What do you do when you are jointly liable with someone else for damage suffered by a third party but you have footed the bill?
You may be able to seek a contribution from the other party under the Civil Liability (Contribution) Act 1978 (the 1978 Act) or under the common law. Despite their usefulness, contribution claims are, arguably, a lesser-known tool into the litigator’s box.
What are contribution claims?
The 1978 Act
Essentially contributions claims under the 1978 Act are a way of sharing the burden of paying for damage where there is more than one party responsible. It often takes the form of an action between defendants or potential defendants who both share a liability to a claimant for the same damage.
The basic elements are that:
- Party A and Party C are both liable for damage suffered by Party B.
- Party B only pursues Party A and Party A pays up – either by way of a bona fide settlement or following a court judgment or arbitral award.
- Instead of just calling it a day there Party A can seek a contribution from Party C to make it pay its share of the damage.
Although the concept seems relatively straightforward, it can be a tricky area of law, not least in determining whether liability has arisen for the “same damage”. It probably helps to bring in some examples at this point.
Construction projects: A lot can go wrong in construction projects and there will often be multiple parties including subcontractors involved making it difficult to determine where ultimate responsibility lies. It is therefore common practice for different parties to share joint and several liability under construction contracts. The purpose of this is to enable the party at the top of the contractual chain to choose whom it wishes to pursue without having to get down into the weeds of precisely who was responsible for what. In those circumstances, the unlucky contractor who gets left with the tab may then seek a contribution under the 1978 Act from others who share the joint and several liability.
Insurance: There are many different circumstances under which such claims might arise in the insurance industry but examples include situations where a particular type of damage is covered by more than one insurance policy but a claim is only brought against one insurer. Or in circumstances where insurance has been mis-sold and there is shared liability between the underwriter of the policy and the seller. In these circumstances the party which settles the liability may be able to bring a contribution claim under the 1978 Act against the other liable party.
Contribution claims under the common law
Where a contribution claim relates to shared liability for a debt this must, in some circumstances, be pursued as a form of unjust enrichment claim. This is often the case in relation to co-guarantors.
In its simplest form, if a debt is guaranteed by more than one guarantor and there is a default, then (depending on the terms of the guarantee and whether the guarantors share joint and several liability) the out of pocket creditor can often choose whether to pursue one or more of the guarantors. If, for instance, guarantor one has deep pockets and guarantor two less so, then the creditor may decide to pursue only guarantor one on the basis that it is more likely to pay up. In these circumstances guarantor one may be able to make a contribution claim against guarantor two to require it to pay its share.
However, careful attention will need to be given to the wording of the guarantee to determine whether the contribution claim arises in debt or damages as this will determine whether it should be pursued as a common law claim or under the 1978 Act. This complication gives rise to a further potential tripwire in relation to limitation, as discussed below.
Pit falls and practicalities
Contribution claims under the 1978 Act are unusual in that there is a much shorter two year limitation period, than the more common six years for claims in e.g. negligence or breach of contract. The rule is that a contribution must be sought within two years from the date on which the right to the contribution accrued. In practice this usually means two years from the date of the initial judgment or arbitral award (assuming that this is when damages are assessed) or, in the case of a settlement, the earlier of the date on which the settlement was agreed or the settlement sum paid.
However, a common law contribution claim would have a six year limitation period which runs from the date on which the co-guarantor paid more than its fair share of the debt.
How is the contribution assessed?
The basic principle in the 1978 Act is that the court will (assuming shared liability is established) determine the level of contribution based on what it considers to be “just and equitable having regard to the extent of that person’s responsibility for the damage in question” (s.2(1) of the 1978 Act).
In determining what is “just and equitable”, the court will look at three key factors:
- Causation – the greater the role a party played in causing the loss, the greater their contribution is likely to be
- Fault – the more “morally blameworthy” a party is considered to be, the greater their contribution is likely to be and
- Financial benefit – the larger the benefit gained by the party, the greater their contribution is likely to be
In practice, it is often the third of these – financial benefit – that carries the most weight with the court.
For common law contribution claims the principle is that the guarantors should contribute equally unless there is a contrary agreement.
Bona fide settlements
It is worth remembering that under the 1978 Act (s.1(4)) a party which enters into a settlement of an alleged damages claim in good faith can seek a contribution, regardless of whether they are or were liable. The key consideration is whether the defendant would have been liable if the factual basis of the claimant’s damages claim could have been established.
This is an important commercial consideration as it means that a party could, in appropriate circumstances, choose to focus its efforts on pursuing a contribution rather than fighting out the main damages claim.
As such, contribution claims can be a very useful tool in opening up avenues of recovery where another party hasn’t paid its fair share. However, it can be a knotty area of law and particularly given the limitation issues, clients contemplating such claims would be well recommended to seek early advice.