Legal: Back of the net

Net contribution clauses are a common and often heavily negotiated feature of consultant appointments and collateral warranties. As with most contract clauses, they come in different shapes and sizes and can be extremely complex, but the essence is this: where a consultant and other defaulting parties have all contributed to a loss suffered by the employer, the consultant’s liability is limited by reference to its “share” of the blame.  

It alters the position at common law that allows the employer to recover all of its losses from any of the defaulting parties that contributed to the loss.  Thus, under the common law a consultant who was 20% to blame for the loss may end up picking up the tab for 100% of that loss. While the unfortunate consultant in this example would have a separate statutory right under the Civil Liability (Contribution) Act to recover the remaining 80% from the other defaulting parties, this will be of little comfort if those other parties have become insolvent. The common law may seem unfair, but it seeks to protect the “innocent” employer from the risk that the other “guilty” defaulting parties become insolvent, albeit at the expense of the “guilty” party against which it makes the claim.

There are few reported cases on net contribution clauses, but the general view is that they are straightforward, so a well-drafted one should work as intended. The Northern Irish High Court has recently confirmed that a net contribution clause in a consultant appointment will – unless expressed to the contrary – operate to limit any liability incurred by the consultant under the appointment, not just liability for negligent performance of services.

Radius vs JNP

In the case of Radius Housing Association vs JNP Architecture [2018] NIQB 57, Radius engaged JNP to design and oversee the construction by a “build-only” contractor of works that included the waterproofing of a concrete platform. JNP’s appointment document included a net contribution clause.  JNP’s design mandated a full tanking solution using an industry-certified product, called Hydroguard. During construction, it was discovered that the design erroneously failed to allow for sufficient quantities of Hydroguard. The appropriate quantity would have materially increased cost, so JNP devised an alternative design – but one that needed a higher degree of workmanship than would have been required using Hydroguard, and which used a cheaper product that was not industry-certified. 

The cheaper solution failed, an outcome predominantly caused by the contractor’s defective workmanship but compounded by a lack of adequate supervision by JNP. Critically, JNP also failed to obtain Radius’ consent to the change in design, contrary to an express clause in its appointment. The court found that “a deliberate decision was made to keep Radius in the dark”. 

Radius sued and JNP sought to rely on the net contribution clause in defence. Radius countered that the clause only applied to negligent design by JNP so did not apply to JNP’s obligation to obtain consent to a change in design, and that such failure to obtain consent therefore made JNP wholly responsible for the problems that followed, regardless of any fault of the contractor.

The court disagreed. The net contribution clause was drafted widely and applied to “any actions or proceedings brought against [JNP] under or in connection with the [appointment]”. It therefore covered all of JNP’s obligations under the appointment – not just in relation to the design. 

The court said the parties could not have intended that some obligations would fall within the clause and others outside it, and therefore all liability for breach of these obligations was subject to the net contribution clause: “[JNP] were to be held only responsible for their share of the responsibility”.

Conclusion and implications

This decision follows previous cases upholding the operation of net contribution clauses and emphasises the width that these clauses can have – albeit that the court ultimately just gave effect to the words used. If you agree a net contribution clause, expect the court to uphold it. 

No doubt Radius will ponder on this. It now faces the prospect of making only a partial recovery, notwithstanding JPN’s “high risk design”, which – in a breach of contract by JPN – it was not given the opportunity to consider or to reject. 

Some commentators believe this case may encourage employers to seek to limit the effect and scope of net contribution clauses so that, for example, they apply only to liability arising from negligent performance of services, and not to ancillary obligations – such as a requirement to obtain consent for changes in design or to act in accordance with the employer’s instructions.  

That may be so, but consultants – and more particularly their professional indemnity insurers – tend to be pretty savvy on these points, so be careful what you wish for. 

After all, the first rule of contract negotiation is much like Newton’s Third Law of Motion: just as every action has an equal and opposite reaction, any attempt to limit the scope of a limitation clause is likely to be met by an attempt to limit the extent of the obligation in the first place.

Chris Hallam is a partner specialising in infrastructure, construction and energy contracts at international law firm CMS Cameron McKenna Nabarro Olswang