This article considers what a net contribution clause is, why they are resisted by some parties to construction contracts and the effect of a recent case on the reasonableness of such clauses.
The term “net contribution clause” will be familiar to many readers, particularly those of you who are either developers negotiating construction documents with your construction team or tenants taking a lease of new or recently built premises and who will benefi t from collateral warranties.
As you will be aware, it is often the practice of building contractors or professional consultants to seek to limit their liability to clients and/or benefi ciaries by seeking to include a net contribution clause in the appointment or collateral warranties, a practice which has become even more prevalent given the recent rise in the number of insolvencies.
What is a net contribution clause?
Where a client or benefi ciary suffers loss as a result of a defect, there may be several parties who are responsible. If a claim is brought against any one or all of those parties, each party who is held to be at fault will be 100% liable for the loss under the principle of joint and several liability. If a single party is sued, they would therefore seek to join the other parties at fault into the proceedings or claim a contribution from such parties.
The purpose of a net contribution clause is to limit the liability of the party to an amount which is reasonable for them to pay in light of the extent of their responsibility for a defect. Crucially, net contribution clauses include a deeming provision that any other party at fault a) owes a similar duty to the claimant and b) has paid their fair share of the losses for which they are responsible to the claimant.
As such, the clause has severe consequences for the client or benefi ciary where one of the parties who was also in breach is now insolvent. As they can no longer respond to a claim, the presence of the net contribution clause in the remaining consultant’s appointment (or collateral warranty) will preclude the client (or benefi ciary) from recovering 100% of its losses.
Langstane Housing Association Limited v Riverside Construction Aberdeen Ltd (2009)
This recent Scottish case considered whether a net contribution clause was a limitation clause within the meaning of the Unfair Contract Terms Act 1977 (the Act), which applies to commercial contract terms which seek to exclude or restrict liability.
The case concerned a dispute over whether an engineer was appointed on the 1988 or 1998 version of the Association of Consultancy and Engineering conditions. The client claimed it was the earlier version because it was keen to avoid the 1998 version, which included the net contribution clause, which would limit the engineer’s liability for defects.
It was held that the presence of a net contribution clause did not seek to exclude or restrict liability but merely sought to ensure the consultant was held liable for its own breach and not for breaches of others. It was also stated that such clauses are not unreasonable for the purpose of the Act.
Effect of decision
This is perhaps an unsurprising result given the fact that such clauses have been in use for some years now, and the terms of construction contracts are usually negotiated in a commercial fashion.
However, it is not the most helpful of decisions because:
- most clients and benefi ciaries will be of the view that the intention of a net contribution clause is by its very nature to limit (and not merely restrict) liability
- consultants and contractors may now claim that it has been held by the courts that a net contribution clause is “reasonable”; however, it does not necessarily follow that because a clause is “reasonable” for the purposes of the Act that it is acceptable for it to be included in construction contracts
No doubt construction professionals will continue to seek to negotiate the inclusion of net contribution clauses in their appointments and they may even argue that the court has upheld their use. This is not necessarily a correct assertion; the court has only stated that a net contribution is not a limitation per se. Until net contribution clauses are fully tested in the courts, they will continue to be a hot topic of any negotiation process.