West and another v Ian Finlay and Associates gives a first insight into how the English courts will interpret net contribution clauses. Prior to this, there was no case law dealing with such clauses and there was uncertainty as to their general enforceability.
Net contribution clauses, which are commonly found in appointments and collateral warranties, reverse the common law rule that two or more parties liable for the same damage can be pursued jointly and severally for all losses. Instead the liability of each party is limited to the amount which would be apportioned to it on a just and equitable basis.
Mr and Mrs West, the claimants, bought a house to which they wanted to make fundamental changes. The claimants engaged the defendant, Ian Finlay and Associates, as architect and entered into an appointment which included the following net contribution clause:
"Our liability for loss or 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."
The claimants later engaged Armour as their building contractor. Following completion of the works, a number of defects were discovered for which Armour and Ian Finlay were both, in part, responsible. Armour became insolvent and the claimants sought to recover full damages from the defendant. The defendant sought to rely on its net contribution clause.
The court held the defendant was liable and, in considering the net contribution clause, commented:
- although the claimants' attention had not been drawn specifically to the clause, there was no evidence that the defendant acted contrary to the good faith requirement in regulation 5(1) of Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR);
- it was not clear whether the reference to 'contractors' included the main contractor or just specialist contractors. Following Regulation 7(2) of UTCCR, which provides that 'if there is doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail…', the court decided that the main contractor was not included and that the defendant could not rely on the clause.
While the application of UTCCR is limited to contracts involving a consumer, it is sensible to assume the courts will apply the Unfair Contract Terms Act 1977 to business to business contracts in the same way. Although net contribution clauses are unlikely to be deemed inherently unfair, any ambiguity will be interpreted against the party seeking to rely on it. Those drafting, and hoping to rely on, net contribution clauses should therefore take care to ensure that all parties with whom they may share liability are clearly stated.