Net contribution clauses are widely used within the construction industry in order to limit a contractor or consultant’s liability to their own acts of negligence or breach of contract. This is the flip side to the doctrine of joint and several liability where damages can be recovered against one party as a result of the negligence of any other parties in the transaction. Whoever has deepest pockets is usually hit the hardest.
Alarmingly, a question was raised recently over whether or not such clauses were fair.
In the case of Langstane Housing Association limited v Riverside Construction (Aberdeen) Limited the pursuers sought to recover damages against 3 consultants for an act of negligence which resulted in the partial collapse of a building. They sought to recover damages under the doctrine of joint and several liability. They had, however, contracted on the basis of ACE standard conditions which contained a Net Contribution Clause.
The pursuers argued that a Net Contribution Clause was an unfair contract term under the Unfair Contract Terms Act 1977.
The relevant sections of the Act state:
“Where a term of a contract purports to exclude or restrict liability for breach of duty arising in the course of any business or from the occupation of any premises used for business purposes of the occupier, that term shall. . . have no effect if it was not fair and reasonable to incorporate the term in the contract” (Section 16 (1) (b))
“Any term of a contract which is a consumer contract or a standard form contract shall have no effect for the purpose of enabling a party to the contract who is in breach of a contractual obligation, to exclude or restrict any liability of his to the . . . . customer in respect of the breach” (Section 17 (1) (a))
The questions which arose were:
- Are the ACE standard terms and conditions subject to the Unfair Contract Terms Act?
- If so, are Net Contribution Clauses fair and reasonable?
The Court stated:
- The pursuers were not “customers” under the Act. The terms were industry standard terms, not standard terms of the defenders. Also, both parties agreed to contract under these terms, it was not necessarily the defenders suggestion that these terms were used – there was evidence that it may in fact have been the pursuers who sought use of these terms in the first place.
- Even if the Court was wrong on point one, a Net Contribution Clause would still not be an unfair contract term as it does not seek to exclude or restrict liability – it only seeks to limit a consultant's liability to that of their own breach or negligent act, as opposed to the breach or negligent acts of other contractors and consultants.
The result - we can all relax in the knowledge that Net Contribution Clauses live to fight another day.