Under English law a party (“ a Claimant”) who has suffered a loss which may have actually been caused by more than one party can choose whom it sues (“the Defendant”) to recover its losses. A Claimant may sue for recovery of the full extent of the loss even though the selected Defendant is only partly responsible for the losses claimed.
The idea behind all this is that it is the Defendants who are best placed to decide which Defendant should pay which share of a Claimant’s losses. The principle can, however, be very harsh where, as is often the case, the Defendant (the ripest cherry in the bunch of potential Defendants) is ordered to pay out the full extent of the Claimant’s losses even though he is actually only responsible for a very small element of the losses claimed. It gets worse when the other cherries start dropping like flies, leaving the party who contributed least to the Claimant’s losses to foot the full bill with nobody available to share in the pain.
It is against this background that Professional Indemnity Insurers require Architects, Engineers, Surveyors etc and savvy parties, including Contractors and Sub-Contractors, to insist on incorporating net contribution clauses within the commercial contracts they enter into.
Up until now there has been no guidance from the court on the enforceability of net contribution clauses. The case of West v Ian Finlay & Associates, a Court of Appeal decision delivered on
24 March 2014, changes that position once and for all, providing long awaited clarity on the use of these provisions within commercial contracts.
Finlay was appointed by the Wests to supervise refurbishment operations to a domestic property. A term within the appointment said:
“Our liability for loss or damage will be limited to the amount that is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you.”
It appears that the project did not go too well. Following completion of the works in May 2007 substantial defects were discovered in the property which included damp proof failures, defects within floor slabs and in the mechanical and electrical systems installations. The Wests were not happy. A period of two years passed during which the Wests engaged other parties to inspect and ultimately repair the defects. At the end of this period, the original builder, whose poor workmanship was largely to blame for the defects, had become insolvent.
The Wests decided to sue Finlay for the full extent of their losses asserting that the net contribution clause within the Finlay appointment was ambiguous and, in any event, fell foul of both The Unfair Terms in Consumer Contract Regulations 1999 (“Consumer Regulations”) and The Unfair Contract Terms Act 1977 (“UCTA”).
At first instance the judge accepted the Wests’ argument that the net contribution clause was ambiguous because it was known that the Wests were engaging other consultants, contractors and specialists to work on other projects (“other operations”) in the house that Finlay was not involved with and it was, in the judge’s mind, unclear whether the net contribution clause was intended to relate to these other operations or, as argued by Finlay, only the works it was engaged upon. As a consequence the judge found in favour of the Wests and Finlay was ordered to pay the Wests’ claim in damages. Finlay appealed.
In the Court of Appeal judgement, the court rejected the judge’s finding that the net contribution clause within the contract was ambiguous. Commenting further on the applicability of the Consumer Regulations and UCTA, the court found that the existence of net contribution clauses was commonplace in commercial contracts, the Wests would have understood the provision and the clause was not so far weighted in Finlay’s favour as to fall foul of the Consumer Regulations or UCTA. More importantly, the court found that the wording of the clause provided for an assessment which was similar to that set out in the Civil Liability (Contribution) Act 1978.
So, in summary, we now have confirmation that Net Contribution clauses are both lawful and, provided, in the case of contracts with domestic clients, care is taken to explain what these provisions actually mean, they will protect the party proposing such a provision in its appointments from finding itself being ordered to pay out for losses which it did not cause.
This all seems like common sense to me. We have had a net contribution clause within our terms and conditions for years. Is it time to review yours?