Net Contribution Clauses: how to avoid the blame game?

Net Contribution Clauses: how to avoid the blame game?

Where construction contracts are subject to the jurisdiction of a common law country such as the UK or USA then the legal concept of joint and several liability will apply. 

In general, if two or more people contract together that they will do something, then in the absence of any express clause to the contrary, there is a presumption that each person is jointly liable for the other person’s actions and performance. Performance of those obligations by one of them discharges the other person from the liability for those obligations, equally the failure by one person to perform those obligations leaves both persons jointly liable.  The person for whom the contract was being performed can choose whether to sue one, some, or all of the persons who are jointly liable.

Several liability is merely a legal term to describe a situation in which two or more persons make separate promises to another, and therefore each person is liable only for their own specified obligations. 

The contractual relationships between parties involved in construction and engineering projects frequently give rise to jointly and severally liability for the contractual obligations of other parties involved on the same project, primarily because more than one company is involved in the design or construction of the project.  The use of contracts which encourage collaborative working and the increasing use of building information modelling reinforce the presumption of joint and several liability. 

There have been demands for the law to be reformed, for example the Association of Consulting Engineers published a report in the 2004 “Professional Indemnity Insurance and Joint and Several Liability in the Construction Industry: the case for reform” calling for the introduction of proportionate liability and a statutory capping regime on insurance claims. However no reform has taken place and none is currently proposed. 

Parties seeking to avoid the consequences of joint and several liability therefore rely upon express terms in their contracts to ‘rebut’ the presumption that they have accepted joint liability for the other person’s actions.  The most common are ‘net contribution’ clauses which limit the liability of a party.  These clauses will state that where two or more parties involved in a construction project are each jointly liable for the same loss or damage, the liability of each party will be limited to the amount that would be apportioned to that party on a fair and reasonable basis having regard to their responsibility for the loss or damage.  The intention being that if a court or arbitration determines a party is 30% responsible for the loss then their liability is limited to 30% of the total damages.  In the absence of a net contribution clause, under the law of joint and several liability, that party, despite being only 30% responsible could be 100% liable for the loss.   

The effectiveness of net contribution clauses depends on the clarity of their drafting.  They are clauses of limitation and therefore any ambiguity will be interpreted against the party seeking to rely on the limitation, usually the consultant or the contractor.  An example of the care needed to draft such clauses is demonstrated in the case of Stephen & Carol West v Ian Finlay & Associates (a firm) [2014] EWCA Civ 316.  The case concerned the interpretation of the net contribution clause in the appointment agreement between the Wests and their architects Ian Finlay Associates. 

The Wests appointed Ian Finlay Associates as their architect to design and administer works to their home, which included lowering the lower ground floor and replacing the plumbing, mechanical services and electrics.  The Wests appointed a main contractor and also directly appointed certain specialist contractors to design and supply certain elements of the project.  Unfortunately the works carried out by the main contractor were defective, in particular the lower ground floor suffered from damp ingress.  The dispute went to court where the judge decided that the architect had been in breach of its professional duties, and the main contractor had been in breach of its contractual obligations to Mr & Mrs West; both were therefore liable for the losses suffered by them.  Unfortunately the main contractor had gone into liquidation and consequently the Wests sought to recover 100% of their losses from the architects, under the rule of joint and several liability.  The architects in turn sought to rely on a net contribution clause in their appointment, the relevant part of the clause read as follows:

“Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you.”

The judge was therefore required to consider whether the clause was effective in limiting the architects’ liability where the main contractor was also liable.  In doing so, he considered the clause in the context of what was known by the parties at the time they entered into the appointment and in particular the fact that the architects knew the Wests would themselves procure several aspects of the work, which would not form part of the main building contract.

The judge considered that the net contribution clause was ambiguous; particularly the words “other consultants, contractors and specialists appointed by you” could be interpreted in two ways:

(a) everyone with whom Mr & Mrs West entered into a contract in relation to the project apart from the architect, or

(b) limited to the various specialist contractors or suppliers with whom Mr & Mrs West were proposing to enter into direct contracts outside the main building contract.

The judge decided that since there was doubt as to the meaning of the net contribution clause  the court was required to give the clause the interpretation that was most favourable to Mr & Mrs West, which was the second meaning above.  As a consequence the clause did not limit the architects’ liability in respect of losses incurred by the main contractor breaching its contract, it merely limited the architects liability in respect of breaches by the specialist contractors appointed by Mr & Mrs West outside the main contract.  Mr & Mrs West could recover 100% of the damages from the architects, who had no means of obtaining a contribution to those damages from the now insolvent main contractor. 

The decision was reversed in the Court of Appeal but it serves to show how careful those operating in construction must be when agreeing the wording of net contribution clauses.

By Matthew Needham-Laing, Head of Construction & Engineering, Stevens & Bolton LLP
Article first published in Construction Global, January 2016

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