Two cases this year, north and south of the border, remind us of the importance of careful drafting when it comes to net contribution clauses.
A net contribution clause is a form of limitation clause, which consultants (typically) often seek to include in their collateral warranties, or their schedules of third party rights, in favour of third parties such as a tenant, purchaser or funder of a building or development. These clauses are also sometimes seen in the consultant’s principal appointment agreement.
Such clauses limit the liability of the party giving the collateral warranty (the warrantor) to a ‘just and equitable’ share of the loss, bearing in mind the role of other parties on the project, e.g. other consultants and sometimes the contractor and subcontractors. The limitation will stand even where other parties have gone insolvent and so flips the risk of their insolvency on to the recipient of the warranty.
Where there is no net contribution clause, warrantors get nervous as the principle of joint and several liability means that the warrantor could be held liable for all of the loss despite only being responsible for part of it. Net contribution clauses are a contractual exception to that rule. In the absence of such a clause, when faced with a claim the warrantor would need make its own claims for “contribution” against any other responsible parties and make them joint defendants to any legal proceedings, if matters go that far. If some or all of these other parties have become insolvent, the warrantor risks being left to bear the entire loss.
The precise drafting of these clauses is key to the scope of the limitation, as two recent decisions highlight.
RBS v Halcrow
Halcrow (the Structural Engineer) provided a warranty to a tenant of a property in Edinburgh, who assigned it to RBS. When structural defects emerged in the floor slab, RBS made a claim against the Engineer under its warranty for the cost of remedial works, among other things. The Engineer argued that the design and build contractor (who by that stage was insolvent) was responsible and relied on a net contribution clause to limit its liability. The Court had to decide as a preliminary issue whether the net contribution clause allowed it to do so.
The clause said that the Engineer’s responsibility was limited to the proportion of RBS's losses that it would be ‘just and equitable’ for the Engineer to pay having regard to the extent of its responsibility and 'on the basis that all Other Consultants shall be deemed to have provided contractual undertakings to the Tenant on terms no less onerous than this Agreement in respect of their services...' etc.
‘Other Consultants’ was defined in the Appointment (not the warranty) as meaning the other consultants engaged by the Employer, except the Architect. The Engineer argued that ‘Other Consultants’ included the contractor (or one of its subcontractors) – one line of argument being that the principal purpose of the clause was to restrict the Engineer’s liability to a proportion of the loss that is ‘just and equitable’, and that meant taking into account the contractor’s responsibility for the same loss.
The Court disagreed, saying there was a clear distinction in the contract between the contractor and the consultants and the contract would have to be re-written for it to say otherwise. It added that it would have been easy for the parties to include the contractor in the net contribution clause if that had been the intention.
West v Ian Finlay and Associates
A couple (the Wests) engaged Ian Finlay as their Architect, together with a main contractor, to refurbish their home. To save money they also engaged a specialist contractor to undertake other works at the property, including a conservatory.
Defects arose and the Wests sued the Architect for, among other things, a failure to notify them of the defects and to arrange remedial works. The main contractor was by that stage insolvent.
The Architect argued that the main contractor was also to blame for the defects and tried to rely on the net contribution clause in its own contract with the Wests to limit its liability. The clause read:
‘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’.
While the Court did not have to decide the point it said that the clause had to be considered in context. As the Architect was aware at the time it signed the contract that the Wests were going to engage a specialist contractor to carry out certain works, the reference to ‘other contractors’ in the net contribution clause referred to the specialist contractor and not to the main contractor. The Architect could not therefore rely on the main contractor’s failings to reduce its liability.
Those drafting net contribution clauses will often wrestle over which parties should be mentioned in the clause as effectively taking a share in the blame: the recipient of the warranty will typically press for a short list of parties but the warrantor will often look to cast the net as wide as possible.
While these cases turned on their specific facts and the precise
wording of the clauses in question, in both cases the main contractor was held to fall outside the scope of the clauses. These cases provide a useful reminder of the importance of clear drafting particularly in transactions where broader than usual clauses are sought. In the absence of clear drafting, parties may find that the clause agreed upon offers less protection than initially thought.