In West v Finlay (handed down on 27 March 2014), the Court of Appeal has set out the relevant factors to consider when assessing the validity and application of a net contribution clause. If binding, liability is to be assessed in the same ‘just and equitable’ manner that an assessment is made under Section 2(1) of the Civil Liability (Contribution) Act 1978.

What is a net contribution clause?

A net contribution clause (“NCC”) is a contractual term that provides that where more than one party is liable for the same loss or damage, the party with the benefit of the NCC will only be responsible to pay an amount that is just and reasonable having regard to the liability of others.

Without a net contribution clause, the law (under the principle of joint and several liability) allows the party who has suffered damage to sue any responsible party for the full amount of the loss, without regard to the extent of that party’s responsibility.

The rationale behind joint and several liability is based upon the presumption that defendants are in the best position to apportion damages amongst themselves. This can, however, give rise to harsh results. In the construction industry complex multi-party projects are commonplace and a claim may arise partly due to, for example, the defective design of an architect (e.g.10% responsibility) and partly due to the defective workmanship of a contractor (90% responsibility), yet only the architect may be sued if the contractor is insolvent. For that reason, no claim for contribution is brought against the contractor, leaving the architect paying 100% of the loss, despite being only 10% to blame for causing it.

The Importance of West v Finlay?

While NCCs have been in use for some time (particularly within the construction industry), until West v Finlay there has been no English decision offering any judicial guidance on their validity and application. As a result, it has been argued (as it was in Finlay) that NCCs are ineffective, since they seek to abrogate the principle of  joint and several liability and, therefore, unfairly exclude liability, contrary to The Unfair Terms in Consumer Contract Regulations 1999 (“Consumer Regulations”) and/or The Unfair Contract Terms Act 1977 (“UCTA”).  The Court of Appeal, however, found no difficulty in accepting that a well drafted NCC will be effective in limiting liability (in both commercial and consumer contracts), providing it has been fairly presented between parties in a reasonably equal bargaining position.

The background facts

On 11 February 2006, Ian Finlay & Associates (“IFA”) sent Mr. and Mrs. West a draft appointment agreement (the “Agreement”) setting out the terms of IFA’s proposed retainer for works to alter and refurbish their home. The Agreement included a NCC in the following terms:-

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.

After some small modification, the Agreement was finalised and a contract for the building work placed with Maurice Armour (Contracts) Limited (“Armour”). Its original tender price of £370,000 was reduced to £292,000 following the Wests’ decision to remove several large items (which they would procure directly) in order to save money.  

The works commenced in June 2006 and the Wests took possession of their property in May 2007. On moving in, they became concerned at the standard and quality of the refurbishment and, in particular, the increasingly high levels of damp in the basement where the kitchen and several utility rooms were located.

Dissatisfied with both Armour's and IFA’s attempts to resolve their concerns, the Wests engaged independent experts to investigate.  After protracted delays, the Wests were eventually advised that the damp works to the basement, as well as all the plumbing and wiring throughout the property were, due to a combination of poor design and workmanship, sub-standard and needed to be replaced. The remedial works were completed in June 2009.

Whilst Armour’s poor workmanship was responsible for much of the damage, the Wests issued a claim against only IFA, relying on the principle of joint and several liability to recover from IFA what they could no longer recover from Armour (who was by then insolvent).
 
At trial, IFA sought to limit its liability by relying on the NCC in the Agreement, but the judge held:-

  1. The NCC was ambiguous. At the time of the Agreement it was understood that the Wests would be directly procuring several work items outside the Armour Contract. The reference to “other consultants, contractors and specialists appointed by you” in the NCC could be referring to these contracts. Under 7(2) of the Consumer Regulations, in the event of ambiguity, the court must give the most favourable interpretation to the consumer.
  2. Although it was not necessary to do so, due to his finding in relation to 7(2) of the Consumer Regulations, he would have decided that the NCC applied to all contractorsother than Armour.
  3. Were it not for 7(2) of the Consumer Regulations and his construction of the Agreement, the NCC would not have failed for lack of good faith under Consumer Regulations 5 and 6. 

The Appeal Court’s judgment

The court rejected the judge’s construction of the NCC, stating the wording of the NCC was ‘crystal clear’.  It then went on to deal with the Wests’ submissions that the judge’s interpretation of the Consumer Regulations was flawed (equating lack of good faith with bad faith), and that he failed to take any account of UCTA. In this regard the Court of Appeal held:

  1. The NCC did not cause a significant imbalance in the parties’ rights and obligations under Consumer Regulations 5 and 6. Although the NCC granted IFA a beneficial limitation of liability, (a) the use of NCCs is prevalent, (b) the clause would be regarded as commonplace in commercial contracts and (c) it was the Wests who took the final decision on Armour's appointment and Mr. West (who had a banking background) would have appreciated the importance of Armour's financial stability. 
  2. Even if the court was wrong in its interpretation that the NCC was not so weighted as to significantly tilt the parties’ rights and obligations in IFA’s favour, it did not do so in a manner that was contrary to the requirement of good faith under Consumer Regulations 5 and 6.
  3. Many of the factors considered under the Consumer Regulations fell for consideration again under UCTA and, for much the same reasons failed to assist the Wests. The NCC was prominently displayed in the Agreement and although the Wests had no inducement to agree to its inclusion, they were in at least as equal a bargaining position as IFA. They could have gone to another architect or, possibly, have protected themselves through insurance or a performance bond.
  4. The similarity of wording between section 2(1) of the Civil Liability (Contribution) Act 1978 and the NCC clause is such that the same assessment is to be applied i.e. an amount that is just and equitable having regard to IFA’s responsibility for the damage in question.

The effect of West v Finlay

Contrary to the stance taken by some in recent years, it will now be difficult to take issue with the validity of a NCC incorporated into a commercial contract. Consumer Regulations will have no application and a challenge under UCTA is unlikely to be successful. For that reason, it is anticipated that Employers will resist the inclusion of a NCC more strongly in future contracts. In the absence of commercial pressure, it is, however, difficult to justify the exclusion of a clause which itself merely seeks to exclude liability for the responsibility of others.  

For consumer contracts the status of NCCs is less clear. Domestic clients will remain largely ignorant of their potential impact and few will be taken to have the ‘savvy’ knowledge that the Court of Appeal ascribed to Mr. West’s banking background. Nonetheless, Finlay has shown that a suitably drafted NCC, the effect of which is properly explained and fairly brought to the attention of a consumer, has every chance of being successful.

Further reading: West v Finlay [2014] EWCA Civ 316.