Obtaining a contribution towards another's losses: jumping the hurdles
In complex construction projects, it is often the case that more than one party may be to blame when something goes wrong. However, that does not mean that the party suffering loss will (or needs to) pursue every party at fault. If you are the unfortunate party sued, how can you pass some of the blame, and more importantly the losses, to others?
There are two distinct situations here. Consider the position where a contractor is sued for building a defective wall. The owner of the wall sues the contractor for breach of contract. The work was carried out by a sub-contractor, but the sub-contractor owes no contractual or tortious duty to the owner. However, when the contractor is sued, he will try to obtain a contribution (or even a full indemnity) from the sub-contractor who constructed the defective wall. He will do this by issuing proceedings against the sub-contractor for breach of the sub-contract.
However, what is the position when another person is partly to blame for the losses caused but that person owes no duty to you in contract or in tort? Is it possible to obtain a contribution from them? This article addresses that question.
This issue is governed by the Civil Liability (Contribution) Act 1978 ("the Act"). Section 1(1) of the Act provides that "Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."
Therefore, in principle, if A sues B for damages, but C is also liable to A for the same damages, B is entitled to claim a contribution from C. The issue that has given rise to difficulties in interpretation is the meaning of "the same damage."
What does "the same damage" mean?
The first proviso is that "the same damage" means damage suffered by the same person. This was set out in the case of Birse Construction Ltd v Haiste Ltd (1996). The contractor had been engaged by a water authority to design and build a reservoir. The contractor engaged a consulting engineer to assist it. The water authority also engaged an engineer. Unfortunately, the reservoir failed, and the contractor agreed to build a new reservoir. It sued its engineer for its losses in doing this. The contractor's engineer tried to claim a contribution against the water authority's engineer under the Act. The Court of Appeal held that the water authority's engineer had caused losses to the water authority, whereas the contractor's engineer had caused losses to the contractor. The two engineers had caused losses to different companies, and therefore the damage was not the same. The contractor's engineer's claim against the water authority's engineer failed. This was despite the fact that both engineers' acts or omissions had contributed to the failure of the reservoir, and so, at first blush, the "damage" appeared to be identical.
Assuming the damage has been suffered by the same person, are there any other restrictions on the meaning of "the same damage?" The answer to this question is yes, but the scope of the restriction is unclear.
In the Court of Appeal case of Royal Brompton Hospital v Hammond and others (2000), a very narrow interpretation was placed on the meaning of "the same damage." The hospital employed Taylor Woodrow (TW) to carry out works at the hospital under the JCT80 form of building contract. The hospital and TW fell out and made various claims against each other which resulted in an arbitration being commenced by TW. The hospital's claim was for liquidated damages and other expenses, TW's for loss and expense, variations, delay and disruption. The arbitration settled. The hospital's architect, WGI, had granted TW extensions of time and the hospital alleged that WGI was negligent in doing so. It sued WGI together with other members of the professional team. WGI issued third party proceedings against TW under the Act, saying that if WGI was liable, TW should contribute towards any damages that WGI had to pay. TW asked the judge to strike out the third party proceedings. The judge did so, and WGI appealed.
The Court of Appeal had to decide if TW and WGI were liable in respect of the same damage. Both had caused losses to the hospital. The hospital suffered losses in relation to TW due to overpaid sums in consequence of the extension of time, and would have recovered liquidated damages but for that extension. However, the Court of Appeal agreed with the Judge's reasoning that the hospital's claim against WGI was not to recover this sum. The claim against WGI was on the basis that WGI's negligence had weakened the hospital's position in the arbitration and the settlement negotiations. The Court of Appeal found this was not "the same damage", and therefore WGI could not claim a contribution against TW.
A question of interpretation
One judge, Lord Justice Ward, had initially considered the issue on a much wider basis. He asked, what is this action about? It was about the hospital losing a sum of money and trying to obtain a contribution towards it from their architects. If the hospital had sued the architects first, it would be difficult to see why the architects would not be entitled to contribution from the contractors, who otherwise would benefit from an extension of time that should not have been given. However, Ward LJ was persuaded by the reasoning of the majority, and agreed finally with the narrow interpretation.
