Proportionate liability clauses are a common feature in professional firms' engagement letters. But there has been very little case law on whether they work or not. The Court of Appeal has now overturned a first instance decision in West v Ian Finlay & Associates  EWCA Civ 316 and held that a net contribution clause in a professional appointment was effective in limiting an architect's liability. The Court of Appeal said that such clauses, in principle, are not unfair or unreasonable.
Ian Finlay & Associates, an architectural firm, was engaged in relation to the refurbishment of the Wests' home. Mr and Mrs West also engaged a main contractor (recommended by the architect) to carry out the works. On completion of the works, significant defects were discovered which caused damp and required remedial work.
The contractor went insolvent, and the Wests brought a claim against the architect alone. The architect alleged that, as the building contractor had also been at fault, a net contribution clause limited its liability.
The clause in question read as follows:
"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 consultants, contractors and specialists appointed by you".
The Court of Appeal found that the normal meaning of the words was "crystal clear" and there was nothing in the factual background to justify an interpretation that would exclude the building contractor from the net contribution clause.
The Court found that the clause did, on its proper construction, limit the architect's liability. This, though, was not unfair. In circumstances where the Wests were able to appoint their own contractor it was reasonable for them to take the insolvency risk of that contractor. Net contribution clauses are by no means unusual. The Court said that the failure to draw the Wests' attention to the clause could weigh against the clause satisfying the requirement of good faith. Each case turns on its own facts however. In this case, the Wests were in an equal bargaining position and were well able to understand the clause and its ramifications. For the same reasons, the clause was not unreasonable.
When deciding a "reasonable" apportionment under a net contribution clause, the Court concluded that the test is the same as when deciding what is "just and equitable" under the Civil Liability (Contribution) Act 1978. This exercise does not take into account the financial ability of the persons from whom the contribution might be claimed to satisfy any claim against them.
This is a helpful judgement. It makes clear that there is no reason why it should be unfair for the contracting client to take the insolvency risk of those with whom it contracts.
There is a warning, though, about flagging such clauses clearly. That is all the more important with less commercially sophisticated clients.