Net contribution clauses
In negotiating the appointment of professional consultants, or contractors, or the terms of collateral warranties or third party rights to be given by consultants or contractors, a common issue is whether or not the appointment or contract should contain a ‘net contribution clause’.
What is a net contribution clause? It is, as we shall see, a type of limitation clause.
If you, as the client, suffer a loss, caused by negligence on the part of the consultant you have appointed, more than one party may be responsible for that loss. You may sue that consultant or all of the parties at fault. If you are successful, each party at fault will be 100% liable for your loss, irrespective of their share of the ‘blame’.
If two or more parties are at fault but one of them has to pay out 100%, then that party may pursue the others for their share. This is under statute, the Civil Liability (Contribution) Act 1978. Under the 1978 Act, if you claim damages from a consultant and the consultant and another party are both liable to you for the same damage, the consultant may claim a contribution from that other party. The contribution is what is found by the court to be ‘just and equitable having regard to the extent of that person’s responsibility for the damage in question’.
A net contribution clause is a means of creating an exception to that outcome. Typically, it provides that instead of each defaulting party being 100% responsible for the losses caused, those parties should only be responsible for their fair and reasonable share. These clauses often contain a range of assumptions, such as:
- All the other professionals and contractors have undertaken to you a similar contractual duty of care;
- Each of them has paid to you a fair and reasonable share of your loss according to the extent to which they have been negligent;
- None of them has any limitations on the extent of their liability to you; and
- None of them is joint insured with you
Let us assume that you are developing a block of flats in central London in joint venture. Your engineer is negligent in the design or certain structural elements. Your architect is however responsible for the overall design and negligently incorporates the engineer’s errors in its work. The defective design comes to light and you have suffered loss. You may sue the engineer and the architect and both are 100% liable for your damages. But, you may pursue the architect alone, perhaps because the engineer has gone out of business and no longer carries professional indemnity insurance. If, however, the architect’s appointment contained a well drafted net contribution clause, the architect could argue that it is only responsible for its fair share of the loss; the engineer was largely responsible so the architect may end up liable for say just 10% of your loss.
You can see three things at work here. First, by including the net contribution clause the architect has effectively imposed a limitation on its potential liability. Second, the risk that the engineer may not be able to stand its corner has been moved away from the architect and onto you. Third, the burden of commencing and pursuing litigation against other consultants, with all the costs and risks involved, has also passed back to you.
Well advised consultants and architects will argue for the inclusion of net contribution clauses in appointments, contracts, collateral warranties and schedules of third party rights. They are spurred on to do so by their professional indemnity insurers. Clients and funders will resist such clauses. There is no absolute right or wrong about this, ultimately it is a matter for negotiation and the strength of the parties’ negotiating positions. The consultant will argue that it should not have, in effect, to insure against the risk of another consultant’s insolvency. It is you who have selected the professional team. From your perspective, however, you would argue that as long as the consultant is not negligent, it will not incur any liability at all. And it is not your appointments that establish the principle of joint and several liability, that is a matter of law.