Following the Technology & Construction Court’s 2013 judgment in the case of West -v- Ian Finlay & Associates, we issued a stark warning to construction professionals about the need for precise drafting of net contribution clauses. Ambiguous wording had rendered such a clause unenforceable resulting in an architect being held liable for a substantial loss rather than limit his contribution to the level agreed in the contract wording. While careful drafting remains essential in every contract, many will be relieved to hear that the Court of Appeal has overturned the TCC’s ruling. In doing so, it has reinforced the value of net contribution clauses as a risk management tool in a contractors’ contractual toolkit. Dileep Pisharody and Rachel Evans consider the Court of Appeal’s decision and its implications for construction professionals and their insurers.

Net contribution clauses – a reminder

Where more than one party on a project is liable for the same damage, then they are jointly and severally liable for any loss. This means that any one of those parties can be sued for the whole of the loss, even if it is to blame for only a very minor part of any damage. In this situation the professional must try and sort out their respective proportions of liability after a claim has arisen by making a contribution claim or claims against any other wrongdoers.

However, even when the construction market is booming, contractors are often ‘men of straw’, litigation is expensive and there are risks in establishing a valid contribution claim. A net contribution clause in a professional’s appointment is therefore of great value in such situations as it limits that professional’s liability to the proportion of loss it actually caused. Importantly, it also shifts the financial risk of a contractor’s insolvency and the litigation risk of a claim under the Civil Liability (Contribution) Act 1978 away from the consultant and back onto the employer or client.

West - the facts

The claimants bought a property in Putney for £1.7 million and instructed an architect, Ian Finlay & Associates (the defendant), to comprehensively redesign the property and administer the building contract (the Works). The claimants appointed Maurice Armour (Contracts) Limited (Armour) to carry out most aspects of the works. However, to save costs, the claimants intended to directly procure certain additional items from outside contractors. These items included balustrades, a high-spec kitchen and wooden floors.

It subsequently became apparent that there were significant defects in Armour’s workmanship, necessitating replacement of the plumbing and electrical works. The claimants alleged that the defendant had negligently failed to advise them in relation to damp proofing and to notice defects in Armour’s work. They claimed damages totalling £800,000, including substantial consequential losses. Armour promptly became insolvent, leaving the defendant as the claimants’ only viable target.

The defendant’s retainer included a net contribution clause which it sought to rely on to limit its liability for Armour’s breaches. The clause stated: ‘Our liability for loss and 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 you.’

At trial, the defendant was found to have breached its professional duties. The losses were caused to some extent by Armour's breach of contract, but it was held that the net contribution clause did not limit the defendant's liability to the claimants where the other party liable was the main contractor.

As the claimants were consumers, the judge referred to terms of the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations) to determine the so-called ambiguities in favour of the claimants. HHJ Edwards-Stuart also considered whether the net contribution clause was ‘fair’ within the context of the Regulations. ‘Fairness’ was equated to open and transparent dealing by HHJ Edwards-Stuart and, as the defendant had not tried to hide the clause or take advantage of the claimants, the net contribution clause was found to be ‘fair’ (the court looked at the judgment in Director General of Fair Trading -v- First National Bank plc [2002] 1 AC 481 for guidance on this point).

However, the problem for the defendant at first instance was imprecise wording of the net contribution clause. It was held that the wording ‘other consultants, contractors and specialists appointed by you’ did not include those carrying out work or services for which the defendant was receiving a fee, including the work undertaken by Armour, as main contractor. The TCC felt that the wording was ambiguous. It could have been meant to refer to either (a) everyone that the claimants entered into a contract with, excluding the defendant or (b) it could have been construed more narrowly to refer to the various direct suppliers that the claimants used to procure items outside of the main building contract, such as the high-spec kitchen. As there was doubt about which interpretation applied, it was held that the Regulations required that the net contribution clause be given the interpretation most favourable to the claimants, being the more narrow interpretation, (b).

The defendant was therefore unable to rely on the net contribution clause to reduce its liability to the claimants to reflect Armour’s failings. The defendant was ordered to pay nearly £900,000 in damages and interest.

The Court of Appeal’s judgment

The defendant’s appeal was successful. A proper apportionment of the liability between the defendant and Armour should have been made.

The Court of Appeal considered that too much reliance had been placed on the contextual background of who would be appointing the suppliers at first instance. That was, in fact, inconsequential. On a proper construction, the net contribution clause was not ambiguous. The words ‘other consultants, contractors and specialists appointed by you’ could properly include anyone, including any main contractor, appointed by the claimants.

In response to the claimants’ argument that the net contribution clause was not binding as it had not been entered into in good faith, the Court of Appeal looked again at the case of Director General of Fair Trading -v- First National Bank plc. It was held that whilst the clause did leave the Wests at a disadvantage, as they would have to bring a separate claim against Armour, the defendant’s openness about the clause and the reasonable equality in bargaining power between the parties satisfied the requirement of good faith.

As to the arguments that the clause did not satisfy the test of reasonableness under the Regulations, the Court of Appeal was satisfied that the claimants would have known of the clause’s existence and could have sought to renegotiate it if they felt it put them at too much risk.

Where do professionals stand?

Following the first instance decision the consensus was that for a net contribution clause to be fair it should be specifically drawn to the attention of the party which it disadvantages. This was most especially the case when a professional is dealing with consumers rather than another business.

The Court of Appeal’s judgment has swung the pendulum back in favour of professionals when dealing with consumers. However, it remains the case that clauses should be very precisely drafted as a lack of clarity will most likely be construed in the manner most favourable to the party against whom it is relied upon.

The main message to take away is that a well worded net contribution clause can save a professional and their insurers a great deal of money.

West -v- Ian Finlay & Associates (a firm)