A few months later, the Court of Appeal decided the case of Howkins & Harrison v Tyler (2000), a case concerning negligence by valuers, and it looked at the question of "the same damage" in a different way. Scott VC set out the following "simple test": "Suppose that A and B are the two parties who are said each to be liable to C in respect of ‘the same damage' that has been suffered by C. So C must have a right of action of some sort [against both]. There are two questions that should then be asked. If A pays C a sum of money in satisfaction, or on account, of A's liability to C, will that sum operate to reduce or extinguish … B's liability to C? Secondly, if B pays C a sum of money in satisfaction or on account of B's liability to C, would that operate to reduce or extinguish A's liability to C? It seems to me that unless both of those questions can be given an affirmative answer, the case is not one to which the 1978 Act can be applied."
The test looks simple, but has proven difficult to apply in practice. In Eastgate Group Ltd v Lindsey Morgan Group Inc and another (2001) (a case on preparation of management accounts), the judge at first instance applied the test and found that the damage was not the same and thus the Act could not apply. The Court of Appeal disagreed, and held the damage suffered was the same, although it would be for the trial judge to decide if it was just to order that a contribution be made. What would the result of this test have been had it been applied in the Royal Brompton case? Arguably, sums paid by TW would have reduced the amount which could be claimed against WGI, otherwise the hospital would recover twice for the same loss. However, since some of the claim related to liquidated damages, TW would have been liable in respect of these even if the hospital recovered sums from WGI for negligence. Therefore, applying this test, WGI arguably could have claimed a contribution in respect of part of the hospital's claim.
Again, however, one judge, Lord Justice Sedley, was prepared to look at the matter in a far simpler way. Although the ways that the valuer and the borrowers (against whom the valuer was trying to obtain a contribution) had caused losses to the claimant lender were different, at the end of the day, the actions of both had left the lender out of pocket and so both had contributed to "the same damage." Despite this, Sedley LJ decided that the better view had been taken by his two colleagues.
Even if a defendant persuades the Court that someone else has contributed to "the same damage," that is only one of the factors that the Court can take into account. Under sections 1(3) and 1(6) of the Act, the person against whom a contribution is sought must also be liable to the claimant. In the case of Oxford University Fixed Assets Ltd v Architects Design Partnership and another (1999), Oxford was the employer under a JCT80 building contract. The architects were employed by Oxford, and issued a final certificate to the contractor, Wimpey. After the final certificate had been issued, Oxford sued the architects for negligence, and the architects sought a contribution by third party proceedings against Wimpey. Wimpey argued that the effect of the final certificate was that Oxford could not have brought proceedings against it, so that served as a defence against any contribution being ordered.
HHJ Humphrey Lloyd held that the final certificate meant that Oxford would be unable to adduce evidence to prove that Wimpey was liable to it. The issue of the final certificate acted as if Wimpey had been discharged from liability. In those circumstances, it was unacceptable that Wimpey should have to contribute to Oxford's losses, since it would enable an employer to get around the issue of the final certificate by suing its architect who would seek a contribution against the contractor.
What happens next?
Assuming a defendant can get over these not insubstantial hurdles, and persuade the Court that a contribution should be made by a third party, what happens then? If the claimant and defendant have settled proceedings, that settlement will act as a ceiling on the maximum amount that the defendant can recover from the third party. Where there has been no admission of liability, the third party can challenge the settlement and argue that it should not have to contribute since in fact the defendant was not liable to the third party. It also has some rights to challenge the amount of the settlement if the defendant was unreasonable in agreeing to it. If there is a trial between the claimant and defendant on liability and quantum, the Court may decide the contribution issue at the same time or at a later hearing.
Under section 2(1) of the Act, the Court has a wide discretion in considering what contribution should be made. The contribution is whatever is "just and equitable having regard to the extent of that person's responsibility for the damage in question." Section 2(2) means that the Court can declare anything from a nil contribution to a full indemnity or any percentage in between. The Court of Appeal will not interfere with the Judge's finding unless it is clearly wrong or he made an error in principle, especially where the Judge has had to make findings on complex issues, as will frequently be the case in construction disputes (BICC Ltd v Cumbrian Industrials Ltd & another (2001)).
In conclusion, if one is the unfortunate defendant being sued, and can jump the hurdles of proving that the damage caused by you and another contributing party is "the same damage", the Act is a useful way of obtaining a contribution towards damages from a party against whom there would otherwise be no recourse. However, if the Courts continue to interpret the meaning of "damage" in a restrictive way, it will prove difficult to establish the necessary ingredients for a contribution claim to be brought.
For further information please contact Clare Collier at clare.collier@cms-cmck.com or on on +44 (0)20 7367 2354.
