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How effective are net contribution clauses?

27 February 2014

The inclusion of net contribution clauses in consultant appointments and collateral warranties is always keenly debated. They are beloved of consultant's PI insurers but strongly resisted by developers and funders. Their effect has rarely been examined by the courts but this is starting to change as shown by two recent cases.

West and another v Ian Finlay & Associates (A Firm) [1]

The court held that the liability of the consultant would not be reduced by reference to the liability of the main contractor when the net contribution clause in the consultant's appointment was drafted as follows:

"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."

The court found that there was doubt about the true meaning of this clause and therefore gave it an interpretation which was more favourable to the employers (who were not professional developers) in accordance with the Unfair Terms in Consumer Contracts Regulations 1999. 

The court found that this clause only excluded the consultant's liability when the other liable party was one of the direct suppliers appointed by the employers to procure works outside the main building contract (and for whose work the consultant was not receiving a percentage supervision fee).

This was despite the main contractor seeming to fall within the description of an "other…contractor… appointed by you".

The Royal Bank of Scotland plc v Halcrow Waterman Limited [2]

This is a Scottish case where the court also held that the liability of the consultant would not be reduced by reference to the liability of the main contractor when the net contribution clause in a consultant's collateral warranty was drafted as follows:

"...The Consultant's liability arising as a result of any breach of this Agreement shall be limited to that proportion of the Tenant's losses which it would be just and equitable to require the Consultant to pay having regard to the extent of the Consultant's responsibility for the same 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 in connection with the Development and shall be deemed to have paid such proportion which it would be just and equitable for them to pay having regard to the extent of their responsibility." (Emphasis added!)

The court held that, as net contribution clauses are a type of limitation on liability, they are to be construed narrowly. The reference to "Other Consultants" highlighted above could not be construed as including the main contractor - this would amount to re-writing the contract.

A clear and well-recognised distinction had been drawn throughout the contractual documentation between the main contractor and the consultants.

Duncan Salmon, Partner in our Construction, Engineering & Projects team, commented:

"Net contribution clauses reverse the normal English law position that a party is liable for all the loss suffered by a claimant, even if that loss has been contributed to by a third party.

These clauses can substantially reduce the liability of a party in default in situations where the other responsible party is insolvent. That party's liability is reduced even though the innocent party cannot make any recovery from the other, insolvent, party in breach.

However, these cases show that clear drafting is required when describing the other parties whose potential liability will be taken into account when reducing the liability of a negligent party.  

It is interesting to note that the Court in RBS v Halcrow found that a net contribution clause that made reference to a design and build contractor would not necessarily simply extinguish a consultant's liability. The consultant's liability would be reduced only to reflect the contractor's just and equitable responsibility for the claimant's loss - irrespective of the fact that contractually the contractor had accepted full design responsibility."

[1] [2013] EWHC 868 (TCC)
[2] [2013] CSOH 173

This article was written by James Worthington.

For more information please contact James on +44 (0)20 7427 1070 or james.worthington@crsblaw.com