve the apportionment between themselves directly) and, depending on drafting, such clauses  usually reverse the insolvency risk. They may give rise to evidential problems for the claiming party. They are highly likely to mean that a claimant recovers less.

Apportioning liability under a net contribution clause

Helpfully, the Court of Appeal also considered how to quantify what would be "reasonable" for IFA to pay under the net contribution clause. The court decided that it should take the same approach as it would when deciding a "just and equitable" contribution under the Civil Liability (Contribution) Act 1978 (the Act).  Under Section 2(1) of the Act, where two parties are liable for the same damage, the amount that is recoverable shall be "such as may be found by the court to be just and equitable having regard to the extent of that person's responsibility for the damage in question".

How a court should approach the issue of what is "just and equitable" was considered in Carillion JM Limited v. Phi Group Ltd [2011] EWHC 1379. In this case, the judge concluded: "it is clear that the Court should take into account relative blameworthiness of the contributing parties and the 'causative potency' of their respective acts and omissions". The judge noted: "There is a slight danger in attaching too much weight to some Court of Appeal decisions because that Court reviews the apportionments made by the lower court and will not readily interfere with what the lower court has done; put another way, the appellate court in dismissing the appeal is accepting that the apportionment is within a range which is not obviously wrong". Consequently, parties seeking to rely on these clauses should be aware that the scope for judicial discretion when carrying out this exercise is very wide.

One of the problems with net contribution clauses is the potential uncertainty when assessing the "relative blameworthiness" of the culpable parties, bearing in mind that each has caused the same loss.

Net contribution

Sometimes net contribution clauses are a policy requirement of insurers, and therefore unavoidable. However, while sometimes they are seen, in our view they are not market norm for the reasons explained above and are resisted by those on the client side. Conversely, as a means of limiting the exposure of consultants and contractors, caps on liability are more likely to be acceptable to the paying parties and end users.