Net Contribution Clauses

Defects in construction projects are often caused by more than one party e.g. by contractors, subcontractors and other building consultants and professionals such as architects and the person suffering loss as a result of the defects can sue any one or more of the parties at fault. If successful, the claimant can recover 100% of the damages awarded from each party at fault because they are jointly and severally liable, although the claimant cannot recover more than 100% of its damages overall.

In order to limit their liability to losses caused by them (and not by others) building professionals will often include a net contribution clause in their contract. In the recent English case of West v Ian Finlay & Associates (A Firm), the Court of Appeal had to decide the effect of a net contribution clause in a construction contract.

Background

The claimants, Mr and Mrs West, entered into a contract with the Defendant, IFA, an architectural firm, under which IFA agreed to provide “Normal Architectural Services  as per RIBA Conditions” as amended by the Contract, in relation to the alteration and refurbishment of their house. The contract contained a net contribution clause which stated:

“Our liability for loss and 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.”

Mrs and Mrs West subsequently engaged Maurice Armour (Contracts) Ltd as the main contractor for the building works.

After completion, Mr and Mrs discovered significant defects in the building works, which necessitated them moving out of the house for eighteen months while remedial works were carried out.  

The main contractor subsequently became insolvent and Mr and Mrs West commenced legal proceedings against IFA for damages for negligence for their failure to notice and remedy the defects, including the cost of the remedial works and damages for distress and inconvenience. IFA denied liability and, in the alternative, claimed that by virtue of the net contribution clause in their contract with Mr and Mrs West, any award for damages against them should be reduced to take into account the main contractor’s liability.

Court of First Instance Ruling

The Court of First Instance held that IFA was in breach of its professional duties. Although, the Court also found that the losses were to some extent caused by the main contractor’s breach of contract, it held that the net contribution clause did not cover any potential liability of the main contractor and ordered IFA to pay damages of over ₤800,000 to Mr and Mrs West, including the cost of the remedial works, interest and damages for distress and inconvenience.

The Court found the wording of the net contribution clause to be ambiguous, in that the words “…other consultants, contractors and specialists appointed by you” could either mean:-

  • everyone with whom Mrs and Mrs West entered into a contract in relation to the project, apart from IFA; or  
  • the various specialist contractors or suppliers with whom Mr and Mrs West were proposing to enter into direct contracts outside the main building contract, which IFA was expected to administer.

As the Court had found the clause to be ambiguous, it was required, by virtue of the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCC Regulations”)  to  give it the interpretation that was most favourable to the consumers, Mr and Mrs West, which was the interpretation at (b) above.    

Court of Appeal’s Ruling

IFA appealed to the Court of Appeal, who allowed the appeal.

The Court of Appeal held that the trial judge’s construction of the net contribution clause had not been an available meaning. The first consideration in any construction exercise, it said, was to consider the normal meaning of the words and here, the normal meaning was crystal clear. The net contribution clause was saying that IFA’s liability for loss and damage was to be limited to the amount that it was reasonable for it to pay, having regard to the “contractual responsibilities of other consultants, contractors and specialists appointed by [Mr and Mrs West].” There was no limitation on the words “other consultants, contractors and specialists appointed by [Mr and Mrs West]” and they must be taken to mean any persons, including any main contractor ultimately appointed, but of course excluding IFA itself.  

Was the net contribution clause unfair? 

In their Respondent’s Notice filed in the appeal, Mr and Mrs West contended that the net contribution clause was unfair (contrary to the UTCC Regulations) because it created an imbalance between the parties’ rights and obligations and was detrimental to them. The Court of Appeal was of the view that the net contribution clause did create an imbalance between the parties, but did not consider that imbalance significant because:-

  1. the usage of the net contribution clause was prevalent in standard RIBA forms;  
  2. the clause was not unusual in a commercial contract; and   
  3. it was Mr and Mrs West who would be taking the final decision on the future choice of main contractor, very likely being alive to the fact (bearing in mind Mr West’s banking background) that the contractor’s financial stability was a matter of importance.   

Was the net contribution clause unreasonable?

The Court of Appeal also decided that the net contribution clause was reasonable under the Unfair Contract Terms Act 1977 and therefore effective to limit IFA’s liability because:-

  1. Mrs and Mrs West were in an equal bargaining position with IFA-they could, for example, have possibly re-negotiated the net contribution clause or gone to another architect;  
  2. Mrs and Mrs West undoubtedly ought reasonably to have known  of the existence of the net contribution clause as it was placed prominently on the third page of the contract; and  
  3. the net contribution clause did not exclude or restrict any relevant liability if a condition, for example a time limit, was not complied with.

Court of Appeal’s Conclusion

Accordingly, the Court of Appeal remitted the case back to the trial judge for the purpose of assessing liability as between IFA and the main contractor.

The Court of Appeal also reduced the amount of damages that had been awarded in respect of distress and inconvenience (from ₤14,000 to ₤6000) because

  1. the judge below had based his award on 2 years’ disruption rather than 18 months; and  
  2. should not have awarded damages well above the maximum.

Lessons to be learnt

The lessons to be learnt from this case are that construction professionals who include net contribution clauses in their contracts should ensure that they are clearly drafted, in unambiguous terms and precisely name the parties intended to be included. Further, such clauses should be brought to the consumer’s attention.