The general principle behind net contribution clauses (NCCs) is to limit the liability of a consultant or contractor to an amount that would be considered by a court to be just and equitable for the consultant or contractor to pay, in the event of a claim, based on the consultant’s or contractor’s actual responsibility for the loss. Without a NCC, the normal legal position is that of joint and several liability, ie the employer can pursue just one party for 100% of its losses (for example the architect), regardless of the extent of the architect's responsibility. The architect then has to go to the cost and expense of seeking to recover at least part of its monies from culpable third parties.
NCCs crop up frequently in terms of appointment, but there has not been much judicial guidance on the operation of NCCs, other than a Scottish case from 2009. However, in April last year, the operation of a NCC was considered in London’s Technology and Construction Court, in the case of West v Ian Finlay and Associates (A Firm). Please see our original briefing note – Focus on: net contribution clauses.
The key consideration in West was whether the NCC included reference to the main contractor, who seemed to be liable for many of the losses complained of and who subsequently became insolvent. The Court held that the NCC did not operate to limit the defendant architect's liability. However, on 27 March 2014, the Court of Appeal overturned the first instance decision of the Technology and Construction Court and enforced the NCC in the defendant architect’s appointment to limit its losses by excluding those for which the main contractor was responsible.
To add some context to this decision, we have set out below:
- the background facts;
- the original decision's analysis on the meaning of the NCC; and
- the Court of Appeal's analysis on the meaning of the NCC.
In June 2005, Mr and Mrs West (the Employer) bought a house in Putney for £1.7million. The Employer wanted to make some fundamental changes to the layout of the house, in particular the ground and lower ground floors. Ian Finlay and Associates was appointed as the architect (the Architect). A specification of work was agreed between the Employer and the Architect, on the basis that the Employer would carry out certain works themselves in relation to a new conservatory and a kitchen. Subsequently, the Employer entered into the main building contract with a contractor called Armour (the Main Contractor).
Unfortunately, the project did not go to plan. About six weeks after the Employer moved into the house, they found extensive damp in the lower ground floor. Experts later concluded that this was as a result of the Main Contractor failing to install proper waterproofing. Subsequent investigations also revealed that there were serious problems with the plumbing and electrical works and it was eventually decided, by the Employer, that all of the mechanical and electrical services would have to be completely removed and replaced. The Main Contractor subsequently became insolvent.
The Employer sued the Architect for negligence, not only in relation to the advice, or lack of it, in relation to the treatment required for the lower ground floor to prevent damp, but also for the Architect's failure to notice the defects in the mechanical and electrical installations and to have them put right. The claim was for a total sum in excess of £800,000 and the Court held that the Architect was liable to the Employer for failing to meet the standard of a reasonably competent architect.
The original decision's analysis on the meaning of the NCC
The Court also considered that there was, “at its lowest”, doubt about the true meaning of the NCC included in the Architect's terms of engagement, which stated:
“Our liability for loss of 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 Court indicated that if there was any doubt, the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations) should be considered. Regulation 7(2) of the Regulations provides that:
“if there is any doubt about the meaning of a written term the interpretation which is most favourable to the consumer shall prevail…”
Therefore, if there is any doubt as to the interpretation of a NCC, the consumer shall have the benefit of being provided with the most favourable interpretation of the NCC. However, it is important to note that the Regulations apply to consumers only, and not businesses. If the employer is a business, but the consultant contracted on its own standard terms, the Unfair Contract Terms Act 1977 (UCTA) would apply. In which case the clause would have to be reasonable, on balance. In any event, if there is any ambiguity in a NCC, then it will be construed against the consultant.
The Court made it clear that the NCC had to be construed in its context and particular consideration was given to the words “other consultants, contractors and specialists appointed by you.”
The Court considered that the initial correspondence between the Employer and the Architect, at the outset of the project, suggested that the parties understood the words of the NCC to be directed to the consultants, contractors and specialists whom the Employer were instructing themselves for the works (kitchen and conservatory) outside of the main contract with the building contractor.
In this case, the Court did not have to consider the true interpretation of the NCC. However, Edwards-Stuart J commented:
“…if I had to do so, I would hold that, in the context of the factual background to this agreement, the clause means what I consider the parties thought it meant, namely that it does not apply so as to limit IFA’s [the Architect's] liability to the Wests [the Employer] in a situation where the other party is Armour [the Main Contractor]”
For the sake of completeness, Edwards-Stuart J also briefly dealt with whether the NCC was unfair under regulation 5(1) of the Regulations. In order to be determined unfair under regulation 5(1), the term must be contrary to the requirements of good faith and be one which causes significant imbalance in the party’s rights and obligations arising under the contract to the detriment of the consumer. Edwards-Stuart J considered that the Architect was not out to take advantage of the Employer and commented:
“I am prepared to accept that this was his belief at the time that this was a form of wording that was, or was at least consistent with, one approved by the RIBA for use in an architect’s terms of engagement.”
