Increasingly consultants and contractors are seeking to include net contribution clauses within their contracts. A net contribution clause seeks to apportion liability for losses where there is more than one party to blame. Put simply, it tries to avoid the default position under which one party could end up picking up the bill for all the losses incurred by an employer client (the claiming party) where it is only partly to blame for those losses. There is very little case law but a recent case (West v Ian Finlay and Associates (A Firm) (2013)) has looked at their meaning and effect – and where they might not work.
Net Contribution Clause – meaning and effect
Such clauses typically seek to limit the contractor/consultant’s financial liability to the amount which it would be fair and reasonable for that party to pay having regard to the extent of their responsibility for the loss. Faced with a net contribution clause, the claiming party must claim against all the responsible parties for example:
- With a net contribution clause in the architect’s appointment, if the client claimed damages from the architect alone and a court found the architect only 60% liable, the client could recover only 60% of its damages. The client would have to claim the remaining 40% separately against the other party/ies responsible for the loss. If the other party/ies were insolvent and/or unable to satisfy the client’s claim, the client could recover only 60% of its total damages.
How not to draft a Net Contribution Clause
In the recent case of West v Ian Finlay, the courts considered a contract between the client, a couple who owned a property in London which required substantial renovation works, and an architect.
The client employed an architect and a contractor for 60% of the works. The other 40% was procured directly by the client in order to save money. The works were carried out but there were numerous defects discovered. The contractor then went bust.
With no prospect of recourse against the insolvent contractor - the client tried to recover against the architect for 100% of the losses incurred. The contract contained a net contribution clause which stated: “[the architect’s] liability for loss or damage will be limited to the amount that it is reasonable for [the architect] to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by [the client].” The architect argued that the net contribution clause limited its liability for damages.
However, this clause was held by the court not to be effective in limiting the architect’s liability as between the architect and the (now insolvent) contractor. The drafting was found to be ambiguous as it failed to make it clear that the contractor’s responsibilities were caught by the clause. The court stated the reference to “other consultants, contractors and specialists appointed by [the client]” meant the other contractors etc appointed by the Wests for the work directly procured by them, not everyone involved in relation to this project apart from the architect.
It should be noted that the court interpreted the clause in a way that was most favourable to the consumer because they were afforded the robust protection of consumer legislation - it is possible that the court may construe this differently in a commercial context.
The key is in the detail
A well worded net contribution clause in the West case could have saved the architect a great deal of money. The lesson to be learned is if you are including such a clause in your contracts, remember – the key is in the detail.
