Net contribution clauses: Make sure it's 'crystal clear'

If things go wrong on a multi-party construction project, a client will understandably want to put things right with as much ease and as little fuss as possible. This normally means that the more options open to it for doing this the better.

The English legal principle of joint and several liability helpfully assists the client in this aim providing  that even if, for example, both the contractor and the consultant are responsible for the same loss, the client can choose to pursue either the consultant or contractor for 100% of the loss. The idea is then that the “pursued” party can in turn pursue the other “unpursued” party to recover a share of the damages under the Civil Liability (Contribution) Act 1978. This legal principle helps the client even further by providing that if one of the parties who may be liable ceases to trade, the client can choose to pursue the remaining solvent party for 100% of the loss.

Bearing all this in mind, it’s hardly surprising that contractors, consultants and their professional indemnity insurers may have misgivings about this legal position and so have developed the net contribution clause. This basically seeks to circumvent the common law and statutory position outlined above by clearly apportioning liability at the outset and this certainty helps the contractor or consultant manage its liability and to keep a handle on its professional fees and insurance costs.

What is surprising is that despite the widespread use of these clauses, the courts have been relatively silent as to whether they are actually legally enforceable

Clients do not like these clauses for obvious reasons, and so over recent years, net contribution clauses have become pretty common place in certain construction agreements such as consultant appointments, warranties and third party rights schedules in favour of purchaser and tenants.

What is surprising is that despite the widespread use of these clauses, the courts have been relatively silent as to whether they are actually legally enforceable. This all changed with the recent case of Stephen West and
Carol West vs Ian Finlay & Associates. Here the client had engaged an architect and contractor to refurbish their home. The architect’s appointment included a net contribution clause. On completion of the works, significant defects were discovered. The contractor became insolvent so the client brought the claim against the architect. The architect argued that, as the contractor had also been at fault, a net contribution clause limited its liability.

The court held that the net contribution was effective and not unfair or unreasonable and it was reasonable for the client to take the insolvency risk of the contractor. Interestingly, the court did have regard to the bargaining position of the parties, the implication being that if one of the parties was not in an equal bargaining position and did not understand the clause and its ramifications then the effectiveness of the clause might be in doubt.

So whether clients like it or not, it would seem that net contribution clauses are here to stay and now have the courts’ backing. The key lesson would seem to be that if you are going to use a net contribution clause then make sure that the wording is (to borrow the court’s description from the West case) “crystal clear” and everyone understands exactly what the clause does.

Laurence Cobb is head of construction at law firm Taylor Wessing