The Court of Appeal's analysis on the meaning of the NCC
The Court of Appeal has turned the Judgment of the Court of First Instance on its head. The Court of Appeal highlighted that the key question in considering the original judge's reasoning as to the construction of the NCC, is the context upon which the original judge and the Employer placed such reliance. According to the Court of Appeal, the first consideration in any construction exercise is to consider the normal meaning of the words.
The Court of Appeal did not accept that there was any ambiguity in the meaning of the NCC and considered that the words were "crystal clear". The NCC stated that the Architect's liability 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 [the Employer]”. The Court of Appeal considered that there was no limitation on the words "other consultants, contractors and specialists" and therefore that they must be taken to mean any such persons including the Main Contractor.
The Court of Appeal stated:
"In these circumstances, we also do not agree with the judge that the NCC is ambiguous.The NCC has a clear meaning and the relevant factual matrix does not lead us to the conclusion that the parties should be taken to have used the wrong language to express their agreement."
Based on the Court of Appeal's conclusion that the NCC had a "clear meaning", the Court of Appeal said that it must go on to consider the questions of unfairness under regulation 5 of the Regulations and reasonableness under UCTA raised by the Employer.
Was the NCC unfair?
Regulation 5 (1) of the UTCC Regulations states:
"A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer"
Having considered the leading First National case and other authorities, the Court of Appeal reached the view that the NCC caused an imbalance between the parties but it did not consider that, viewed in isolation, that imbalance was significant for the following reasons:
- the prevalence of the usage of the NCC in standard RIBA forms;
- the fact that the clause would be regarded as not unusual in a commercial contract; and
- the fact that it was the Employer who in this case would be taking the final decision on the future choice of main contractor – "very likely being alive (bearing in mind Mr West’s [of the Employer] banking background) to the fact that that contractor’s financial stability was a matter of importance".
Therefore, the Court of Appeal concluded that the NCC was not so weighted in favour of the Architect "as to tilt the parties’ rights and obligations under the contract significantly in [the Architect's] favour…and taking all the necessary factors together, we regard the balance as lying firmly in favour of the NCC not being unfair".
Was the NCC unreasonable?
The Court of Appeal then went on to consider the question of unreasonableness under the provisions of UCTA and highlighted the following:
- The Employer were in an equal bargaining position with the Architect, and they could have re-negotiated the NCC, gone to another architect or even possibly protected themselves from the risk posed by the NCC by some other commercial route (insurance or a performance bond);
- The Employer "undoubtedly ought reasonably to have known of the existence of the NCC, placed prominently as it was on the third page of the Agreement"; and
- There was no particular conditions or restrictions attaching to the NCC, ie a time limit or similar.
The Court of Appeal concluded that the NCC satisfied the requirement of reasonableness, within the meaning of UCTA. It was therefore held that, in all the circumstances, the NCC was an effective limitation of the Architect's liability.
Application of the NCC
The Court of Appeal held that the amount that it would be reasonable for the Architect to pay should be approached in the same way as an evaluation of contribution under section 2(1) of the Civil Liability (Contribution) Act 1978. Section 2(1) provides that in proceedings for contribution between persons liable for the same damage, the amount recoverable shall be “such as may be found by the court to be just and equitable having regard to that person’s responsibility for the damage in question”.
The Court of Appeal held that the original judge should have gone on to consider the amount that it was reasonable in all the circumstances for the Architect to pay having regard to the contractual responsibilities of the Main Contractor. Therefore, the case has been remitted to the original judge sitting in the Technology and Construction Court to carry out an evaluation of the proper apportionment of liability as between the Architect and the Main Contractor that would have been made under the 1978 Act.
NCCs are now increasingly popular for professional indemnity insurers and consultants looking to limit their potential liability and, therefore, this decision will be good news for them. However, although the Court of Appeal enforced the operation of the NCC, consultants still need to ensure that the wording of NCCs are clear and easy to understand. Further, whilst the Court of Appeal has provided clarity on the operation of NCCs, whether or not the NCC will work (or whether it is deemed unfair or unreasonable) will depend on the facts of the case. At least, for now, NCCs are back in fashion.